SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED December 31, 2001
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Commission File Number: 000-28602
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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
Incorporation or Organization) Identification No.)
4492 Okeechobee Rd
Fort Pierce,Florida 34947
---------------------------------------- ----------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (772) 464-5100.
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant (based upon the closing price of such stock as reported on the
National Association of Securities Dealers Automated Quotation System as of
March 11, 2002): Common Stock, $.001 par value; $213,521.
1
PART I
ITEM 1. BUSINESS
A. General
Pro Tech Communications, Inc., throughout this document referred to as "Pro
Tech," "we," "our," or "us," was incorporated in 1994 under the laws of the
State of Florida and has its principal executive offices at 4492 Okeechobee Rd,
Fort Pierce, Florida. From its formation on August 30, 1991 to October 31, 1994,
the business was conducted by Pro Tech Systems, a limited partnership organized
under the laws of the State of California. Keith Larkin, the Chairman of the
Board of Pro Tech, was general partner of Pro Tech Systems and there were 12
limited partners in the limited partnership. From August 1991 until June 1993,
the limited partnership was involved in engineering and designing lightweight
telecommunications headsets as well as preliminary marketing efforts for the
products. From June 1993 until October 1994, Pro Tech Systems was engaged in
limited manufacturing and marketing activities for its products. On November 1,
1994, all of the assets of Pro Tech Systems were transferred to Pro Tech as
consideration for the issuance of 2,000,000 shares of our common stock, par
value $.001 per share. These shares were subsequently distributed on a pro rata
basis to each of the partners of the partnership. Effective December 13, 1994,
Pro Tech Systems was formally dissolved. On September 13, 2000, Pro Tech sold
23,702,750 shares of its common stock, representing approximately 83% of
outstanding common stock, to NCT Hearing Products, Inc., a wholly-owned
subsidiary of NCT Group, Inc., in exchange for exclusive rights to certain NCT
Group, Inc. technologies for use in lightweight cellular, multimedia and
telephony headsets.
Pro Tech operates mainly in the lightweight headset industry. During the fiscal
year ended December 31, 2001, we expanded into the telecommunication integration
business and the call center operations business (see section L. Business
Segments 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. Our products include:
o The ProCom Headset
o The Apollo Headset
o The Apollo Freedom Series Headset
o The Gemini Amplifier (telephone)
o The USB Adapter
o The DSP Intelligent Microphone
o The Manager's Headset
o The APEX
o The ASTRA
o The A-10 Amplifier (telephone)
o The A-27 Amplifier
o The Active Series Headset
o The Trinity Headset
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
2
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 with complimentary engineering patents. We project
that this strategy will greatly decrease the product development cycle while
offering far 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.
B. Industry Background
Designed specifically for air traffic controllers and other aerospace
applications, the first lightweight headsets were intended as a replacement for
the heavy, bulky headsets then in use. Today, while lightweight telephone
headsets continue to be used for such purposes, telephone headsets are
predominantly used as a substitute to telephone handsets. These headsets are
used by a wide variety of customers, including telephone operating companies and
telephone call centers (such as airline reservations, catalog sales and credit
collection operations) and, to a lesser extent, by business persons and other
professionals whose occupations require extensive, though not constant, use of
the telephone. In comparison to speakerphones, telephone headsets provide
greater communication clarity and security. We believe that these advantages
will lead to increased demand for telephone headsets.
Telephone headsets also have other commercial applications, primarily two-way
radio communication systems, such as those used by fast food attendants to
communicate with patrons and other personnel. Personal computer applications for
telephone headsets include audio input and output via voice command, voice
dictation and integrated voice telephone functions.
C. Existing Products
The ProCom.
Pro Tech's initial entry into the lightweight fast food headset market was the
ProCom. Weighing less than 2 ounces, the ProCom is worn over the head by means
of a springsteel wire headband and a cushioned earphone. Attached to the
earphone, which may be worn over either ear, is an adjustable boom, which
connects to the ProCom's microphone. The ProCom headset connects to the wireless
belt-pack system with the use of various plug types offered by the wireless
belt-pack providers and sold to many fast food franchises around the world.
The Apollo.
The Apollo headset is Pro Tech's most advanced, lightweight headset design sold
for use with telephone users in the call center and small office market. It
incorporates the use of the most advanced microphone and speaker components and
is designed for durability and comfort over long periods. The Apollo headset was
introduced on August 1, 2001 and since then has been sold directly through Pro
Tech's sales force and the internet. It has also been sold indirectly through
our established distributor base in the United States, Canada and Europe.
The Apollo Freedom Series Headset.
A headset with the exact form factor of the Apollo headset, the Apollo Freedom
Series is made to plug directly into phone systems that already have
amplification built into their existing handset. Through the use of advanced
circuitry, many new phone systems have built-in the added feature of
amplification of
3
sound inside each handset phone, therefore not requiring another amplifier in
order to use a headset with the phone system. The Apollo Freedom Series headset
adapts to all of these newer design phone systems using sophisticated microphone
technology and a direct connect phone cord.
The Gemini Amplifier.
