Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-28602
Pro Tech Communications, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3281593
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4492 Okeechobee Rd Fort Pierce, FL 34947
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(772) 464-5100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ Yes / / No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). / / Yes /X/ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
33,200,311 shares outstanding as of November 14, 2003
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRO TECH COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
December 31, September 30,
2002 2003
---------------- --------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 13,624 $ 7,226
Accounts receivable, less allowance for doubtful
accounts of $27,309 and $29,755, respectively 160,961 171,825
Inventories, net (Note 5) 592,536 499,467
Due from officers and employees (Note 15) 63,113 65,306
Other current assets 16,760 12,473
---------------- --------------
Total current assets 846,994 756,297
Property and equipment, net (Note 6) 601,183 488,605
Intangible assets, net 2,710,815 2,575,274
Other assets 4,500 3,648
---------------- --------------
$ 4,163,492 $ 3,823,824
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 426,976 $ 228,465
Accrued expenses (Note 7) 222,980 218,933
Current portion of capital lease obligations 9,662 10,185
Due to factor and other liabilities (Note 8) 34,165 93,369
Notes payable (Note 9) 172,754 151,503
Preferred stock subject to mandatory conversion
into a variable number of shares (Note 10) - 736,915
---------------- --------------
Total current liabilities 866,537 1,439,370
Noncurrent notes payable (Note 14) 1,071,164 1,573,006
Capital lease obligations 31,767 24,036
---------------- --------------
Total liabilities 1,969,468 3,036,412
---------------- --------------
Series B redeemable convertible preferred stock, $.01 par value,
$1,000 stated value, 500 shares authorized, issued and outstanding (Note 10) 653,438 -
---------------- --------------
Stockholders' equity (Notes 10, 11 and 12):
Preferred stock, $.01 par value, authorized 998,000 shares, none issued and
outstanding - -
Series A convertible preferred stock, $.01 par value, $1,000 stated
value, authorized 1,500 shares, issued and outstanding 50 shares 54,521 -
Common stock, $.001 par value, authorized 300,000,000 shares,
issued and outstanding 33,200,311 shares 33,200 33,200
Additional paid-in-capital 18,451,079 18,427,668
Accumulated deficit (16,998,214) (17,673,456)
---------------- --------------
Total stockholders' equity 1,540,586 787,412
---------------- --------------
$ 4,163,492 $ 3,823,824
================ ==============
The accompanying notes are an integral part of the condensed financial
statements.
2
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
2002 2003 2002 2003
------------- ------------- ------------- -------------
Net sales $ 407,357 $ 324,639 $ 1,290,365 $ 936,318
Cost of goods sold 209,275 102,983 583,087 292,882
------------- ------------- ------------- -------------
Gross profit 198,082 221,656 707,278 643,436
Selling, general and administrative (including $103,080, $64,918,
$408,956 and $259,923, respectively for related party charges
- see Note 14) 576,337 384,801 2,126,972 1,257,036
------------- ------------- ------------- -------------
Loss from operations (378,255) (163,145) (1,419,694) (613,600)
Other income/(expense):
Interest income 753 739 2,377 2,192
Interest expense (9,758) (4,265) (24,035) (20,082)
Interest expense - NCT Hearing Products, Inc. (5,510) (15,457) (10,896) (41,152)
Interest expense on convertible preferred stock (Note 10) - (5,545) - (5,545)
Other 1,260 (677) 5,380 2,945
------------- ------------- ------------- -------------
Net loss (391,510) (188,350) (1,446,868) (675,242)
Adjustments attributable to preferred stock (Notes 10 and 11):
Preferred stock beneficial conversion feature 4,966 - 45,810 -
Preferred stock dividend 5,544 - 16,455 10,911
------------- ------------- ------------- -------------
Net loss attributable to common stockholders $ (402,020) $ (188,350) $(1,509,133) $ (686,153)
============= ============= ============= =============
Basic and diluted loss per share $ (0.01) $ (0.00) $ (0.05) $ (0.02)
============= ============= ============= =============
Weighted average common shares outstanding - basic and diluted 33,200,311 33,200,311 33,200,311 33,200,311
============= ============= ============= =============
The accompanying notes are an integral part of the condensed
financial statements.
