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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 June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-28602
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 Road, 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 August 13, 2004
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRO TECH COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
December 31, June 30,
2003 2004
---------------- ---------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 21,193 $ 110,750
Accounts receivable, less allowance for doubtful accounts
of $31,437; and $22,074, respectively 88,769 115,129
Inventories, net of reserves (Note 4) 493,555 469,977
Due from officer/stockholder (Note 14) 66,044 -
Other current assets (Note 5) 17,571 48,074
---------------- ---------------
Total current assets 687,132 743,930
Property and equipment, net (Note 6) 449,672 375,709
Intangible assets, net of accumulated amortization of $2,277,398
and $2,371,648, respectively (Note 7) 2,530,094 2,710,844
Other assets 6,138 2,521
---------------- ---------------
$ 3,673,036 $ 3,833,004
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 231,282 $ 201,850
Accrued expenses (Note 8) 195,201 187,215
Current portion of capital lease obligations 10,434 10,850
Due to factor and other liabilities (Note 9) 11,117 76,250
Note payable 2,385 2,385
Note payable to stockholder (Note 14) 142,001 58,552
Preferred stock subject to mandatory conversion into
a variable number of shares of common stock (Note 10) 742,459 698,757
---------------- ---------------
Total current liabilities 1,334,879 1,235,859
Noncurrent note payable 4,076 2,914
Noncurrent notes payable due to affiliates (Note 14) 1,824,540 1,672,638
Capital lease obligations 21,333 15,826
---------------- ---------------
Total liabilities 3,184,828 2,927,237
---------------- ---------------
Commitments
Stockholders' equity (Notes 11 and 12):
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 and 73,390,133 shares, respectively 33,200 73,390
Additional paid-in-capital 18,427,668 19,357,332
Accumulated deficit (17,972,660) (18,524,955)
---------------- ---------------
Total stockholders' equity 488,208 905,767
---------------- ---------------
$ 3,673,036 $ 3,833,004
================ ===============
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 Six Months
Ended June 30, Ended June 30,
---------------------------------- ------------------------------
2003 2004 2003 2004
--------------- ---------------- -------------- -------------
Net sales $ 258,142 $ 269,797 $ 611,679 $ 536,814
Cost of goods sold 65,368 84,139 189,899 167,014
--------------- ---------------- -------------- -------------
Gross profit 192,774 185,658 421,780 369,800
Selling, general and administrative expenses 294,033 340,124 677,230 653,741
NCT Hearing and affiliates charges (Note 14) 110,693 127,962 195,005 217,044
--------------- ---------------- -------------- -------------
Loss before other income (expense) (211,952) (282,428) (450,455) (500,985)
Other income (expense):
Interest income 730 - 1,453 731
Interest expense (8,649) (3,995) (15,817) (10,141)
Interest expense - NCT Hearing (Note 14) (14,500) (15,142) (25,695) (33,470)
Interest expense - convertible preferred stock (Note 10) - (5,200) - (10,685)
Miscellaneous income (expense), net (31) 2,115 3,622 2,255
--------------- ---------------- -------------- -------------
Net loss (234,402) (304,650) (486,892) (552,295)
Adjustments attributable to preferred stock (Note 10):
Preferred stock dividend 5,485 - 10,911 -
--------------- ---------------- -------------- -------------
Net loss attributable to common stockholders $ (239,887) $ (304,650) $ (497,803) $ (552,295)
=============== ================ ============== =============
Basic and diluted loss per share $ (0.01) $ (0.00) $ (0.02) $ (0.01)
=============== ================ ============== =============
Weighted average common shares outstanding - basic and diluted 33,200,311 69,286,978 33,200,311 51,343,332
=============== ================ ============== =============
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 Six Months Ended
June 30,
-------------------------------------
2003 2004
----------------- ----------------
Cash flows from operating activities:
Net loss $ (486,892) $ (552,295)
Adjustments to reconcile net loss to net
cash used in operating activities:
Note payable issued for services received 230,976 349,017
Depreciation and amortization 169,895 169,940
Provision for doubtful accounts 3,111 6,614
Provision for obsolete inventory (5,000) -
Interest expense related to preferred stock dividend - 10,685
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 59,012 (32,974)
Decrease in inventories, net 79,784 23,578
Increase in other assets (5,704) (26,886)
Decrease in accounts payable (201,348) (29,432)
Decrease in accrued expenses (6,090) (7,595)
(Decrease) increase in other liabilities (31,793) 328
----------------- ----------------
Net cash used in operating activities $ (194,049) $ (89,020)
----------------- ----------------
Cash flows from investing activities:
Capital expenditures (1,454) (1,730)
Net change in due from officer/stockholder (2,375) (731)
----------------- ----------------
Net cash used in investing activities $ (3,829) $ (2,461)
----------------- ----------------
Cash flows from financing activities:
Proceeds from:
Notes payable - NCT Hearing (Note 14) 217,000 232,000
Payment made on:
Notes payable (16,100) (18,223)
Note payable due to affiliates - (27,648)
Capital lease obligations (4,811) (5,091)
----------------- ----------------
Net cash provided by financing activities $ 196,089 $ 181,038
----------------- ----------------
Net (decrease) increase in cash and cash equivalents $ (1,789) $ 89,557
Cash and cash equivalents - beginning of period 13,624 21,193
----------------- ----------------
Cash and cash equivalents - end of period $ 11,835 $ 110,750
================= ================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 14,746 $ 10,141
================= ================
Supplemental disclosures of non-cash investing and financing activities:
During the six months ended June 30, 2003, Pro Tech increased the carrying value
of preferred stock and additional paid-in capital for a 4% dividend
totaling $10,911.