Introduced on August 1, 2001, the Gemini amplifier is our latest amplifier. It
is a full feature unit designed to be used in nearly all phone and/or PC phone
configurations in the call center and small office market. The user has full
control of receive and transmit sound levels in addition to being able to work
directly with the latest multi-media configurations employing analog or digital
technologies. This amplifier's circuitry has been awarded a patent by the United
States Patent and Trademark Office. The Gemini amplifier was awarded "Best of
Show" in the category Best Desktop/Agent Productivity Tools at the 12th Annual
Call Center & CRM Solutions 2002 Conference & Exposition held during the week of
February 11, 2002.
The USB Adapter.
The USB adapter is an adapter that allows the use of an amplifier and headset in
PC phone installations. Several new applications such as Internet Protocol (IP)
telephony, voice recognition and auto attendant allow for the use of telephone
headsets which in most cases improve the performance of the application. The USB
adapter allows the use of our headsets and amplifiers in these new market
niches.
The DSP Intelligent Microphone.
The DSP Intelligent microphone is designed to serve those market niches where
the use of a headset is not wanted although the user still requires the need for
headset functionality such as speech recognition and speech enabling
input/output PC gaming applications. This product allows for the receiving of
sound to be very focused in addition to eliminating all background noise. Pro
Tech is currently directing our sales and marketing efforts towards these
emerging PC markets.
The Manager's Headset.
The manager's headset is a lightweight over-the-ear fast food headset, which
provides improved comfort to the fast food store manager monitoring drive-thru
activity. It was introduced and favorably received by the marketplace in
February of 2000. We will continue to offer this headset in our fast food
product line for the year 2002.
The APEX.
Pro Tech introduced the APEX headset for sale in the second quarter of 1999.
After conducting our own market research, we determined that there was a demand
for a headset which combined both over-the-head and over-the-ear features. As a
result, we designed the APEX to incorporate these features, which has enhanced
our ability to market the product to cellular, personal computer and small
office telephone users. The APEX is a commercial adaptation of the headset that
Pro Tech designed for use by the National Aeronautics and Space Administration,
known as NASA. Boeing Defense and Space Group is a prime contractor for NASA,
and as such has the responsibility to choose certain components and products
used in NASA's space program. Pro Tech was chosen by Boeing as a supplier of
telephone headsets for NASA projects after we provided Boeing with product
specifications, which met NASA's requirements. Boeing also subjected our product
to various tests in order to ensure that it would function under conditions for
space travel. The APEX is a smaller design of the Trinity (see below), with
components reduced by 20% in order to create a lightweight headset. The speaker
and microphone positioning can be easily adjusted by the user thereby allowing
the product to fit numerous head and ear sizes. In addition, the APEX has a
detachable headband allowing the user the choice of wearing the headset over the
head or over the ear.
4
The ASTRA.
Pro Tech introduced the ASTRA headset for sale in the fourth quarter of 1999.
The ASTRA headset is a variation of the APEX headset in that it has been adapted
for use directly in non-amplified phone systems. A preamplifier circuit has been
inserted inside the headset to allow for a direct connection into an automatic
call distributor or phone system that provides this type of headset.
The A-10 Amplifier.
The A-10 amplifier is the first in a series of multi-line amplifiers being
offered with each of our headsets. It is designed for the small office/home
office market and has been engineered to work with over 90% of all existing
phone systems in the world.
The A-27 Amplifier.
The A-27 amplifier is the first in a series of amplifiers specifically designed
for automatic control distributors or phone systems which use the standard
PJ-237 2-prong plug as their interface. This amplifier will employ noise
suppression technology designed by Pro Tech. We received patent approval for
this technology during fiscal year 2001. The A-27 was introduced into the call
center market in the 2nd quarter of fiscal year 2000.
The Active Series Headset.
The Active Series Headset was introduced in the 2nd quarter of fiscal year 2000.
This headset is designed for the mobile headset user. Cellular phone users and
automobile hands-free kits are the primary market focus of this product.
The Trinity.
The Trinity was designed for users in noisy environments. Pro Tech completed the
development of this product early in the 2000 calendar year. Unlike other
currently available headsets, the Trinity employs a light (1/2-ounce)
"acoustical ear cup" which completely surrounds the user's ear. The perimeter of
this cup rests lightly in a broad area of contact around the ear, rather than
against or in the ear itself, which we believe will allow the user to wear the
Trinity in comfort for extended periods. Moreover, by enclosing the ear, the
acoustical ear cup reduces background noise, thereby significantly improving the
clarity and strength of reception from the earphone. The Trinity has been
designed as a comfortable and lightweight alternative to the bulky commercial
sound suppressant headsets, which are presently the only lightweight noise
suppression headsets available to users operating in noisy office environments.
The Trinity headset can be worn in a single ear cup version or dual ear cup
version. Like the ProCom, the Trinity is produced with a choice of adapters
capable of interfacing with the electronic amplifiers and telephone systems of
most major manufacturers.