3
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30,
---------------------------------------------
2002 2003
-------------------- --------------------
Cash flows from operating activities:
Net loss $ (1,446,868) $ (675,242)
Adjustments to reconcile net loss to net
cash provided used in operating activities:
Provision for doubtful accounts (753) 2,446
Provision for obsolete inventory - (5,000)
Depreciation and amortization 821,239 253,957
Note payable issued for services received 385,201 246,433
Interest expense related to preferred stock dividend - 5,545
Changes in operating assets and liabilities:
Decrease/(increase) in accounts receivable 51,614 (13,310)
Decrease in inventories 325,393 98,069
(Increase)/decrease in other assets (4,179) 3,676
Decrease in accounts payable (140,022) (198,511)
Increase/(decrease) in accrued expenses 19,608 (3,048)
(Decrease)/increase in due to factor and other liabilities (25,681) 59,204
-------------------- --------------------
Net cash used in operating activities $ (14,448) $ (225,781)
-------------------- --------------------
Cash flows from investing activities:
Net change in due from officer/stockholder and employees $ - $ (2,193)
Capital expenditures - (4,375)
-------------------- --------------------
Net cash used in investing activities $ - $ (6,568)
-------------------- --------------------
Cash flows from financing activities:
Proceeds from:
Notes payable to NCT Hearing Products, Inc. $ - $ 217,000
Cash advances from NCT Hearing Products, Inc. - 40,000
Payments made on:
Notes payable - (23,841)
Capital lease obligations (12,648) (7,208)
-------------------- --------------------
Net cash (used in)/provided by financing activities $ (12,648) $ 225,951
-------------------- --------------------
Net decrease in cash and cash equivalents $ (27,096) $ (6,398)
Cash and cash equivalents - beginning of period 46,881 13,624
-------------------- --------------------
Cash and cash equivalents - end of period $ 19,785 $ 7,226
==================== ====================
Supplemental disclosures of cash flow information:
Cash paid during the nine months ended for:
Interest $ 17,030 $ 19,082
==================== ====================
Supplemental disclosures of non-cash investing and financing activities:
Pro Tech adjusted the carrying value of preferred stock and additional paid-
in capital by $10,911 through the nine months ended September 30, 2002 and
2003, respectively, for the 4% dividend attributable to preferred stock.
Pro Tech obtained an asset under a capital lease for $6,038 during the nine
months ended September 30, 2002.
Pro Tech adjusted the carrying value of preferred stock and additional paid-
in-capital by $125,000 during the nine months ended September 30, 2003 due
to the reversal of a redemption penalty on the Series B preferred stock.
Pro Tech adjusted the carrying value of preferred stock and additional paid-
in-capital by $137,500 during the three months ended September 30, 2003
due to the adoption of SFAS No. 150.
The accompanying notes are an integral part of the condensed financial
statements.
4
PRO TECH COMMUNICATIONS, INC.
SEPTEMBER 30, 2003
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation:
Throughout this document, Pro Tech Communications, Inc. is referred to as
"we," "our," or "Pro Tech." The accompanying condensed financial statements are
unaudited but, in the opinion of management, contain all adjustments (consisting
of those of a normal recurring nature) considered necessary to present fairly
the financial position and the results of operations and cash flows for the
periods presented in conformity with accounting principles generally accepted in
the United States of America applicable to interim periods. The results of
operations for the three and nine months ended September 30, 2003 and cash flows
for the nine months ended September 30, 2003 are not necessarily indicative of
the results for any other interim period or the full year. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto for the year ended December 31, 2002.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates. We have reclassified some amounts in prior period financial
statements to conform to the current period's presentation.
2. Loss Per Share:
We report loss per common share in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The per share
effects of potential common shares such as warrants, options, and convertible
preferred stock have not been included, as the effect would be antidilutive.
3. Recent Accounting Pronouncements:
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." SFAS No. 150 establishes standards for how a
company classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The provisions of SFAS No. 150
were effective for financial instruments entered into or modified after May 31,
2003 and to all other instruments that existed as of the beginning of the first
interim financial reporting period beginning after June 15, 2003. Pro Tech
adopted SFAS No. 150 as of the third quarter 2003. We were required to
reclassify our Series A and Series B convertible preferred stock from the equity
section to the liability section on our condensed balance sheet. Adoption of
SFAS No. 150 also required us to present payments to holders of such instruments
and related accruals separately from payments to and interest due to other
creditors in our statements of cash flows and operations. See Note 10 -
Preferred Stock Subject to Mandatory Conversion into a Variable Number of
Shares.
5
4. Stock Options:
Pro Tech has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure an
amendment to FASB Statement No. 123," and continues to apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
our stock-based compensation plans.
No options were issued to officers and employees during the three or nine
months ended September 30, 2003. No compensation expense was recorded during the
three or nine months ended September 30, 2002 for options issued to officers and
employees, in accordance with APB No. 25. Had compensation expense been
determined on the fair value at the date of grant in accordance with SFAS No.