During the six months ended June 30, 2004, Pro Tech offset the amount owed to a
stockholder with the amount owed to Pro Tech from an officer/director
($66,775 in total).
During the six months ended June 30, 2004, Pro Tech converted $640,466 of notes
payable to NCT Hearing Products, Inc. into 27,846,351 shares of our common
stock.
During the six months ended June 30, 2004, Pro Tech obtained an expansion of our
license agreement valued at $275,000 in exchange for 9,821,429 shares of
our common stock.
The accompanying notes are an integral part of the condensed financial
statements.
4
PRO TECH COMMUNICATIONS, INC.
JUNE 30, 2004
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation:
Throughout this document, Pro Tech Communications, Inc. is referred to as
"we," "us," "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 six months ended
June 30, 2004 and cash flows for the six months ended June 30, 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 in
our Annual Report on Form 10-K 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. Certain amounts for 2003 have been reclassified to conform with the
2004 classifications.
2. Loss Per Share:
Pro Tech reports 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 ("APB") Opinion No. 25 and related interpretations in
accounting for our stock-based compensation plans.
No options were issued during the three months ended June 30, 2004. During
the six months ended June 30, 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 or six
months ended June 30, 2003. Had compensation expense for all issued options been
determined based on the fair value at the date of grant in
5
accordance with SFAS No. 123, the net loss and net loss per share attributable
to common stockholders would have been adjusted to the pro forma amounts
indicated below:
For the three months ended For the six months ended
June 30, June 30,
--------------------------------- ------------------------------
2003 2004 2003 2004
-------------- ---------------- -------------- --------------
Net loss attributable to common
stockholders, as reported $ (239,887) $ (304,650) $ (497,803) $ (552,295)
Stock-based employee costs based on fair
value method, net of related taxes 359 (1,668) (1,812) (6,166)
-------------- ---------------- -------------- --------------
Net loss attributable to common
stockholders, pro forma $ (239,528) $ (306,318) $ (499,615) $ (558,461)
============== ================ ============== ==============
Basic and diluted loss per common share:
As reported $ (0.01) $ (0.00) $ (0.02) $ (0.01)
============== ================ ============== ==============
Pro forma $ (0.01) $ (0.00) $ (0.02) $ (0.01)
============== ================ ============== ==============
4. Inventories, net:
Inventories, net consisted of the following:
December 31, June 30,
2003 2004
--------------- -------------
Finished goods $ 295,346 $ 269,539
Raw materials 179,179 185,026
Work in progress 24,030 20,412
--------------- -------------
Gross inventories 498,555 474,977
Less: reserve for obsolete inventory 5,000 5,000
--------------- -------------
Total Inventories, net $ 493,555 $ 469,977
=============== =============
5. Other Current Assets:
Other current assets consisted of the following:
December 31, June 30,
2003 2004
--------------- -------------
Prepaid inventory purchases $ 11,632 $ 42,134
Deposits on leases 5,939 5,940
--------------- -------------
Total Other current assets $ 17,571 $ 48,074
=============== =============
6
6. Property and Equipment, net:
Property and equipment, net consisted of the following:
December 31, June 30,
2003 2004
--------------- -------------
Production molds $ 455,440 $ 455,440
Office equipment 149,568 151,296
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 1,073,062
Less accumulated depreciation
and amortization 621,662 697,353
--------------- -------------
Total Property and equipment, net $ 449,672 $ 375,709
=============== =============
Depreciation expense for the six months ended June 30, 2003 and 2004 was
$78,071 and $75,691, respectively.