D. Marketing and Sales
Pro Tech presently intends to market products primarily through our officers and
staff, utilizing industry contacts and calling upon potential purchasers. We
plan on supplementing the marketing efforts of our employees by using electronic
commerce from our web site along with independent sales representatives and
strategic marketing agreements.
5
The following summarizes Pro Tech's key alliances:
- --------------------------------------------------------------------------------
Date Relationship
Key Marketing Alliances Established Applications
- -------------------------- --------------------- ------------------------------
The McDonald's Corporation April 1995 Aftermarket Fast Food Headsets
Hello Direct April 2000 Marketing Agreement
3M Corporation April 2000 Marketing Agreement
Muzak Corporation July 2000 Marketing Agreement
- --------------------------------------------------------------------------------
Pro Tech markets and will continue to market our headsets directly to the
commercial headset market as a replacement for our competitors' headsets.
Examples of such purchasers include fast food companies and franchisees and
other large quantity users of commercial headset systems. We entered into a
non-binding business relationship agreement with the McDonald's Corporation that
allows us to sell our products on a non-exclusive basis to McDonald's franchises
and company-owned restaurants. Initial test sales to McDonald's and its
franchisees by Pro Tech and Pro Tech Systems totaled $424,300 in 1994, which
included sales to more than 3,500 McDonald's restaurants. Penetration increased
to more than 7,000 restaurants during fiscal year 1995 and to more than 11,000
restaurants during the fiscal year ending December 31, 2001.
As Pro Tech expands, we will continue to direct marketing and sales efforts
toward: (1) telephone operating companies; (2) telephone system manufacturers;
(3) personal computer manufacturers; and (4) government agencies. To exploit a
developing market for telephone headsets, we have targeted manufacturers of new
telephone systems and other telecommunication equipment that utilize headsets.
We will also supplement the above strategies with joint ventures and marketing
agreements with companies with complementary technologies. Although we presently
intend to sell our products to several large telephone users, there can be no
assurance that we will be successful in such efforts. Other potential large
volume purchasers of headsets are manufacturers of personal computers,
especially when headsets become a standard telephone accessory. In addition, we
plan to market our products to government agencies. Pro Tech's headsets have
been approved for sale to Boeing, a prime contractor of NASA, for use by
astronauts in space travel. To date, we have had $5,400 of sales to Boeing for
prototype headsets. While profits from government contracts are anticipated to
be minimal, such sales enhance the credibility and reputation of the selected
headset and its manufacturer, especially within the telephone industry.
Finally, Pro Tech's direct marketing and sales efforts will be supplemented by
the distribution of products through established channels of distribution. These
include: (1) specialized headset distributors that derive a majority of their
revenues from the sale of headsets to both end users and, to a lesser extent,
resellers; and (2) large electronic wholesalers that offer hundreds of products,
including headsets. It is anticipated that a majority of sales of our headsets
to commercial users such as credit card companies and airlines will be through
such distributors.
In addition to marketing our technology through existing marketing alliances as
described above, as of December 31, 2001, Pro Tech had an internal sales and
marketing force of 6 employees, 2 independent sales representative and our
executive officers and directors.
E. Manufacturing
Pro Tech is currently outsourcing nearly all components from several Far East
suppliers who build each component according to Pro Tech's specifications.
However, as a result of manufacturing inconsistencies from one Far East
supplier, Pro Tech was forced to temporarily expand U.S. manufacturing
operations to offset the increased failure rate of the related products during
the year ended December 31, 2001. Pro Tech has since resolved all product
quality issues with its Far East supplier and reduced its production headcount
at its U.S. corporate offices. Pro Tech will continue to adhere to past cost
reduction policies and is in the process of expanding its Far East manufacturing
operations to support the current and future projected sales volumes. A full
migration of this production capacity from U.S. operations to offshore
operations will be completed by the second quarter of 2002. An interruption in
the supply of a component for which Pro
6
Tech is unable to readily procure a substitute source of supply could
temporarily result in Pro Tech's inability to deliver products on a timely
basis, which in turn could adversely affect its operations. To date, Pro Tech
has not experienced any shortages of supplies. In order to meet forecasted
customer requirements, Pro Tech has multiple suppliers for every component to
reduce the risk in a disruption of the supply chain. At December 31, 2001, the
value of our inventory was $945,744.
Pro Tech believes that its Fort Pierce, Florida office presently does possess
sufficient capacity for its current needs. In the event that sales volumes were
to exceed the capabilities of the Fort Pierce location or Pro Tech's supply
chain from the Far East were to be disrupted, Pro Tech would immediately enter
into subcontracting arrangements for products with other third parties. A delay
in establishing such arrangements, if necessary, could adversely affect Pro
Tech's ability to deliver products on a timely basis to its customers, which in
turn could adversely affect Pro Tech's operations. Pro Tech, however, believes
that subcontracting the manufacture of Pro Tech's products could be accomplished
on short notice given the simple design of Pro Tech's products.
F. Concentrations of Credit Risk
Pro Tech sells products and services to distributors and end users in various
industries worldwide. As outlined below, our two largest customers accounted for
approximately 35% of revenues during the fiscal year ended December 31, 2001 and
27% of gross accounts receivable at December 31, 2001. We do not require
collateral or other security to support customer receivables.
