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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 March 31, 2004
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
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(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.
73,390,133 shares outstanding as of May 10, 2003
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRO TECH COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
December 31, March 31,
2003 2004
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,193 $ 212,032
Accounts receivable, less allowance for doubtful accounts
of $31,437; and $22,579, respectively 88,769 117,860
Inventories, net of reserves (Note 4) 493,555 475,650
Due from officer/stockholder 66,044 66,775
Other current assets 17,571 23,263
------------- -------------
Total current assets 687,132 895,580
Property and equipment, net (Note 5) 449,672 412,741
Intangible assets, net of accumulated amortization of
$2,277,398 and $2,322,579, respectively 2,530,094 2,484,913
Other assets 6,138 4,330
------------- -------------
$ 3,673,036 $ 3,797,564
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 231,282 $ 227,386
Accrued expenses (Note 6) 195,201 201,777
Current portion of capital lease obligations 10,434 10,688
Due to factor and other liabilities (Note 7) 11,117 46,076
Note payable 2,385 2,385
Note payable to stockholder 142,001 134,424
Preferred stock subject to mandatory conversion into
a variable number of shares (Note 8) 742,459 747,944
------------- -------------
Total current liabilities 1,334,879 1,370,680
Noncurrent note payable 4,076 3,503
Noncurrent notes payable due to affiliates (Note 12) 1,824,540 2,164,255
Capital lease obligations 21,333 18,563
------------- -------------
Total liabilities 3,184,828 3,557,001
------------- -------------
Commitments
Stockholders' equity (Notes 9 and 10):
Preferred stock, $.01 par value, authorized 998,000 shares, none
issued and outstanding - -
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 18,427,668 18,427,668
Accumulated deficit (17,972,660) (18,220,305)
------------- -------------
Total stockholders' equity 488,208 240,563
------------- -------------
$ 3,673,036 $ 3,797,564
============= =============
The accompanying notes are an integral part of the financial statements.
2
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended March 31,
-----------------------------
2003 2004
------------- -------------
Net sales $ 353,537 $ 267,017
Cost of goods sold 124,531 82,875
------------- -------------
Gross profit 229,006 184,142
Selling, general and administrative expenses 383,197 313,617
NCT Hearing and affiliates charges (Note 12) 84,312 89,082
------------- -------------
Loss before other income (expense) (238,503) (218,557)
Other income (expense):
Interest income 723 731
Interest expense (7,169) (6,146)
Interest expense - NCT Hearing (Note 12) (11,194) (18,328)
Interest expense - convertible preferred stock (Note 8) - (5,485)
Miscellaneous income, net 3,653 140
------------- -------------
Net loss $ (252,490) $ (247,645)
Adjustments attributable to preferred stock:
Preferred stock dividend (accretion) (Note 8) $ 5,426 $ -
------------- -------------
Net loss attributable to common stockholders $ (257,916) $ (247,645)
============= =============
Basic and diluted net loss per share attributable
to common stockholders $ (0.01) $ (0.01)
============= =============
Weighted average common shares outstanding -
basic and diluted 33,200,311 33,200,311
============= =============
The accompanying notes are an integral part of the financial statements.
3
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31,
--------------------------------
2003 2004
--------------- --------------
Cash flows from operating activities:
Net loss $ (252,490) $ (247,645)
Adjustments to reconcile net loss to net
cash used in operating activities:
Note payable issued for services received 105,507 150,452
Depreciation and amortization 85,774 83,840
Provision for doubtful accounts 4,237 7,119
Provision for obsolete inventory (5,000) -
Interest expense related to preferred stock dividend - 5,485
Changes in operating assets and liabilities:
Increase in accounts receivable (37,743) (36,210)
Decrease in inventories, net 63,690 17,905
Decrease (increase) in other assets 1,213 (3,884)
Decrease in accounts payable (119,346) (3,896)
Increase in accrued expenses 4,803 6,578
Increase (decrease) in other liabilities 12,685 (7,778)
--------------- --------------
Net cash used in operating activities $ (136,670) $ (28,034)
--------------- --------------
Cash flows from investing activities:
Capital expenditures (1,011) (1,730)
Net change in due from officer/stockholder (813) (731)
--------------- --------------
Net cash used in investing activities $ (1,824) $ (2,461)
--------------- --------------
Cash flows from financing activities:
Proceeds from:
Notes payable - NCT Hearing (Note 12) 197,000 232,000
Payment made on:
Notes payable (7,489) (8,150)
Capital lease obligations (2,472) (2,516)
--------------- --------------
Net cash provided by financing activities $ 187,039 $ 221,334
--------------- --------------
Net increase in cash and cash equivalents $ 48,545 $ 190,839
Cash and cash equivalents - beginning of period 13,624 21,193
--------------- --------------
Cash and cash equivalents - end of period $ 62,169 $ 212,032
=============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 7,169 $ 6,146
=============== ==============
Supplemental disclosures of non-cash investing and financing activities:
During the three months ended March 31, 2003, Pro Tech increased the carrying
value of preferred stock and additional paid-in capital
for a 4% dividend totaling $5,426.