7. Intangible Assets:
On April 21, 2004, in exchange for 9,821,429 newly issued shares of our
common stock, Pro Tech obtained an expansion of its existing, exclusive
worldwide technology license from NCT Hearing Products, Inc., our parent
company. 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 existing brands including: NoiseBuster(R) ANR
lightweight consumer audio and communications headsets; ProActive(R) ANR
industrial safety earmuffs and two-way radio headsets including aviation; and
ClearSpeech(R) noise and echo cancellation algorithm-based products.
The license expansion was valued at $275,000 and was added to the cost
basis of the intangible assets listed in our condensed balance sheet. The
license expansion will be amortized over 13.75 years (the remaining life of the
original license) on a straight-line basis.
7
8. Accrued Expenses:
Accrued expenses consisted of the following:
December 31, June 30,
2003 2004
-------------- ------------
Accrued warranty expense $ 41,687 $ 32,699
Accrued payroll and related expenses 119,937 104,529
Accrued vacation 12,245 18,150
Accrued lease payable 16,723 14,026
Other accrued expenses 4,609 17,811
-------------- ------------
Total Accrued expenses $ 195,201 $ 187,215
============== ============
9. Due to Factor and Other Liabilities:
Due to factor and other liabilities consisted of the following:
December 31, June 30,
2003 2004
-------------- ------------
Due to factor $ 11,117 $ 11,445
Due to NCT Hearing Products, Inc. - 64,805
-------------- ------------
Total Due to factor and other liabilities $ 11,117 $ 76,250
============== ============
On March 26, 2001, Pro Tech entered into a factoring agreement. At June 30,
2004, outstanding accounts receivable factored under this agreement were
$13,256, of which $11,445 had been received by the factor under recourse
provisions. Total fees incurred under this arrangement amounted to $720 and $348
during the three months ended June 30, 2003 and 2004, respectively; $2,821 and
$763 during the six months ended June 30, 2003 and 2004, respectively. Interest
expense incurred under this arrangement amounted to $604 and $118 during the
three months ended June 30, 2003 and 2004, respectively; $1,583 and $434 during
the six months ended June 30, 2003 and 2004, respectively.
During the six months ended June 30, 2004, NCT Hearing advanced cash to Pro
Tech in anticipation of the receipt of funds from outstanding accounts
receivable. There is no written agreement between Pro Tech and NCT Hearing
requiring additional cash advances. These advances are non-interest bearing and
are payable within 35 days. As of June 30, 2004, outstanding cash advances to
Pro Tech from NCT Hearing based upon accounts receivable was $64,805 (see Note
14).
10. Preferred Stock Subject to Mandatory Conversion into a Variable Number of
Shares of Common Stock:
Pro Tech had two series of preferred stock outstanding as of June 30, 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
8
stated value of $1,000. There were 1,500 shares authorized and 50 shares issued
and outstanding as of December 31, 2003 and June 30, 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 outstanding as of December
31, 2003. As of June 30, 2004, there were 500 shares authorized and 460 shares
issued and outstanding. 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 requires 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 June 30, 2004 was $499 and $4,701, respectively; $997 and $9,688 for the
six months ended June 30, 2004, respectively. The reduction to additional
paid-in-capital, calculated for purposes of determining net loss attributable to
common stockholders, on the Series A and Series B was $498 and $4,987,
respectively, for the three months ended June 30, 2003; $991 and $9,920,
respectively, for the six months ended June 30, 2003.
The Series A is carried on our balance sheet as of June 30, 2004 at its
monetary value of $70,018, which is comprised of the fair value of the shares of
$62,500, plus the cash value of the accrued dividends of $7,518. Pro Tech would
have to issue approximately 1.4 million shares of our common stock if settlement
of the stated value of the Series A were to occur as of June 30, 2004. Pro Tech
has the option to settle the accrued dividends in cash or common stock. As of
June 30, 2004, settlement in common stock for the accrued dividends on the
Series A would require issuance of approximately 0.2 million shares. There is no
limit on the number of shares that Pro Tech could be required to issue upon
conversion of the Series A. No shares of the Series A were converted or
exchanged during the six months ended June 30, 2004.