As of December 31, 2001,
And for the year then ended
----------------------------------------
Accounts
CUSTOMER Receivable Revenue
--------------------------------- ------------------ ----------------
Muzak $ 47,436 $ 521,156
McDonalds 18,296 185,377
All Other 178,486 1,468,773
------------------ ----------------
Total $ 244,218 $ 2,175,306
================== ================
Pro Tech regularly assesses the realizability of our accounts receivable and
performs a detailed analysis of aged accounts receivable. When quantifying the
realizability of accounts receivable, we take into consideration the value of
past due receivables and the collectibility of such receivables, based on credit
worthiness.
Financial instruments, which potentially subject us to concentration of credit
risk, consist principally of cash and cash equivalents and trade receivables.
Our cash equivalents consist of commercial paper and other investments that are
readily convertible into cash and have original maturities of three months or
less. We maintain our cash and cash equivalents primarily in one bank.
Pro Tech does not have a significant foreign exchange transaction risk because
non-U.S. revenue and purchases are denominated and settled in U.S. dollars.
G. Competition
The lightweight telephone headset industry is highly competitive and
characterized by a few dominant manufacturers. We are aware of several companies
who manufacture telephone headsets. Primary among our competitors is
Plantronics, Inc., the world's largest manufacturer of lightweight telephone
headsets. Plantronics was founded by Mr. Larkin, Pro Tech's Chairman. We
estimate Plantronics' share of the market to be approximately 46% worldwide.
Plantronics reported net sales from all of its products (including electronic
amplifiers and other headset accessories and services) of approximately $401
million for the fiscal year 2001. Our other major competitor is GN Netcom, Inc.
In 1997, GN NetCom, Inc. purchased both UNEX Corporation and ACS Wireless and in
calender year 2000 announced the purchase
7
of Hello Direct. ACS Wireless was founded by Mr. Larkin. We believe GN Netcom,
Inc. has a market share of approximately 20% worldwide. These companies are well
established and have substantially more management, technical, financial,
marketing, manufacturing and product development resources than Pro Tech.
Pro Tech believes that in selecting telephone headsets, users primarily consider
price, product quality, reliability, product design and features, and warranty
terms. We believe that our headsets are superior in design and construction, and
substantially lower in price, than the models currently available from our
competitors. However, we cannot assure that our products will be perceived by
users and distributors as providing a competitive advantage over competing
headsets. In addition, we cannot assure that competing technologies will not
become available which are superior, less costly or marketed by better known
companies. Also, certain customers may prefer to do business with companies that
have greater access to resources.
In addition to direct competition from other companies offering lightweight
telephone headsets, Pro Tech may face indirect competition in our industry from
technological advances such as interactive voice response systems which require
no human operators for certain applications such as account balance inquiries or
airplane flight information. We believe that this competition will be more than
offset by increased demand for headsets as voice telecommunication applications
expand.
H. Government Contracts
Pro Tech currently is a contract provider of headsets to the Boeing Corporation,
a prime contractor to NASA, for headsets to be used in the international space
station. Government contracts provide for cancellation at the government's sole
discretion, in which event the contractor or subcontractor may recover its
actual costs up to the date of cancellation, plus a specified profit percentage.
Governmental expenditures for defense are subject to the political process and
to rapidly changing world events, either or both of which may result in
significant reductions in such expenditures in the proximate future. Government
contracts or contracts with prime government contractors are not viewed as a
significant part of Pro Tech's business.
I. Environmental Regulation Compliance
Compliance with Federal, state and local provisions regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, does not have any material effect upon the capital expenditures,
earnings or competitive position of Pro Tech.
J. Proprietary Protection
Pro Tech owns one technology patent which was granted during the fiscal year
2001. We intend to seek patent protection on our inventions at the appropriate
time in the future. The process of seeking patent protection can be lengthy and
expensive, and there can be no assurance that patents will be issued from any
applications or that any patent issued will be of sufficient scope or strength
or provide meaningful protection or any commercial advantage. Pro Tech may be
subjected to, or may initiate, litigation or patent office interference
proceedings, which may require significant financial and management resources.
The failure to obtain necessary rights or the advent of litigation arising out
of any such claims could have a material adverse effect on our operations.
Pro Tech also has a license to utilize certain patent-protected technologies
owned by its ultimate parent company, NCT Group, Inc., in the area of noise
reduction.
Certain of Pro Tech's employees involved in engineering are required to enter
into confidentially agreements as a condition of employment. We do not currently
own any registered trademarks, although we intend to file trademark registration
applications in the future with respect to distinguishing marks.
8
K. Employees
As of December 31, 2001, Pro Tech had 27 full-time employees and 1 part-time
employee, including 2 persons in research and development, 11 persons in
administration and shipping, 6 persons in sales and marketing and 8 persons in
assembly and production. None of our employees are represented by a collective
bargaining unit, and we believe that our relationship with employees is good.