123, the net loss and loss per share attributable to common shareholders would
have been adjusted to the pro forma amounts indicated below:
For the three months ended For the nine months ended
September 30, September 30,
-------------------------------- -------------------------------
2002 2003 2002 2003
-------------- --------------- --------------- -------------
Net loss attributable to common
stockholders, as reported $ (402,020) $ (188,350) $(1,509,133) $ (686,153)
Stock-based employee costs based on fair
value method, net of related taxes (1,352) (1,926) (19,500) (3,738)
-------------- --------------- --------------- -------------
Net loss attributable to common
stockholders, pro forma $ (403,372) $ (190,276) $(1,528,633) $ (689,891)
============== =============== =============== =============
Basic and diluted loss per common share:
As reported $ (0.01) $ (0.00) $ (0.05) $ (0.02)
============== =============== =============== =============
Pro forma $ (0.01) $ (0.00) $ (0.05) $ (0.02)
============== =============== =============== =============
5. Inventories, net:
Inventories, net consisted of the following:
December 31, September 30,
2002 2003
----------------- -----------------
Finished goods $ 379,089 $ 332,030
Raw materials 196,330 142,867
Work in progress 27,117 29,570
----------------- -----------------
Gross inventories 602,536 504,467
Less: reserve for obsolete inventory 10,000 5,000
----------------- -----------------
Total Inventories, net $ 592,536 $ 499,467
================= =================
6. Property and Equipment, net:
Property and equipment, net consisted of the following:
6
December 31, September 30,
2002 2003
----------------- -----------------
Production molds $ 454,076 $ 455,440
Office equipment 146,556 149,567
Production equipment 39,514 39,514
Leased equipment 83,188 83,188
Leasehold improvements 315,050 315,050
Vehicles 12,414 12,414
Marketing displays 16,160 16,160
----------------- -----------------
Total cost 1,066,958 1,071,333
Less: accumulated depreciation
and amortization 465,775 582,728
----------------- -----------------
Total Property and equipment, net $ 601,183 $ 488,605
================= =================
Depreciation expense for the nine months ended September 30, 2002 and 2003
was $121,820 and $116,953, respectively.
7. Accrued Expenses:
Accrued expenses consisted of the following:
December 31, September 30,
2002 2003
----------------- ------------------
Accrued payroll and related expenses $ 98,718 $ 107,768
Accrued warranty expense 69,486 49,680
Accrued vacation 16,397 13,155
Accrued lease payable 18,881 17,532
Other accrued expenses 19,498 30,798
----------------- ------------------
Total Accrued expenses $ 222,980 $ 218,933
================= ==================
8. Due to Factor and Other Liabilities:
December 31, September 30,
2002 2003
-------------- ---------------
Due to factor $ 34,165 $ 28,421
Due to NCT Hearing Products, Inc. - 64,948
-------------- ---------------
Total Due to factor and other liabilities $ 34,165 $ 93,369
============== ================
Pro Tech is a party to a factoring agreement with Goodman Factors, Inc. At
September 30, 2003, outstanding accounts receivable factored under this
agreement were $33,875, of which $28,421 had been received by Goodman under
recourse provisions. Total fees incurred under this arrangement amounted to
$1,783 and $822 during the three months ended September 30,
7
2002 and 2003, respectively; $5,207 and $3,937 during the nine months ended
September 30, 2002 and 2003, respectively. Interest expense incurred under this
arrangement amounted to $1,031 and $212 during the three months ended September
30, 2002 and 2003, respectively; $2,571 and $1,795 during the nine months ended
September 30, 2002 and 2003, respectively.
9. Notes Payable:
Pro Tech successfully renegotiated its note payable with Westek
Electronics, Inc., which was due on June 27, 2003. The new $159,938 note dated
June 27, 2003, represented principal of $158,938 plus accrued interest of $1,000
from the matured note. The new note has interest at 8.5% and payment terms of
$3,500 due on the last day of each month starting on June 30, 2003 through May
31, 2004; with the remaining balance due on June 27, 2004. The balance of this
note outstanding as of September 30, 2003 was $149,353, which is included in
Notes payable on our condensed balance sheet.
10. Preferred Stock Subject to Mandatory Conversion into a Variable Number of
Shares:
Pro Tech had two types of preferred stock outstanding as of September 30,
2003, Series A and Series B. Each share of the Series A preferred stock ("Series
A") has a par value of $0.01 and a stated value of $1,000. There were 1,500
shares authorized and 50 shares issued and outstanding as of December 31, 2002
and September 30, 2003. The Series A has a mandatory conversion date of March
31, 2005. Each share of the Series B preferred stock ("Series B") has a par
value of $0.01 and a stated value of $1,000. There were 500 shares authorized,
issued and outstanding as of December 31, 2002 and September 30, 2003. The
Series B has a mandatory conversion date of March 31, 2006.