The Series B is carried on our balance sheet as of June 30, 2004 at its
monetary value of $628,739, which is comprised of the fair value of the shares
of $575,000, plus the cash value of the accrued dividends of $53,739. Pro Tech
would have to issue approximately 12.8 million shares of our common stock if
settlement of the stated value of the Series B were to occur as of June 30,
2004. Pro Tech has the option to settle the accrued dividends in cash or common
stock. As of June 30, 2004, settlement in common stock for the accrued dividends
on the Series B would require issuance of approximately 1.5 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. On April 27, 2004, 40 shares of Series B
(plus applicable accretion) were converted into 2,522,042 shares of Pro Tech
common stock.
9
11. Stockholders' Equity:
The changes in stockholders' equity during the six months ended June 30,
2004, were as follows:
Common Stock Additional Accumulated
Shares Amount Paid-in-capital Deficit Total
---------------------------- --------------- --------------- --------------
Balance at December 31, 2003 33,200,311 $ 33,200 $ 18,427,668 $ (17,972,660) $ 488,208
Issuance of common stock:
Conversion of Notes Payable 27,846,351 27,846 622,620 - 650,466
License Agreement Amendment 9,821,429 9,822 265,178 - 275,000
Conversion of Preferred Stock 2,522,042 2,522 41,866 - 44,388
Net Loss - - - (552,295) (552,295)
---------------------------- --------------- --------------- --------------
Balance at June 30, 2004 73,390,133 $ 73,390 $ 19,357,332 $ (18,524,955) $ 905,767
============================ =============== =============== ==============
12. Common Stock:
During the six months ended June 30, 2004, Pro Tech issued 40,189,822
shares of its common stock in various transactions. On April 5, 2004, Pro Tech
issued 27,846,351 shares in connection with the conversion of $640,466 of
outstanding notes payable with NCT Hearing (see Note 14 - Related Party
Transactions). On April 21, 2004, Pro Tech issued 9,821,429 shares in connection
with an expanded license we obtained from NCT Hearing (see Note 7 - Intangible
Assets). On April 27, 2004, Pro Tech issued 2,522,042 shares in connection with
the conversion of 40 shares (plus applicable accretion) of our Series B
Preferred Stock (see Note 10 - Preferred Stock Subject to Mandatory Conversion
into a Variable Number of Shares of Common Stock).
The number of shares of common stock required to be reserved for issuance
was approximately 24.5 million at June 30, 2004. 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:
Products: The products division develops and distributes lightweight
communications headset products and systems to many markets, including contact
centers, telephony, multimedia, mobile, and quick service restaurants. Pro Tech
is also in the process of completing development of headphones to be used in the
consumer audio and industrial safety markets.
Telecommunications Systems Integration: The Telecommunications Systems
Integration division sells and installs simple to sophisticated analog, digital
and Internet Protocol phone systems providing telecommunications systems
integration support to small office and large corporate call center clients.
Call Center Operations: In 2001, Pro Tech launched a Call Center Operations
division to provide a full service call center to customers. In December 2001,
Pro Tech suspended operations in the Call Center Operations division due to poor
performing contracts. After reorganizing this division, limited operations were
resumed during the third quarter of 2002, and development of this business
continued in 2003 and 2004.
10
As of June 30, 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 primary markets and
capital investments were concentrated in the United States.
Business division data is as follows:
Division
---------------------------------------------------------------
Telecom
Systems Call Center
Products Integration Operations Total
---------------------------------------------------------------
For the three months ended June 30, 2004:
Sales to external customers $ 241,673 28,124 - $ 269,797
Other revenue - other operating segments $ - - - $ -
Loss before other income (expense) $ (280,553) (1,817) (58) $ (282,428)
For the three months ended June 30, 2003:
Sales to external customers $ 231,382 26,760 - $ 258,142
Other revenue - other operating segments $ - - - $ -
Loss before other income (expense) $ (205,627) (3,323) (3,002) $ (211,952)
For the six months ended June 30, 2004:
Sales to external customers $ 473,992 62,822 - $ 536,814
Other revenue - other operating segments $ - - - $ -
(Loss) income before other income (expense) $ (503,325) 206 2,134 $ (500,985)
For the six months ended June 30, 2003:
Sales to external customers $ 560,867 50,812 - $ 611,679
Other revenue - other operating segments $ - - - $ -
Loss before other income (expense) $ (432,279) (11,736) (6,440) $ (450,455)
14. Related Party Transactions:
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 of Pro Tech, to the stockholder. In
consideration for this assignment by Pro Tech, the stockholder agreed to apply
the amount of assignment ($66,775 in total) against the note payable from Pro
Tech to the stockholder dated June 27, 2003. This transaction reduced to zero
the current asset Due from officer/stockholder and reduced by $66,775 the
current liability Note payable to stockholder.