L. Business Segments
Pro Tech operates in three business segments: headset products,
telecommunication integration, and call center operations. The headset segment
encompasses the design, development, manufacturing and marketing of lightweight
headsets for commercial use. The telecommunication integration segment was
launched in 2001 to sell and install simple to sophisticated analog, digital and
IP phone systems. The call center operation was launched in 2001 to take
advantage of expertise in a specialized niche of the medical market. In December
2001, management decided to suspend operations in the call center segment due to
poor performing contracts. Pro Tech has reorganized this business segment and
intends to resume operations by the third quarter of 2002. All of these segments
operate predominantly within the North American geographic area.
M. Available Information
We file annual, quarterly and special reports, proxy statements and other
information with the Securities Exchange Commission, known as the SEC. You may
read and copy any document we file at the SEC's public reference rooms in
Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from the SEC's Website at
"http://www.sec.gov."
ITEM 2. PROPERTIES
Pro Tech's executive, sales and manufacturing facilities occupy approximately
13,000 square feet of space located at 4492 Okeechobee Rd, Fort Pierce, Florida
34947, pursuant to a lease agreement dated March 1, 2001 which expires in
February 2006 and provides for monthly rental of approximately $5,000 increasing
to approximately $8,000 over the five-year term.
ITEM 3. LEGAL PROCEEDINGS
Pro Tech is not party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Pro Tech's common stock began trading on the NASD OTC Bulletin Board on March
22, 1996. Our stock is currently being traded under the symbol "PCTU." The
following table sets forth the average high and low bid prices of the common
stock as reported by the NASD's OTC Bulletin Board for each of the fiscal
quarters during the two fiscal years ended October 31, 1999 and 2000; the
interim two-month period ended December 31, 2000; and the fiscal year ended
December 31, 2001. The market quotations reflect inter-dealer prices, without
retail mark-up, markdown, or commission and may not represent actual
transactions.
Year ended October 31, 1999 High Low
---------------------------------------------- ---------- -----------
First Quarter $ 0.50 $ 0.38
Second Quarter $ 0.38 $ 0.27
Third Quarter $ 0.50 $ 0.31
Fourth Quarter $ 0.50 $ 0.19
Year ended October 31, 2000 High Low
---------------------------------------------- ---------- -----------
First Quarter $0.310 $0.299
Second Quarter $0.880 $0.788
Third Quarter $0.670 $0.625
Fourth Quarter $1.062 $0.625
Two Months Ended - December 31, 2000 High Low
---------------------------------------------- ---------- -----------
November 1, 2000 to December 31, 2000 $0.875 $0.312
Year ended December 31, 2001 High Low
---------------------------------------------- ---------- -----------
First Quarter $0.750 $0.281
Second Quarter $0.500 $0.090
Third Quarter $0.180 $0.100
Fourth Quarter $0.130 $0.050
On March 11, 2002, the last reported sale of Pro Tech's common stock as reported
by the NASD OTC Bulletin Board was $0.04. As of March 11, 2002, there were 54
record holders of the common stock, representing approximately 650 beneficial
owners.
Pro Tech has neither declared nor paid any dividends on shares of common stock
since our incorporation in October 1994 and we do not anticipate declaring a
cash dividend in the reasonably foreseeable future. Any decisions as to the
future payment of dividends will depend on our earnings and our financial
position and such other factors as the Board of Directors deems relevant. We
anticipate that we will retain earnings, if any, in order to finance expansion
of our operations.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for a description of our sales of unregistered securities
during the twelve months ended December 31, 2001.
10
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below is derived from the
historical financial statements of Pro Tech. The data set forth below is
qualified in its entirety by and should be read in conjunction with Item 8.
Financial Statements and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations that are included elsewhere in
this document.