As of December 31, 2002, the Series B was carried on our balance sheet at
$653,438, which represented 125% of the stated value of the shares, plus the
accrued dividends of $28,438 and was classified as temporary equity rather than
stockholders' equity. The Series B was presented this way because, as of
December 31, 2002, under the terms of the agreements entered into in connection
with the issuance of the Series B, the holders of those shares may have had a
right to require Pro Tech to redeem the shares at 125% of the stated value.
Because any such redemption would not be within the sole control of Pro Tech,
Rule 5-02.28 of Regulation S-X applied and mandated treatment of the shares as
temporary equity. On April 10, 2003, Pro Tech entered into an agreement with the
holder of the Series B whereby the holder agreed to waive certain requirements
of the Registration Rights Agreement relating to the Series B. This waiver
released Pro Tech from the requirement to register shares of Pro Tech's common
stock for the conversion of the Series B. This cancelled the triggering event,
which may have placed the redemption of the Series B at the holder's option.
With the signing of this agreement, such redemption was within Pro Tech's
control. At June 30, 2003, the Series B was classified within the stockholders'
equity section of the balance sheet and carried at its stated value plus accrued
dividends.
Both the Series A and the Series B are covered under the adoption of SFAS
No. 150 as of the beginning of the third quarter of 2003. SFAS No. 150 required
us to move the Series A and
8
the Series B from the equity section to the liability section on our condensed
balance sheet. In connection with the move from the equity section to the
liability section, Pro Tech was required to increase the value of the preferred
stock to reflect the monetary value of the shares required to be issued upon
conversion. The Series A was increased by $12,500 and the Series B was increased
by $125,000. The corresponding entry was to reduce the additional
paid-in-capital by $137,500. See Note 11 - Stockholders' Equity.
SFAS No. 150 also required us to record any payments or accruals of
payments to holders of such instruments as interest costs. Therefore, as of July
1, 2003, the dividends accrued to holders of Series A and Series B are recorded
as interest expense in the condensed statement of operations; whereas,
previously they were recorded as a reduction to the additional paid-in-capital.
The interest expense recorded for Series A and Series B for the three months
ended September 30, 2003 was $504 and $5,041, respectively. The reduction to
additional paid-in-capital for the six months ended June 30, 2003, calculated
for purposes of determining net loss attributable to common stockholders, on the
Series A and Series B was $991 and $9,920, respectively.
The Series A is carried on our balance sheet as of September 30, 2003 at
$68,516, which is comprised of the monetary value of the shares of $62,500, plus
the accrued dividends of $6,016. Pro Tech would have to issue approximately 8
million shares of our common stock if settlement of the stated value of the
Series A were to occur as of September 30, 2003. Pro Tech has the option to
settle the accrued dividends in cash or common stock. As of September 30, 2003,
settlement in common stock for the accrued dividends on the Series A would
require issuance of approximately 1 million shares. There is no limit on the
number of shares that Pro Tech could be required to issue upon conversion of the
Series A preferred stock.
The Series B is carried on our balance sheet as of September 30, 2003 at
$668,399, which is comprised of the monetary value of the shares of $625,000;
plus the accrued dividends of $43,399. Pro Tech would have to issue
approximately 78 million shares of our common stock if settlement of the stated
value of the Series B were to occur as of September 30, 2003. Pro Tech has the
option to settle the accrued dividends in cash or common stock. As of September
30, 2003, settlement in common stock for the accrued dividends on the Series B
would require issuance of approximately 7 million shares. There is no limit on
the number of shares that Pro Tech could be required to issue upon conversion of
the Series B preferred stock.
11. Stockholders' Equity:
The changes in stockholders' equity during the nine months ended September
30, 2003, were as follows:
9
Balance Dividend on Reverse Balance
at Preferred Redemption Adoption of Net At
12/31/02 Stock Adjustment SFAS No. 150 Loss 9/30/03
----------------- -------------- ------------- -------------- ----------- --------------
Series A preferred stock: Shares 50 - - (50) - -
Amount $ 54,521 991 - (55,512) - $ -
Series B preferred stock: Shares 500 - - (500) - -
Amount $ 653,438 9,920 (125,000) (538,358) - $ -
Common stock: Shares 33,200,311 - - - - 33,200,311
Amount $ 33,200 - - - - $ 33,200
Additional paid-in capital: $ 18,451,079 (10,911) 125,000 (137,500) - $ 18,427,668
Accumulated deficit: $(16,998,214) - - - (675,242) $(17,673,456)
12. Common Stock:
The number of shares of common stock required to be reserved for issuance
was approximately 136 million at September 30, 2003. This reserve includes
amounts for the conversion of preferred stock and for the exercise of options
and warrants.