The accompanying notes are an integral part of the financial statements.
4
PRO TECH COMMUNICATIONS, INC.
MARCH 31, 2004
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 months ended March 31, 2004 and cash flows for the
three months ended March 31, 2004 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, 2003.
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. 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 ("APB") No. 25 and related interpretations in
accounting for our stock-based compensation plans.
During the three months ended March 31, 2004, 635,000 stock options were
issued to officers and employees. No compensation expense was recorded for these
options, in accordance with APB No. 25. No options were issued during the three
months ended March 31, 2003. Had compensation expense for all issued options
been determined based on the fair value at the date of grant in accordance with
SFAS No. 123, the net loss and net loss per share attributable to common
shareholders would have been adjusted to the pro forma amounts indicated below:
5
For the three months ended
March 31,
----------------------------------
2003 2004
--------------- -----------------
Net loss attributable to common stockholders, as reported $ (257,916) $ (247,645)
Stock-based employee costs based on fair
value method, net of related taxes (2,171) (4,498)
--------------- -----------------
Net loss attributable to common stockholders, pro forma $ (260,087) $ (252,143)
=============== =================
Basic and diluted loss per common share:
As reported $ (0.01) $ (0.01)
=============== =================
Pro forma $ (0.01) $ (0.01)
=============== =================
4. Inventories, net:
Inventories, net consisted of the following:
December 31, March 31,
2003 2004
--------------- --------------
Finished goods $ 295,346 $ 284,852
Raw materials 179,179 172,351
Work in progress 24,030 23,447
--------------- --------------
Gross inventories 498,555 480,650
Less: reserve for obsolete inventory 5,000 5,000
--------------- --------------
Total Inventories, net $ 493,555 $ 475,650
=============== ==============
5. Property and Equipment, net:
Property and equipment, net consisted of the following:
December 31, March 31,
2003 2004
--------------- --------------
Production molds $ 455,440 $ 455,440
Office equipment 149,568 151,297
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 1,071,334 1,073,063
Less accumulated depreciation
and amortization 621,662 660,322
--------------- --------------
Total Property and equipment, net $ 449,672 $ 412,741
=============== ==============
Depreciation expense for the three months ended March 31, 2003 and 2004 was
$39,131 and $38,660, respectively.
6
6. Accrued Expenses:
Accrued expenses consisted of the following:
December 31, March 31,
2003 2004
--------------- --------------
Accrued warranty expense $ 41,687 $ 36,183
Accrued payroll and related expenses 119,937 120,914
Accrued vacation 12,245 14,196
Accrued lease payable 16,723 15,644
Other accrued expenses 4,609 14,840
--------------- --------------
Total Accrued expenses $ 195,201 $ 201,777
=============== ==============
7. Due to Factor and Other Liabilities:
Due to factor and other liabilities consisted of the following:
December 31, March 31,
2003 2004
--------------- --------------
Due to factor $ 11,117 $ 3,339
Due to NCT Hearing Products, Inc. - 42,737
--------------- --------------
Total Due to factor and other liabilities $ 11,117 $ 46,076
=============== ==============
On March 26, 2001, Pro Tech entered into a factoring agreement. At March
31, 2004, outstanding accounts receivable factored under this agreement were
$6,192, of which $3,339 had been received by the factor under recourse
provisions. Total fees incurred under this arrangement amounted to $2,101 and
$415 during the three months ended March 31, 2003 and 2004, respectively.
Interest expense incurred under this arrangement amounted to $979 and $316
during the three months ended March 31, 2003 and 2004, respectively.
During the three months ended March 31, 2004, NCT Hearing advanced cash to
Pro Tech in anticipation of receipt of funds from outstanding accounts
receivable. There is no formal agreement between Pro Tech and NCT Hearing for
these cash advances. These advances are non-interest bearing and are payable
within 35 days. As of March 31, 2004, cash advanced to Pro Tech from NCT Hearing
based upon accounts receivable was $42,737 (see Note 12).