Pro Tech renegotiated a note payable to stockholder, which was due on June
27, 2004. The new $62,009 note, dated June 27, 2004, represented principal of
$61,621 plus accrued interest of $388 from the matured note. The new note bears
interest at 8.5% and has payment terms of $3,500 due on the last day of each
month starting on June 30, 2004 through May 31, 2005; with the remaining balance
due on June 27, 2005. The balance of this note outstanding as of June 30, 2004
was $58,552.
11
During the three months ended June 30, 2003 and 2004, NCT Group, Inc., our
ultimate parent company, charged Pro Tech approximately $38,000 and $6,000,
respectively, for health benefits paid by NCT and its affiliates, approximately
$39,000 and $92,000, respectively, for labor provided by NCT employees, and
approximately $34,000 and $29,000, respectively, for Pro Tech's share of parent
company expenses allocated to each subsidiary. During the six months ended June
30, 2003 and 2004, NCT charged Pro Tech approximately $51,000 and $17,000,
respectively, for health benefits paid by NCT and its affiliates, approximately
$82,000 and $146,000, respectively, for labor provided by NCT employees, and
approximately $63,000 and $54,000, 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
$20,000 and none for the three-month period ended June 30, 2003 and 2004,
respectively; $217,000 and $232,000 for the six-month period ended June 30, 2003
and 2004, respectively.
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. NCT
Hearing converted the full amount outstanding (plus accrued interest) of the
December 31, 2003 and March 31, 2004 notes payable from Pro Tech, $284,069 and
$121,454, respectively. In addition, NCT Hearing converted $234,943 of the total
amount outstanding of the June 30, 2003 note payable. Subsequent to the
conversion, $1,324,794 remained outstanding under the June 30, 2003 note
payable. This transaction decreased noncurrent notes payable due to affiliates
by $640,466; increased common stock by $27,846; and increased additional
paid-in-capital by $612,620.
As of December 31, 2003 and June 30, 2004, Pro Tech owed an aggregate of
$1,824,540 and $1,737,443, respectively, to NCT Hearing. As of June 30, 2004,
$1,672,638 is included in Noncurrent notes payable and the remaining $64,805 is
included in Due to factor and other liabilities (see Note 9) on our condensed
balance sheet.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
JUNE 30, 2004
Description of Business
Pro Tech operates mainly in the lightweight headset industry. During 2001,
Pro Tech 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 develops and distributes lightweight communications headset
products and systems to many markets, including contact centers, telephony,
multimedia, mobile, and quick service restaurants. Pro Tech's mission is to
deliver products that are more technologically-advanced, more feature-rich, more
comfortable and more durable than competitive products - all at comparable or
lower prices.
Pro Tech plans to pursue new product development. Through an expanded
license from NCT Hearing Products, Inc. ("NCT Hearing"), Pro Tech has access to
over 50 patents as well as patents pending and other innovations and marketing
rights to three award-winning brands. This expanded license enables Pro Tech to
address additional markets of opportunity including consumer audio, personal
hearing protection, spectator racing, two-way radio communications, aviation and
military. Pro Tech intends to enter the consumer audio market with the
introduction of the NoiseBuster(R) NB-FX active noise canceling headphone due
out in late August 2004. Pro Tech also intends to enter the spectator racing,
two-way radio communications, aviation and military markets with the
introduction of an extensive new ProActive(R) line of active noise reduction as
well as passive products designed for higher noise settings.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses and related disclosures of contingent assets and liabilities in our
financial statements and accompanying notes. Several of our accounting policies
involve significant judgments and uncertainties. On an on-going basis, our
management evaluates its estimates and judgments, including those related to
allowance for doubtful accounts, adjustments to inventory valuations, asset
impairment and accrual for warranty expense. Our management bases its estimates
on historical experience, observable trends and various other assumptions that
are believed to be reasonable under the circumstances. Our management uses this
information to make judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Management
believes that the accounting estimates employed are appropriate and resulting
balances are reasonable; however, actual results could differ from the original
estimates, requiring adjustments to these balances in future periods.