13. Business Divisions Results:
Pro Tech is divided into the following three business divisions:
Product Business: We presently design, develop, manufacture and market
lightweight telecommunications headsets. Our headsets employ new concepts in
advanced lightweight design, and our marketing strategies involve the sale of
our product directly to the commercial headset market as a replacement for our
competitors' products. We presently sell our first design for the commercial
headset market comprised of fast-food companies and other large quantity users
of headset systems. We are also in the process of completing development of
several other headsets for the telephone user market, to include telephone
operating companies, government agencies, business offices, and professional
telephone centers.
Telecommunications Systems Integration: On March 1, 2001, we launched the
Telecommunications Systems Integration Business to sell and install simple to
sophisticated analog, digital and Internet Protocol phone systems providing
telecommunications systems integration support to the small office and the large
corporate call center clients.
Call Center Operations: During 2001, we launched the Call Center Operations
Business. We utilized customer relationship management technologies and
strategies in order to achieve business division objectives. As of December 21,
2001, we suspended operations in the Call Center Operations Business due to poor
performing contracts. We resumed limited operations during the third quarter of
2002.
10
As of September 30, 2003, these divisions are not deemed to be reportable
segments in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." No geographic information for revenues from
external customers or for long-lived assets is disclosed as our primary market
and capital investments were concentrated in the United States.
Business division data is as follows:
Division
----------------------------------------------------------
Telecom
Product Systems Call Center
Business Integration Operations Total
----------------------------------------------------------
For the three months ended September 30, 2003:
Sales to external customers $ 287,670 $ 35,997 $ 972 $ 324,639
Other revenue - other operating segments - - - -
Loss from operations (157,031) (3,279) (2,835) (163,145)
For the three months ended September 30, 2002:
Sales to external customers $ 363,287 $ 32,503 $ 11,567 $ 407,357
Other revenue - other operating segments - - - -
(Loss)/income from operations (373,612) (9,089) 4,446 (378,255)
For the nine months ended September 30, 2003:
Sales to external customers $ 848,538 $ 86,808 $ 972 $ 936,318
Other revenue - other operating segments - - - -
Loss from operations (589,310) (15,015) (9,275) (613,600)
For the nine months ended September 30, 2002:
Sales to external customers $ 1,180,995 $ 97,803 $ 11,567 $ 1,290,365
Other revenue - other operating segments - - - -
Loss from operations (1,380,084) (6,202) (33,408) (1,419,694)
14. Related Party Transactions:
During the three months ended September 30, 2002 and 2003, we recorded
charges from NCT of approximately $103,000 and $65,000, respectively (for health
benefits, labor and parent company allocations), which are included in Selling,
general and administrative expenses in our condensed statement of operations.
For the nine months ended September 30, 2002 and 2003, these charges were
approximately $409,000 and $260,000, respectively. In addition, NCT provided
cash advances to Pro Tech in the amount of $40,000 and $257,000 for the three
and nine-month periods ended September 30, 2003, respectively.
On March 31, 2003, Pro Tech issued a promissory note to NCT Hearing
Products, Inc. ("NCT Hearing"), bearing interest at prime (4.00% at September
30, 2003) and due on April 1, 2004, for $291,312 in exchange for services
provided and cash advanced to Pro Tech by NCT and its subsidiaries during the
three months ended March 31, 2003.
11
On June 30, 2003, Pro Tech issued a promissory note to NCT Hearing, bearing
interest at prime (4.00% at September 30, 2003) and due on April 1, 2005 in the
amount of $1,512,679. This note was issued as consideration for the rollover of
$1,345,811 in principal of all outstanding notes payable by Pro Tech to NCT
Hearing (plus accrued interest of $35,900) as of June 30, 2003, plus $130,968
for services provided and cash advanced to Pro Tech by NCT and its subsidiaries
during the three months ended June 30, 2003. The following notes payable were
outstanding and rolled into the new note payable dated June 30, 2003:
Outstanding Accrued
Original issue date of note: Principal Interest Total
---------------- --------------- --------------
September 30, 2002 $ 906,232 $ 29,664 $ 935,896
December 31, 2002 148,267 3,146 151,413
March 31, 2003 291,312 3,090 294,402
---------------- --------------- --------------
Total rolled into new note payable $ 1,345,811 $ 35,900 $ 1,381,711
================ =============== ==============
As of December 31, 2002 and September 30, 2003, Pro Tech owed an aggregate
of $1,064,703 and $1,633,085, respectively, to NCT Hearing. As of September 30,
2003, $1,568,137 is included in Noncurrent notes payable and the remaining
$64,948 is included in Due to factor and other liabilities on our condensed
balance sheet.
15. Subsequent Events
On October 19, 2003, the note receivable of approximately $65,000 from
Keith Larkin became due. Pro Tech did not receive payment. We have begun
collection efforts on such note.