8. Preferred Stock Subject to Mandatory Conversion into a Variable Number of
Shares:
Pro Tech had two types of preferred stock outstanding as of March 31, 2004,
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, 2003 and
March 31, 2004. 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
7
outstanding as of December 31, 2003 and March 31, 2004. The Series B has a
mandatory conversion date of March 31, 2006. Both the Series A and the Series B
are classified as current liabilities on our condensed balance sheet in
accordance with SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and 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 March 31, 2004 was $499 and $4,986, respectively. The reduction to
additional paid-in-capital for the three months ended March 31, 2003, calculated
for purposes of determining net loss attributable to common stockholders, on the
Series A and Series B were $493 and $4,933, respectively.
The Series A is carried on our balance sheet as of March 31, 2004 at its
monetary value of $69,519, which is comprised of the fair value of the shares of
$62,500; plus the cash value of the accrued dividends of $7,019. Pro Tech would
have to issue approximately 3.0 million shares of our common stock if settlement
of the stated value of the Series A were to occur as of March 31, 2004. Pro Tech
has the option to settle the accrued dividends in cash or common stock. As of
March 31, 2004, settlement in common stock for the accrued dividends on the
Series A would require issuance of approximately 0.4 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. No shares of the Series A were converted or
exchanged during the three months ended March 31, 2004.
The Series B is carried on our balance sheet as of March 31, 2004 at its
monetary value of $678,425, which is comprised of the fair value of the shares
of $625,000; plus the cash value of the accrued dividends of $53,426. Pro Tech
would have to issue approximately 29.8 million shares of our common stock if
settlement of the stated value of the Series B were to occur as of March 31,
2004. Pro Tech has the option to settle the accrued dividends in cash or common
stock. As of March 31, 2004, settlement in common stock for the accrued
dividends on the Series B would require issuance of approximately 3.2 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. No shares of the Series B
were converted or exchanged during the three months ended March 31, 2004.
8
9. Stockholders' Equity:
The changes in stockholders' equity during the three months ended March 31,
2004, were as follows:
Balance Dividend on Balance
at Preferred Net At
12/31/2003 Stock Loss 3/31/2004
--------------- ----------- ------------- ------------------
Common stock: Shares 33,200,311 - - 33,200,311
Amount $ 33,200 - - $ 33,200
Additional paid-in capital: $ 18,427,668 - - $ 18,427,668
Accumulated deficit: $ (17,972,660) - (247,645) $ (18,220,305)
10. Common Stock:
The number of shares of common stock required to be reserved for issuance
was approximately 52.9 million at March 31, 2004. This reserve includes amounts
for the conversion of preferred stock and for the exercise of options and
warrants.
11. 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
headphones to be used in the commercial audio and industrial safety markets.
Telecommunications Systems Integration: The Telecommunications Systems
Integration Business sells and installs 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. We continue to develop this business in 2004.
9
As of March 31, 2004, 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 March 31, 2004:
Sales to external customers $ 232,320 34,697 - $ 267,017
Other revenue - other operating segments $ - - - $ -
Net (loss) income $ (251,514) 1,696 2,173 $ (247,645)
For the three months ended March 31, 2003:
Sales to external customers $ 329,485 24,052 - $ 353,537
Other revenue - other operating segments $ - - - $ -
Net loss $ (240,189) (8,836) (3,465) $ (252,490)
12. Related Party Transactions:
During the three months ended March 31, 2003 and 2004, NCT charged Pro Tech
approximately $13,000 and $11,000, respectively, for health benefits paid by NCT
and its affiliates, approximately $43,000 and $54,000, respectively, for labor
provided by NCT employees and approximately $29,000 and $25,000, respectively,
for Pro Tech's share of parent company expenses allocated to each subsidiary.
These expenses are included in NCT Hearing and affiliates charges on our
condensed statement of operations. In addition, NCT Hearing provided cash
advances to Pro Tech in the amount of $197,000 and $232,000 for the three-month
periods ended March 31, 2003 and 2004, respectively.
As of December 31, 2003 and March 31, 2004, Pro Tech owed an aggregate of
$1,824,540 and $2,206,992, respectively, to NCT Hearing. As of March 31, 2004,
$2,164,255 is included in Noncurrent notes payable and the remaining $42,737 is
included in Due to factor and other liabilities (see Note 7) on our condensed
balance sheet.
13. Subsequent Events
On April 1, 2004, Pro Tech entered into an agreement with a stockholder,
whereby Pro Tech agreed to assign the rights to all outstanding amounts
receivable from Keith Larkin, a director, to the stockholder. In consideration
for such assignment by Pro Tech, the stockholder agreed to apply the amount of
the assignment ($66,775) against the Note Payable from Pro Tech to the
stockholder dated June 27, 2003.