13
Forward-Looking Statements
This report contains forward-looking statements, in accordance with Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that reflect our current estimates,
expectations and projections about our future results, performance, prospects
and opportunities. Forward-looking statements include all statements that are
not historical facts. These statements are often identified by words such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "plan," "may,"
"should," "will," "would" and similar expressions. These forward-looking
statements are based on information currently available to us and are subject to
numerous risks and uncertainties that could cause our actual results,
performance, prospects or opportunities to differ materially from those
expressed in, or implied by, the forward-looking statements we make in this
report. Important factors that could cause our actual results to differ
materially from the results referred to in the forward-looking statements we
make in this report include:
o our ability to generate sufficient revenues to sustain our current level of
operations and to execute our business plan;
o our ability to obtain additional financing if and when necessary;
o the level of demand for our products and services;
o the level and intensity of competition in our industry;
o difficulties or delays in manufacturing;
o our abilitiy to develop new products and the market's acceptance of these
products;
o our ability to maintain and expand our strategic relationships;
o our ability to protect our intellectual property;
o our ability to effectively manage our operating costs; and
o our ability to attract and retain key personnel.
You should not place undue reliance on any forward-looking statements.
Except as otherwise required by federal securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, changed circumstances or any
other reason after the date of this report.
Results of Operations
Three months ended June 30, 2004 compared to three months ended June 30, 2003
Net loss. Net loss for the three months ended June 30, 2004 increased
approximately $70,000, or 30%, compared to the same three-month period in 2003.
This increase was due to the combination of an increase of approximately $19,000
in cost of goods sold, an increase of approximately $46,000 in selling, general
and administrative expenses and an increase of approximately $17,000 in related
party expenses, partially offset by an increase of approximately $12,000 in
total revenue.
Net sales. Net sales for the three months ended June 30, 2004 increased
approximately $12,000, or 5%, compared to the three months ended June 30, 2003.
This increase was due
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mainly to an increase in our fast-food market, partially offset by a decrease in
our telephone market.
Revenue from the fast-food market increased approximately $18,000 due to
increased purchases of our fast-food headsets. Fast-food headset units sold
increased from approximately 4,000 units for the three months ended June 30,
2003 to approximately 6,000 units during the same period in 2004. The increase
in fast-food headset units represented an increase of approximately $50,000 in
sales for the three-month period. Partially offsetting this increase in
fast-food headset sales was a decrease of approximately $32,000 in fast-food
parts sales. Fast-food parts units sold decreased from approximately 4,000 units
for the three months ended June 30, 2003 to approximately 1,000 units during the
same period in 2004. This decrease was due primarily to decreased sales of
replacement batteries for fast-food belt packs.
Revenue from the telephone market decreased approximately $8,000 due mainly
to reduced purchases of our telephone parts. Telephone parts units sold
decreased from approximately 4,000 units for the three months ended June 30,
2003 to approximately 2,000 units during the same period in 2004. The decrease
in telephone parts units represented a decrease of approximately $15,000 in
sales for the three-month period. Partially offsetting this decrease in
telephone parts sales was an increase of approximately $7,000 in telephone
headset sales. This increase in telephone headset sales included increases in
sales of telephone amplifiers. The number of amplifier units sold increased from
approximately 100 units during the three months ended June 30, 2003 to
approximately 200 units during the same period in 2004.
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, Pro Tech is 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 audio headphone that
reduces low frequency background noise electronically using the ANR technology,
while leaving speech and music clearly audible. Launch of the next generation
NoiseBuster is anticipated during the 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. Launch of the ProActive Safety Earmuff is anticipated within the
next four to six months.
Cost of goods sold. For the three months ended June 30, 2004, cost of goods
sold increased approximately $19,000, or 29%, compared to the same three-month
period in 2003. This increase was due mainly to a credit of $15,000 received
from a vendor during the three months ended June 30, 2003. The remaining
increase in cost of goods sold was attributable to the increase in sales volume
for 2004 when compared to the same three months in 2003.
15
Gross profit. Gross profit margin decreased from 74.68% for the three
months ended June 30, 2003 to 68.81% for the three months ended June 30, 2004.