On October 28, 2003, the 4,500,000 warrants issued in conjunction with the
Series A Preferred Stock expired. The exercise price of these warrants was $0.50
per share.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SEPTEMBER 30, 2003
Description of Business
Pro Tech operates mainly in the lightweight headset industry. During 2001,
we expanded into the telecommunications systems integration business and the
call center operations business (see Note 13. Business Divisions Results for
further discussion of these operations).
Pro Tech presently designs, develops, manufactures and markets lightweight
telecommunications headsets. Our headsets employ new concepts in advanced
lightweight design. Our marketing strategy involves the sale of our products
directly to the commercial headset market as a replacement for competitors'
products. We presently sell to the commercial headset market comprised of
fast-food companies and other large quantity users of headset systems. We have
recently completed development of several other headsets for the telephone user
market including telephone operating companies, government agencies, business
offices, and professional telephone centers.
There are two components to a complete telephone headset. The first is the
headset component that the user wears, consisting of a speaker and a microphone.
The second is the electronic amplifier which is relatively more complex, time
consuming and costly to produce as it requires many variations to interface with
the wide variety of telephone systems in the market and generates higher labor
and material costs. The electronic amplifier also generally offers lower profit
margins than the headset component. As a result, we have outsourced the
production of several amplifiers engineered to our specifications. We will
continue to concentrate our efforts on the production of that portion of the
telephone headset that the user wears.
Pro Tech will also continue to concentrate efforts on the production and
distribution of new headsets designed to connect to and interface with various
electronic amplifiers and telephone systems currently in use. We have adopted a
co-engineering product development strategy through the use of joint engineering
agreements with companies that have complimentary engineering patents. We
project that this strategy will greatly decrease the product development cycle
while offering superior products to our customers. We have continued to make
investments in technology and have incurred development costs with respect to
engineering prototypes, pre-production models and field testing of several new
products. Management believes that our investment in technology will result in
the improvement of the functionality, speed and cost of components and products.
Critical Accounting Policies
Our condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. As
such, some accounting
13
policies have a significant impact on amounts reported in the financial
statements. A summary of those significant accounting policies can be found in
our 2002 Annual Report on Form 10-K, filed on March 31, 2003, in the Notes to
the Financial Statements, Note 1. In particular, judgment is used in areas such
as determining the allowance for doubtful accounts, adjustments to inventory
valuations, asset impairments and the accrual for warranty expense.
Forward-Looking Statements
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document contains
such "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future
growth in revenues and cash flow. Words such as "anticipates," "estimates,"
"expects," "projects," "intends," "plans," "believes," "will be," "will
continue," "will likely result," and words and terms of similar substance used
in connection with any discussion of future operating or financial performance
identify such forward-looking statements. Those forward-looking statements are
based on management's present expectations about future events. As with any
projection or forecast, they are inherently susceptible to uncertainty and
changes in circumstances, and Pro Tech is under no obligation to (and expressly
disclaims any such obligation to) update or alter its forward-looking statements
whether as a result of such changes, new information, future events or
otherwise.
Pro Tech operates in a highly competitive and rapidly changing environment
and market segments that are dependent on our ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of electronic systems; produce a cost effective product that will
gain acceptance in relevant consumer and other product markets; increase
revenues from products; realize funding from product sales, and engineering and
development revenues, to sustain our current level of operation; introduce, on a
timely basis, new products; maintain satisfactory relations with our customers;
attract and retain key personnel; maintain and expand our strategic alliances;
and protect our know-how, and inventions. Pro Tech's actual results could differ
materially from management's expectations because of changes in such factors.
New risk factors can arise and it is not possible for management to predict all
such risk factors, nor can it assess the impact of all such risk factors on the
company's business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction of
actual results.
Investors should also be aware that while the company might, from time to
time, communicate with securities analysts, it is against the company's policy
to disclose to them any material non-public information or other confidential
commercial information. Accordingly, investors should not assume that the
company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Furthermore, the company has a policy
against issuing or confirming financial forecasts or projections issued by
others. Thus, to the extent that reports issued by securities analysts or others
contain any projections, forecasts or opinions, such reports are not the
responsibility of the company.
14
In addition, Pro Tech's overall financial strategy, including growth in
operations, maintaining financial ratios and strengthening the balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions, economic
slowdowns and changes in Pro Tech's plans, strategies and intentions.
Results of Operations
Three months ended September 30, 2003 compared to three months ended September
30, 2002
Net loss for the three months ended September 30, 2003 decreased
approximately $203,000, or 52%, compared to the same three-month period in 2002.
This decrease was due to a reduction in selling, general and administrative
expenses of approximately $192,000, combined with an increase of approximately
$24,000 in our gross profit.