For the Year For the Two For the Year
Ended Months Ended Ended
October 31, December 31, December 31,
------------------------------------------------ ------------ -----------
1997 1998 1999 2000 2000 2001
----------- ----------- ----------- ----------- ------------ -----------
STATEMENTS OF OPERATIONS DATA:
Net sales $ 996,993 $1,142,482 $1,090,551 $1,562,484 $ 307,902 $ 2,175,306
Cost of goods sold 333,755 470,450 414,931 623,555 113,920 860,277
----------- ----------- ----------- ----------- ------------ -----------
Gross profit 663,238 672,032 675,620 938,929 193,982 1,315,029
Selling, general and administrative 698,785 882,385 893,384 1,275,290 561,044 3,715,561
Provision for doubtful accounts 3,924 38,835 3,771 7,990 1,574 9,958
----------- ----------- ----------- ----------- ------------ -----------
Loss from operations (39,471) (249,188) (221,535) (344,351) (368,636) (2,410,490)
Other income (expense):
Interest income (expense), net 28,688 24,719 9,181 (31,715) (8,713) (20,262)
Miscellaneous income 58 89 697 1,726 1,029 4,305
Loss on disposal of fixed assets (1,116) - (9,408) - - (2,945)
----------- ----------- ----------- ----------- ------------ -----------
Loss before income taxes (11,841) (224,380) (221,065) (374,340) (376,320) (2,429,392)
Income tax expense (benefit) 400 (964) - - - -
----------- ----------- ----------- ----------- ------------ -----------
Net loss (12,241) (223,416) (221,065) (374,340) (376,320) (2,429,392)
Less:
Preferred stock beneficial conversion - - - 3,569,000 - 79,190
Preferred stock embedded dividend - - - 375,000 - 62,661
Dividend accretion on preferred stock - - - 5,425 10,027 24,085
----------- ----------- ----------- ----------- ------------ -----------
Net loss attributable to
common stockholders (12,241) (223,416) (221,065) (4,323,765) (386,347) (2,595,328)
=========== =========== =========== =========== ============ ===========
Basic and diluted net loss per share (0.00) (0.05) (0.05) (0.57) (0.01) (0.08)
=========== =========== =========== =========== ============ ===========
Weighted average number
of common shares outstanding (1) 4,122,795 4,254,000 4,254,000 7,537,855 28,248,438 32,281,034
=========== =========== =========== =========== ============ ===========
October 31, December 31,
------------------------------------------------ -------------------------
1997 1998 1999 2000 2000 2001
----------- ----------- ----------- ----------- ------------ -----------
BALANCE SHEET DATA:
Total assets 1,239,143 1,158,898 945,377 18,652,665 18,264,130 17,184,920
Total current liabilities 81,764 209,845 209,300 662,956 651,313 1,549,997
Long-term debt - - 8,089 3,687 3,115 36,021
Retained earnings/(accumulated deficit) 31,197 (192,219) (413,284) (787,624) (1,163,944) (3,593,336)
Stockholders' equity(2) 1,157,469 949,053 727,988 17,986,022 17,609,702 14,965,464
Working capital/(deficit) 996,458 724,769 494,148 1,419,819 1,205,686 (329,136)
(1) Excludes shares issuable upon the exercise of outstanding stock options,
warrants and convertible preferred stock, since their effect would be
antidilutive.
(2) Pro Tech has never declared nor paid cash dividends on common stock.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the notes thereto included herein.
Caution Concerning 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,"
"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.
In addition, Pro Tech's overall financial strategy, which includes growing
operations, maintaining financial ratios and strengthening our 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 our plans, strategies and intentions.
Pro Tech operates in a highly competitive and rapidly changing environment and
in business 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 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 our 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 Pro Tech might, from time to time,
communicate with securities analysts, it is against our policy to disclose to
them any non-public information or other confidential commercial information.
Accordingly, investors should not assume that Pro Tech agrees with any statement
or report issued by any analyst irrespective of the content of the statement or
report. Furthermore, Pro Tech 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 Pro Tech.
RESULTS OF OPERATIONS
The Year Ended December 31, 2001 As Compared To The Year Ended December 31, 2000
(Unaudited):
Net loss for the year ended December 31, 2001 increased $1,650,050, or 212%,
over the year ended December 31, 2000. This increase is attributed to the
following: (1) Pro Tech was adversely impacted by the September 11, 2001
terrorist attack. We experienced a major reduction in demand for our products
after
12
the attack; therefore, reducing the actual sales gains over the previous year.
Actual revenues for the period September 12 through December 31 decreased from
$584,000 in 2000 to approximately $480,000 in 2001; (2) amortization expense
associated with the September 2000 acquisition of certain intangible personal
property from NCT Hearing, Inc. increased from approximately $234,000 in 2000 to
approximately $933,000 in 2001 due to a full year's amortization; (2) payroll
and related expenses increased approximately $785,000 due to additional
personnel, increased health benefit expenses, and salary increases for the
current year; (3) expenses charged by the parent company including overhead and
specific employee time allocations; and (4) growing competition in Pro Tech's
distributor selling channel in the fast food market causing a deterioration of
gross margins.
Despite the decrease in sales that we attributed to the terrorist attacks, net
sales generated during the year ended December 31, 2001 increased approximately
$445,000, or 26%, over the year ended December 31, 2000. This increase was a
result of two factors: (1) sales from the market introduction of several new
telephone headsets and related communication equipment; and (2) our ability to
continue to recoup fast food headset market share lost during the year ended
1999.
Pro Tech continued the sale of products through distributors, augmenting these
sales with direct sales from our own outbound telemarketing operation. During
the year ended December 31, 2001, we sold a total of 70,803 headsets and headset
related products, as compared to 46,314 headsets during the same 2000 period, a
53% increase. Net unit sales of fast food headsets increased 27% primarily from
the expansion of sales distribution channel previously mentioned. Consistent
with the our objectives, the indirect distribution channel accounted for 88% of
net revenues and 86% of unit volumes versus 77% of net revenues and 78% of unit
volumes in the comparable 2000 period. We successfully maintained our
relationship with the McDonald's Corporation and once again have been selected
to be a part of the McDonald's International Owner Operator's trade show planned
for April 2002. Sales from outside the fast food market were only $450,660 for
the year ended December 31, 2001, as a result of delays in the market
introduction of the telephone product line. These delays were the result of the
lack of working capital required to successfully enter this market. On July 30,
2001, we received a capital infusion of $500,000 to support this working capital
requirement.