This decrease was due primarily to the $15,000 credit which was received from a
vendor during the three months ended June 30, 2003. Without this credit, the
gross profit margin for the three months ended June 30, 2003 would have been
68.87%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased approximately $46,000, or 16%, compared to the
same three-month period in 2003. This increase was due to an increase of $46,000
in consulting expenses related to investor communications and public relations.
NCT Hearing and affiliate charges. For the three months ended June 30,
2004, NCT Hearing and affiliates charges increased approximately $17,000, or
16%, 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 intended to be released later this year (see
discussion above).
Six months ended June 30, 2004 compared to six months ended June 30, 2003
Net loss. Net loss for the six months ended June 30, 2004 increased
approximately $65,000, or 13%, compared to the same three-month period in 2003.
This increase was due to the combination of a decrease of approximately $52,000
in gross profit, an increase of approximately $22,000 in related party expenses
and an increase of approximately $12,000 in total interest expense. Offsetting
these increases was a decrease of approximately $23,000 in selling, general and
administrative expenses.
Net sales. Net sales for the six months ended June 30, 2004 decreased
approximately $75,000, or 12%, compared to the six months ended June 30, 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 $21,000 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 19,000 units for the six months ended June 30, 2003 to
approximately 14,000 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 $70,000 due
mainly to reduced purchases by two major customers. The first customer,
contributing approximately $50,000 to the decrease, was acquired by another
company during 2003. During the first quarter of 2004, relations with this
customer were re-established and discussions to supply it with its headset needs
are ongoing. The $12,000 decrease attributable to the second customer was due to
the decision by that customer to consolidate its purchases to two other vendors.
Revenue for our telecommunications system integration division increased
approximately $12,000 for the six months ended June 30, 2004 compared to the
same six-month period in 2003. This increase was due to an expanded customer
base in 2004. Our customer base has expanded
16
with the increased awareness of our services, along with an expansion of the
local economy in central eastern Florida.
Cost of goods sold. For the six months ended June 30, 2004, cost of goods
sold decreased approximately $23,000, or 12%, compared to the same six-month
period in 2003. This decrease was due mainly to the decrease in sales volume for
the first six months of 2004 when compared to the same six months in 2003.
Gross profit. Gross profit margin decreased from 68.95% for the six months
ended June 30, 2003 to 68.89% for the six months ended June 30, 2004. As noted
above, Pro Tech received a $15,000 credit from a vendor during the six months
ended June 30, 2003. Without this credit, the gross profit margin for the six
months ended June 30, 2003 would have been 66.50%, compared to 68.89% for the
six months ended June 30, 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. Pro
Tech is now selling more to retail customers who do not buy in large quantities
and, therefore, are not given discounted prices, resulting in higher profit
margins.
Selling, general and administrative expenses. For the six months ended June
30, 2004, selling, general and administrative expenses decreased approximately
$23,000, or 3%, compared to the same six-month period in 2003. This decrease was
due to: (1) a decrease of approximately $76,000 in payroll and related expenses;
(2) a decrease of approximately $6,000 in professional fees and expenses; and
(3) a decrease of approximately $18,000 in insurance expenses and miscellaneous
fees. These decreases resulted from our continued costs savings through work
force reductions and tighter controls over expenditures. Partially offsetting
these decreases were: (1) an increase of $46,000 in consulting expenses related
to investor communications and public relations; and (2) an increase of
approximately $27,000 in marketing expenses related to the anticipated launch of
the new NoiseBuster product.
NCT Hearing and affiliate charges. For the six months ended June 30, 2004,
NCT Hearing and affiliates charges increased approximately $22,000, or 11%,
compared to the same six-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 intended to be released later this year (see discussion
above).
Interest expense. Interest expense - NCT Hearing for the six months ended
June 30, 2004 increased approximately $8,000 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 June 30, 2004, the balance of the outstanding notes
payable, including interest, was $1,672,638, compared to $1,512,679 as of June
30, 2003.
Liquidity and Capital Resources
17
Pro Tech has experienced net losses from operation since its inception.
These losses have been funded primarily from product sales, the sale of
preferred stock convertible into common stock and advances from NCT Hearing and
its affiliates. During the six months ended June 30, 2004, Pro Tech funded
working capital requirements with continued use of our short-term financing
arrangement and advances from NCT Hearing and its affiliates. Pro Tech has taken
steps to reduce working capital requirements, including 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 Pro Tech
will have sufficient funds to meet anticipated working capital requirements for
the next 12 months. However, our liquidity is affected by many factors,
including, among others, the level of product sales, capital expenditures, the
level of new product development efforts, and other factors related to the
uncertainties of our industry and the economy in general. Accordingly, Pro Tech
may be required to seek additional financing during the next 12 months.