Total revenue for the three months ended September 30, 2003 decreased
approximately $83,000, or 20%, compared to the same three months ended September
30, 2002. This decrease was due mainly to reductions in our headset sales,
mainly fast-food parts and radio headsets, and our call center operations.
Revenue from the fast-food market decreased approximately $36,000 due to
reduced purchases by three of our major distributors. This decrease was
primarily the result of slowed demand from their customer base. Demand has
decreased and we expect it to remain slow for the remainder of the year as a
result of two factors: (1) the announced closures of several hundred McDonalds
franchises worldwide; and (2) increased market competition from far-east
competitors.
Revenue from the radio market decreased approximately $24,000 due to Pro
Tech's decision to exit the radio market during 2002. Revenues for the three
months ended September 2002 were approximately $24,000 as compared to less than
$1,000 for the same period in 2003.
Revenues from our call center operations decreased approximately $11,000
due to a lack of contracts during 2003. Pro Tech is currently evaluating the
current call center business plan as it relates to the recently enacted federal
legislation pertaining to Do Not Call or DNC lists. This new law was enacted on
October 1, 2003. The legislation requires several changes to the operating model
in order to comply with the new law. A decision will be made by management in
the fourth quarter to determine the viability of pursuing this business for Pro
Tech.
For the three months ended September 30, 2003, cost of goods sold decreased
approximately $106,000, or 51%, compared to the same three-month period in 2002.
This decrease was due mainly to the decrease in sales volume for 2003 when
compared to the same three months ended in 2002. In addition, replacement of
headsets in connection with a component failure that we experienced during the
second quarter of 2001 was completed as of September 30, 2002. The number of
units replaced through warranty during the three-month period ended September
30, 2003 decreased by approximately 2,500 compared to the same period in 2002,
representing approximately $18,000 in costs.
15
Gross profit margin increased from 48.6% for the three months ended
September 30, 2002 to 68.3% for the three months ended September 30, 2003. We
completed the replacement of component failure headsets in September 2002 so
that these costs were not incurred during the three-month period ended September
30, 2003, but were incurred during the same period in 2002.
For the three months ended September 30, 2003, selling, general and
administrative expenses decreased approximately $192,000, or 33%, compared to
the same three-month period in 2002. This decrease was due mainly to a decrease
of approximately $187,000 in amortization expense related to our intangible
assets.
Nine months ended September 30, 2003 compared to nine months ended September 30,
2002
Net loss for the nine months ended September 30, 2003 decreased
approximately $772,000, or 53%, compared to the same nine-month period in 2002.
This decrease was due to the net effect of a reduction in selling, general and
administrative expenses of approximately $870,000, partially offset by a
decrease of approximately $64,000 in our gross profit and an increase in
interest expense of approximately $32,000.
Total revenue for the nine months ended September 30, 2003 decreased
approximately $354,000, or 27%, compared to the same nine months ended September
30, 2002. This decrease was due mainly to the reduction in revenues from the
fast-food and radio markets. This reduction reflected a decrease in demand due
primarily to a general slowdown in the economy.
Revenue from the fast-food market decreased approximately $280,000 due to
reduced purchases by three of our major distributors. This decrease was
primarily the result of slowed demand from their customer base. Demand has
decreased and we expect it to remain slow for the remainder of the year as a
result of two factors: (1) the announced closures of several hundred McDonalds
franchises worldwide; and (2) increased market competition from far-east
competitors.
Revenue from the radio market decreased approximately $93,000 due to Pro
Tech's decision to exit the radio market during 2002. Revenues for the nine
months ended September 2002 were approximately $95,000 as compared to
approximately $2,000 for the same period in 2003.
For the nine months ended September 30, 2003, cost of goods sold decreased
approximately $290,000, or 50%, compared to the same nine-month period in 2002.
This decrease was due mainly to the decrease in sales volume for 2003 when
compared to the same nine months ended in 2002. In addition, replacement of
headsets in connection with a component failure that we experienced during the
second quarter of 2001 was completed as of September 30, 2002. The number of
units replaced through warranty during the nine-month period ended September 30,
2003 decreased by approximately 7,300 compared to the same period in 2002,
representing approximately $54,000 in costs. During the nine months ended
16
September 30, 2003 we received a $15,000 credit from a vendor in settlement of
disputed charges from prior years.
Gross profit margin increased from 54.8% for the nine months ended
September 30, 2002 to 68.7% for the nine months ended September 30, 2003. This
increase was the result of two factors mentioned above. First, we received a
$15,000 credit from a vendor in settlement of disputed charges from prior years.
Second, we completed the replacement of component failure headsets in September
2002 so that these costs were not incurred during the nine-month period ended
September 30, 2003, but were incurred during the same period in 2002.