10
On April 5, 2004, Pro Tech entered into an agreement with NCT Hearing,
whereby NCT Hearing converted $640,466 of Notes Payable from Pro Tech to NCT
Hearing into 27,846,351 shares of newly issued Pro Tech common stock.
On April 21, 2004, in exchange for 9,821,429 newly issued shares of our
common stock, we obtained an expansion of our existing, exclusive worldwide
technology license from NCT Hearing. This license, which covers over 50 patents,
patents pending and innovations relating to active noise reduction ("ANR") and
noise and echo cancellation, now encompasses all styles of headsets (an
expansion from lightweight, portable styles) including headphones, earmuffs,
earbuds, earplugs, etc., as well as all markets (an expansion from cellular,
multimedia and telephony) including consumer audio, industrial safety, spectator
racing, two-way radio communications and aviation. In addition to having the
expanded technology license, Pro Tech now has the right, in marketing the
licensed products, to use NCT Hearing's most successful existing brands
including: NoiseBuster(R) ANR lightweight consumer audio and communications
headsets; Pro Active(R) ANR industrial safety earmuffs and two-way radio
headsets including aviation; and ClearSpeech(R) noise and echo cancellation
algorithm-based products.
On April 27, 2004, we received notification for conversion of 40 shares,
plus applicable accretion, of our Series B preferred stock, resulting in the
issuance of 2,522,042 shares of our common stock.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MARCH 31, 2004
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 11. 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
12
policies have a significant impact on amounts reported in the financial
statements. A summary of those significant accounting policies can be found in
our 2003 Annual Report on Form 10-K, filed on March 30, 2004, 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.
13
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 March 31, 2004 compared to three months ended March 31, 2003
Net loss for the three months ended March 31, 2004 decreased approximately
$5,000, or 2%, compared to the same three-month period in 2003. This decrease
was due to a reduction in selling, general and administrative expenses of
approximately $70,000, offset by a combination of: (1) a decrease in our gross
profit of approximately $45,000; (2) an increase in related party expenses of
approximately $5,000; and (3) an increase in total interest expense of
approximately $12,000.
Total revenue for the three months ended March 31, 2004 decreased
approximately $87,000, or 24%, compared to the same three months ended March 31,
2003. This decrease was due to reductions in our headset sales, mainly fast-food
parts and telephone headsets.
Revenue from the fast-food market decreased approximately $39,000 due to
reduced purchases by two of our major distributors. The number of units sold in
the fast-food market, including both headsets and parts, decreased from
approximately 10,000 units for the three months ended March 31, 2003 to
approximately 7,000 units during the same period in 2004. This decrease was
primarily the result of increased market competition from far-east competitors.
Revenue from the telephone market decreased approximately $62,000 due
mainly to reduced purchases by two major customers. The first customer,
contributing approximately $48,000 to the decrease, was acquired by another
company during 2003. During the first quarter 2004, we re-established our
relationship with this customer and have been in discussions to supply them with
their headset needs. We anticipate sales to this customer to begin during the
second quarter 2004. The $9,000 decrease attributable to the second customer was
due to the decision by that customer to consolidate their purchases to two
vendors. Pro Tech lost this customer to our largest competitors, Plantronics,
Inc. and GN Netcom, Inc.
In April 2004, Pro Tech obtained an expansion of its exclusive worldwide
technology license from NCT Hearing. This license now encompasses all styles of
headsets (an expansion from lightweight, portable styles) including headphones,
earmuffs, earbuds, earplugs, etc., as well as all markets (an expansion from
cellular, multimedia and telephony) including consumer audio, industrial safety,
spectator racing, two-way radio communications and aviation. In connection with
this expanded license, we are planning to launch two new products during 2004.
The first product will be the next generation NoiseBuster(R) with Active Noise
Reduction ("ANR"). The NoiseBuster is a personal headphone that reduces low
frequency background noise electronically using the ANR technology, while
leaving speech and music clearly audible.
14
We anticipate launching the next generation NoiseBuster during the latter part
of the second quarter or early third quarter of 2004. The second new product
will be the ProActive(R) Safety Earmuff. The ProActive provides industrial
hearing protection for use in higher-noise environments by combining what we
believe to be the best passive hearing protection with the most advanced ANR
technology. We anticipate launching the ProActive Safety Earmuff in the latter
part of 2004.
Revenue for our telephone installation division increased approximately
$11,000 for the three months ended March 31, 2004 as compared to the same
three-month period in 2003. This increase was due to an expanded customer base
in 2004. Our customer base has expanded with the increased awareness of our
services, along with an expansion of the local economy.
For the three months ended March 31, 2004, cost of goods sold decreased
approximately $42,000, or 33%, compared to the same three-month period in 2003.