Management can give no assurance that any additional financing, including from
NCT Hearing, will be available to Pro Tech on commercially reasonable terms, or
at all. The failure to obtain any needed financing could have a material adverse
effect on Pro Tech.
At June 30, 2004, cash and cash equivalents were $110,750.
The current ratio (current assets to current liabilities) was .60 to 1.00
at June 30, 2004, as compared to .51 to 1.00 at December 31, 2003. At June 30,
2004, the working capital deficit was $491,929 compared to a working capital
deficit of $647,747 at December 31, 2003. This decrease in working capital
deficit of approximately $156,000 was due mainly to the receipt of $232,000 from
NCT Hearing in exchange for a noncurrent note payable during the six months
ended June 30, 2004.
For the six months ended June 30, 2004, net cash used in operating
activities was $89,020 compared to $194,049 for the six months ended June 30,
2003. This decrease of approximately $105,000 was due primarily to a decrease in
the funds used to reduce the outstanding accounts payable, partially offset by
an increase in funds used by an increase in accounts receivable. For the six
months ended June 30, 2003, the outstanding accounts payable was reduced by
approximately $201,000 compared to approximately $29,000 for the same period in
2004. Our accounts receivable decreased approximately $59,000 during the six
months ended June 30, 2003 compared to an increase of approximately $33,000
during the same six-month period in 2004.
For the six months ended June 30, 2004, net cash provided by financing
activities was $181,038 compared to $196,089 for the six months ended June 30,
2003. This decrease of approximately $15,000 was due to an increase of $28,000
in cash payments made on notes payable due to affiliates, partially offset by an
increase of $15,000 in cash advances received from NCT Hearing in exchange for
noncurrent notes payable during the six months ended June 30, 2004.
Pro Tech has no lines of credit with banks or other lending institutions.
Capital expenditures
18
There were no material commitments for capital expenditures as of June 30,
2004. In connection with the proposed release of a new product, the ProActive
Safety Earmuff, Pro Tech has been in detailed discussions with the manufacturer
and anticipates incurring approximately $110,000 in tooling costs (for the mold
needed for the product) consisting of 25% paid at the beginning of production,
25% paid with the first shipment of product and the remainder to be paid as
units are produced, not to exceed a period of 12 months of production.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are fluctuations in interest rates. We
are exposed to short-term interest rate risk on certain debts and trade accounts
receivable sales. We do not use derivative financial instruments to hedge cash
flows for these obligations. In the normal course of business, we employ
established policies and procedures to manage these risks.
Based upon a hypothetical 10% proportionate increase in interest rates from
the average level of interest rates during the last twelve months, and taking
into consideration expected investment positions, commissions paid to selling
agents, growth of new business and the expected borrowing level of variable-rate
debt, the expected effect on net income related to our financial instruments
would be immaterial.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Management, with the participation of our President and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Act of 1934, as amended) as
of June 30, 2004. Based on that evaluation, the President and Chief Financial
Officer concluded that our disclosure controls and procedures as of June 30,
2004 were effective in ensuring that information required to be disclosed by us
in reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Management believes that a control system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, could be detected within
a company.
(b) Changes in internal controls.
There were no changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2004 that have materially affected,
or are reasonably likely to materially affect, Pro Tech's internal control over
financial reporting.
19
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 5, 2004, we issued 27,846,351 shares of our common stock to NCT
Hearing Products, Inc. in exchange for the surrender and cancellation of
$640,466 of notes payable, together with accrued interest.
On April 21, 2004, we issued 9,821,429 shares of our common stock to NCT
Hearing Products in consideration for the expansion of an existing license
agreement with NCT Hearing Products.
On April 27, 2004, we issued 2,522,042 shares of common stock to Alpha
Capital Aktiengesellschaft upon conversion of 40 shares ($1,000 stated value per
share) of our Series B Preferred Stock plus applicable accretion.
These shares were not registered under the Securities Act of 1933, as
amended, pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
31(a) Certication of principal executive officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
31(b) Certification of principal financial officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
32 Certification of principal executive officer and chief financial
officer pursuant to Rule 13a-14(b) under the Securities Exchange
Act of 1934 and 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: August 16, 2004
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