For the nine months ended September 30, 2003, selling, general and
administrative expenses decreased approximately $870,000, or 41%, compared to
the same nine-month period in 2002. This decrease was due mainly to a decrease
of approximately $562,000 in amortization expense related to our intangible
assets and a decrease of approximately $279,000 in payroll and related employee
medical benefit expenses. Starting in the latter part of the first quarter 2002,
Pro Tech implemented changes to reduce selling, general and administrative
expenses. These changes included a reduction of work force in all areas of the
products operations, tighter controls over expenditures and the continued
reorganization of the call center operation.
Liquidity and Capital Resources
During the nine months ended September 30, 2003, we funded working capital
requirements with continued use of our short-term financing arrangement and
advances from NCT Group, Inc. (our ultimate parent company) and its affiliates.
We have taken steps to reduce our working capital requirements. These steps
include the reorganization of the call center operations, the reduction of work
force levels in all areas of the products operations, and the institution of
tighter controls over all expenditures. As a result of the reorganization and
reductions of work force, management believes we will have sufficient funds to
meet anticipated working capital requirements for the next 12 months.
At September 30, 2003, cash and cash equivalents were $7,226.
The current ratio (current assets to current liabilities) was .53 to 1.00
at September 30, 2003, as compared to .98 to 1.00 at December 31, 2002. At
September 30, 2003 we had a working capital deficit of $683,073 compared to a
working capital deficit of $19,543 at December 31, 2002. This increase in
working capital deficit of approximately $664,000 was due to the
reclassification of our Series A ($56,016) and Series B ($543,399) Preferred
Stock from the equity section to the current liabilities section on our
condensed balance sheet. In addition, we increased the value of the Series A and
Series B by $12,500 and $125,000, respectively. Both of these transactions were
done in conjunction with the adoption of SFAS No. 150. See Note 10 - Preferred
Stock Subject to Mandatory Conversion into a Variable Number of Shares.
For the nine months ended September 30, 2003, the net cash used in
operating activities was $225,781 compared to $14,448 for the nine months ended
September 30, 2002. This increase in used funds of approximately $211,000 was
due primarily to the $199,000 decrease in accounts payable.
17
For the nine months ended September 30, 2003, the net cash provided by
financing activities was $225,951 compared to $12,648 net cash used in financing
activities for the nine months ended September 30, 2002. This increase of
approximately $239,000 was due to $40,000 in cash advances received from NCT
Hearing and $217,000 received from NCT in exchange for notes payable to NCT
Hearing during the nine months ended September 30, 2003.
The company has no lines of credit with banks or other lending
institutions.
Capital expenditures
There were no material commitments for capital expenditures as of September
30, 2003, and no material commitments are anticipated in the near future.
ITEM 4. CONTROLS AND PROCEDURES
Pro Tech management, including the President and the Chief Financial
Officer, conducted an evaluation of the effectiveness of disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14 within 90 days of the filing of
this report. Based on that evaluation, the President and the Chief Financial
Officer concluded that the disclosure controls and procedures are effective in
ensuring that all material information required to be filed in this quarterly
report has been made known to them in a timely fashion. There have been no
significant changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date the President and the Chief
Financial Officer completed their evaluation.
18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10(a) Exchange Rights and Release Agreement dated April 10, 2003 among
NCT Group, Inc., Pro Tech Communications, Inc., Alpha Capital
Aktiengesellschaft, Austost Anstalt Schaan, Balmore, S.A. and
Libra Finance, S.A., incorporated herein by reference to Exhibit
10 (a) of Pro Tech's Form 10-Q filed on May 14, 2003.
31(a) Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 for the quarterly period ended
September 30, 2003.
31(b) Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 for the quarterly period ended
September 30, 2003.
32(a) Certification of Form 10-Q for the quarterly period ended March
30, 2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, incorporated by
reference to Exhibit 99 of Pro Tech's Form 10-Q filed on May 14,
2003.
32(b) Certification of Form 10-Q for the quarterly period ended June
30, 2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, incorporated by
reference to Exhibit 99 of Pro Tech's Form 10-Q filed on August
8, 2003.
32(c) Certification of Form 10-Q for the quarterly period ended
September 30, 2003 pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Form 8-K.
On April 4, 2003, Pro Tech filed a report on Form 8-K announcing its
results of operations for the fiscal year ended December 31, 2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pro Tech Communications, Inc.
-----------------------------
Registrant
By: /s/ RICHARD HENNESSEY
-----------------------------
Richard Hennessey
President
By: /s/ DEBRA KIRVEN
-----------------------------
Debra Kirven
Chief Financial Officer
Dated: November 18, 2003
20