This decrease was due mainly to the decrease in sales volume for 2004 when
compared to the same three months ended in 2003.
Gross profit margin increased from 64.8% for the three months ended March
31, 2003 to 69.0% for the three months ended March 31, 2004. This increase was
due primarily to a change in the mix of customers. This change resulted from the
decrease in sales to our major distributors. These distributors purchased in
large quantities and, therefore, were given discounted prices resulting in lower
profit margins. We are now selling more to retail customers who do not buy in
large quantities and, therefore, were not given discounted prices resulting in
higher profit margins.
For the three months ended March 31, 2004, selling, general and
administrative expenses decreased approximately $70,000, or 18%, compared to the
same three-month period in 2003. This decrease was due to: (1) a decrease of
approximately $40,000 in payroll expenses; (2) a decrease of approximately
$19,000 in professional fees and expenses; and (3) a decrease of approximately
$8,000 in insurance expenses. These decreases resulted from Pro Tech's continued
costs savings through work force reductions and tighter controls over
expenditures.
For the three months ended March 31, 2004, NCT Hearing and affiliates
charges increased approximately $5,000, or 6%, compared to the same three-month
period in 2003. This increase was due mainly to the additional work performed by
NCT Hearing's engineering staff in connection with the new products being
released later this year (see discussion above).
Interest expense - NCT Hearing for the three months ended March 31, 2004
increased approximately $7,000 compared to the same period in 2003. These
charges were incurred on the outstanding notes payable to NCT Hearing. The
outstanding notes payable represent amounts owed to NCT Hearing for services
provided to Pro Tech by NCT Hearing and its affiliated companies, as well as
cash advances. As of March 31, 2004, the balance of the outstanding notes
payable, including interest, was $2,164,255, as compared to $1,367,210 as of
March 31, 2003.
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Liquidity and Capital Resources
During the three months ended March 31, 2004, we funded working capital
requirements with continued use of our short-term financing arrangement and
advances from NCT Hearing and its affiliates. We have taken steps to reduce our
working capital requirements. These steps include 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 reduction in work force and
continued controls over expenditures, management believes we will have
sufficient funds to meet anticipated working capital requirements for the next
12 months.
At March 31, 2004, cash and cash equivalents were $212,032.
The current ratio (current assets to current liabilities) was .65 to 1.00
at March 31, 2004, as compared to .51 to 1.00 at December 31, 2003. At March 31,
2004 we had a working capital deficit of $475,100 compared to a working capital
deficit of $647,747 at December 31, 2003. This decrease in working capital
deficit of approximately $173,000 was due mainly to the receipt of $232,000 from
NCT Hearing in exchange for a noncurrent note payable during the three months
ended March 31, 2004.
For the three months ended March 31, 2004, the net cash used in operating
activities was $28,034 compared to $136,670 for the three months ended March 31,
2003. This decrease in used funds of approximately $109,000 was due primarily to
a decrease in the funds used to reduce the outstanding accounts payable. For the
three months ended March 31, 2003 we reduced the outstanding accounts payable by
approximately $119,000 as compared to approximately $4,000 for the same period
in 2004.
For the three months ended March 31, 2004, the net cash provided by
financing activities was $221,334 compared to $187,039 for the three months
ended March 31, 2003. This increase of approximately $34,000 was due to an
increase of $35,000 in cash advances received from NCT Hearing in exchange for
noncurrent notes payable during the three months ended March 31, 2004 compared
to the same period in 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 March 31,
2004. In connection with the proposed release of a new product, the ProActive
Safety Earmuff, we have been in discussions with our manufacturer and anticipate
incurring approximately $131,000 in tooling costs (for the mold needed for the
product) consisting of 33% paid at the beginning of the project and the
remainder to be paid as units are produced, not to exceed a period of 18 months
of production.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Pro Tech's President and the Chief Financial Officer, based on their
evaluation of our disclosure controls and procedures (as defined in Securities
Exchange Act of 1934 Rules 13a-15(e) and 15(d)-15(e)) as of the end of the
period covered by this Quarterly Report on Form 10-Q, have concluded that Pro
Tech's disclosure controls and procedures are effective for ensuring that all
material information required to be disclosed by Pro Tech in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
(b) Changes in internal controls.
There were no changes in our internal control over financial reporting that
occurred during Pro Tech's last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, Pro Tech's internal control over
financial reporting.
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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.
31(a) Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended March
31, 2004.
31(b) Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 for the quarterly period ended March
31, 2004.
32(a) Certification of Form 10-Q for the quarterly period ended March 31,
2004 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.
None.
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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: May 14, 2004
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