Gross margin percent decreased 2.4% from the comparable year end period in 2000
as a result of our desire to regain lost market share due to price competition
in the fast food headset market as well as a temporary increase in manufacturing
of certain products here in the U.S.
Selling, general and administrative expenses for the year ended December 31,
2001 increased approximately $1,899,000, or 105%, over the comparable year ended
December 31, 2000. This increase was the result of the following: (1)
amortization expense associated with the 2000 acquisition of certain intangible
personal property from NCT Hearing increased from approximately $234,000 in 2000
to approximately $933,000 in 2001; (2) payroll and related expenses increased
$785,000 for the year ended December 31, 2001 over the comparable 2000 period;
and (3) expenses charged by the parent company including overhead and specific
employee time allocations increased approximately $131,000 over the comparable
2000 period.
We continued to invest in research and development and new product development
for mold designs and component testing. We are also reviewing several possible
alliances with companies that have complimentary products, which could provide
access into several key accounts in the telephone market. Although we intend to
form alliances, there are no formal agreements in place and no assurances that
they will occur in the future.
Interest expense for the year ended December 31, 2001 decreased approximately
$21,000, or 46%, from the comparable year ended December 31, 2000. This decrease
was due to the retirement of approximately $300,000 in loans outstanding in
2000. These loans served as bridge financing to the issuance of 1,500 shares of
Series A Convertible Preferred Stock in September 2000.
13
The Two Months Ended December 31, 2000 As Compared To The Two Months Ended
December 31, 1999 (Unaudited):
For the two months ended December 31, 2000, Pro Tech realized a net loss of
$376,320 compared to a net loss of $68,906 for the two months ended December 31,
1999. The current reporting period loss was attributed to three factors: (1)
acquisition of certain intangible property from NCT Hearing required
amortization expenses of $155,000 during the two months ended December 31, 2000,
(2) we incurred approximately $84,000 of overhead expense allocation during the
two months ended December 31, 2000 due to acquisition of approximately 83% of
Pro Tech's outstanding common stock by NCT Hearing; and (3) the result of the
growing competition in Pro Tech's distributor selling channel in the fast food
market causing a deterioration of gross margins.
Net sales generated during the two months ended December 31, 2000 increased 163%
to $307,902 from $116,716 for the two months ended December 31, 1999. This
increase in sales was as a result of two factors: (1) our ability to continue to
recoup fast food headset market share lost during the year ended 1999; and (2)
sales from the market introduction of several new telephone headsets and related
communication equipment.
Pro Tech continued the sale of products through distributors, augmenting these
sales with direct sales from our own outbound telemarketing operation. During
the two months ended December 31, 2000, we sold a total of 9,517 headsets, as
compared to 3,548 headsets in the same two-month period in 1999, a 168%
increase. Net unit sales of fast food headsets increased 189% primarily from the
expansion of sales distribution channel previously mentioned. Consistent with
the our objectives, the indirect distribution channel accounted for 77% of net
revenues and 78% of unit volumes versus 70% of net revenues and 64% of unit
volumes in the comparable 1999 two-month period. Sales from outside the fast
food market were only $63,336 for the two months ended December 31, 2000, as a
result of delays in the market introduction of the telephone product line. These
delays were the result of the lack of working capital required to successfully
enter this market. On September 29, 2000, we received a capital infusion of $1.5
million to support this working capital requirement.
Gross margin percent decreased 4% from the comparable two-month period in 1999
as a result of our desire to regain lost market share due to price competition
in the fast food headset market as well as an increase in costs related to the
manufacture of certain products here in the U.S.
Selling, general and administrative expenses for the two-month period ended
December 31, 2000 were $561,044 or 182% of revenues versus $145,119 or 124% of
revenues in the comparable 1999 period. This increase was the result of the
following: (1) due to the transaction resulting in the acquisition of the
intangible property from NCT Hearing Products, Inc., we incurred approximately
$155,000 of amortization expense of such intangible property and an allocation
of overhead expense which amounted to approximately $115,000 for the two-month
period ended December 31, 2000; and (2) we increased our marketing and
advertising expenses to $5,088 from $2,482 in the comparable 1999 two-month
period as a result of an increase in expenses in marketing material from the use
of an alternative source along with the decision to increase our attendance at
trade shows showing targeted return on investments.
We continued to invest in research and development and new product development
for mold designs and component testing. We are also reviewing several possible
alliances with companies that have complimentary products, which could provide
access into several key accounts in the telephone market. Although we intend to
form alliances, there are no formal agreements in place and no assurances that
they will occur in the future.
14
We generated interest income of $721 for the two months ended December 31, 2000
as compared to $1,008 for the comparable 1999 two-month period. The interest
income resulted from investment of the net proceeds from the private placement
of securities into short-term certificates of deposits.
The Year Ended October 31, 2000 As Compared To The Year Ended October 31, 1999:
For the year ended October 31, 2000, Pro Tech realized a net loss of $374,340
compared to a net loss of $221,065 for the year ended October 31, 1999. The
current reporting year loss was attributed to three factors: (1) the acquisition
of certain intangible property from NCT Hearing required amortization expenses
of $78,000 during the month of October 2000, (2) we incurred approximately
$101,000 of overhead expense allocation for the period from September 13, 2000
to October 31, 2000 due to acquisition of approximately 83% of Pro Tech's
outstanding common stock by NCT Hearing; and (3) the result of the growing
competition in distributor selling channel in the fast food market causing a
deterioration of gross margins.
Net sales generated during the year ended October 31, 2000 increased 43% to
$1,562,484 from $1,090,551 in fiscal year ended October 31, 1999. This increase
in sales was as a result of two factors: (1) our ability to continue to recoup
fast food headset market share lost during fiscal year ended 1999; and (2) sales
from the market introduction of several new telephone headsets and related
communication equipment.
Pro Tech continued the sale of products through distributors augmenting these
sales with direct sales from our own outbound telemarketing operation. For the
fiscal year 2000, we sold a total of 41,121 headsets, as compared to 27,641
headsets in the previous year, an increase of 49%. Net unit sales of fast food
headsets increased 33%, primarily from the expansion of sales distribution
channels previously mentioned. Consistent with our objectives, the indirect
distribution channels accounted for 73% of net revenues and 77% unit volumes
versus 64% of net revenues and 74% of unit volumes in the comparable 1999
period. Sales from outside the fast food market were only $250,000 as a result
of delays in the market introduction of our telephone product line. These delays
were the result of the lack of working capital required to successfully enter
this market. On September 29, 2000, we received a capital infusion of $1.5
million to support this working capital requirement.
Gross margin percent decreased 1.86% to 60.09% versus 61.95% in the comparable
1999 period as a result of our desire to regain lost market share due to price
competition in the fast food headset market as well as an increase in costs
related to the manufacture of certain products here in the U.S.
Selling, general and administrative expenses for the fiscal year were $1,275,290
or 81.6% of revenues versus $893,384 or 89% of revenues in the comparable 1999
period. This increase was the result of several factors. First, due to the
transaction resulting in the acquisition of the intangible property from NCT
Hearing, we incurred approximately $78,000 of amortization expense of such
intangible property and an allocation of overhead expense which amounted to
approximately $101,000 for the period from September 13, 2000 to October 31,
2000. Second, we decreased our marketing and advertising expenses to $54,424
from $98,738 in the comparable 1999 period as a result of a reduction in
expenses in marketing material from the use of an alternative source along with
the decision to reduce attendance at trade shows showing targeted return on
investments. These trade shows allowed us the opportunity to successfully
present the new products planned for market introduction in the 1st and 2nd
quarter of fiscal year 2000 along with the opportunity to perform needed market
research necessary to have successful product introductions in the future.
We continued to invest in research and development and new product development
for mold designs and component testing. We are also reviewing several possible
alliances with companies that have complimentary products, which could provide
access into several key accounts in the telephone market. Although we intend to
form alliances, there are no formal agreements in place and no assurances that
they will occur in the future.
15
We generated interest income of $4,877 for the year ended October 31, 2000 as
compared to $10,202 for the year ended October 31, 1999. The interest income
resulted from investment of the net proceeds from the private placement of
securities into short-term certificates of deposits.
LIQUIDITY AND CAPITAL RESOURCES
The current ratio (current assets to current liabilities) was .79 to 1.00 at
December 31, 2001, as compared to 2.85 to 1.00 at December 31, 2000. At December
31, 2001, current liabilities exceeded current assets by approximately $329,136.
During the current fiscal year ending December 31, 2001, we funded working
capital requirements with cash flow from operations, proceeds from the sale of
convertible preferred stock in July 2001 and a new short-term factoring
arrangement. Management believes Pro Tech has sufficient funds to meet
anticipated working capital requirements for the next 12 months.
In addition, in order to maximize the potential of the telephone user market and
to enable us to expand into additional markets, including government agencies
and personal computers, we will require additional capital. On March 27, 2001,
we were able to roll the outstanding loan from Westek Communications Inc., a
stockholder, for $150,000 into a new note for $162,750, which included accrued
interest payable from the old note. The new note is payable on March 27, 2002
with an interest rate of 8.5%. We will seek to raise additional financing as a
result of our relationship with NCT Hearing and its parent company, NCT Group,
Inc.
At December 31, 2001, cash and cash equivalents were $46,881. Such balance was
invested in interest bearing money market accounts.
Pro Tech had a working capital deficit of $329,136 at December 31, 2001 as
opposed to working capital of $1,205,686 at December 31, 2000. This $1,534,822
decrease was due primarily to the use of the remaining proceeds from the sale of
$1,500,000 of Series A Convertible Preferred Stock in September 2000 and the
increase in our accounts payable and other liabilities.
Cash flows used in operating activities was $585,477 during the year ended
December 31, 2001. This use of funds was driven primarily by the 2001 generated
net loss of $2,429,392 and the increase in inventory of $295,156, offset by the
depreciation and amortization expense of $1,052,737 and the increases of
$378,167 in accounts payable and $403,599 in other liabilities.
Net cash used in investing activities was $543,352 during the year ended
December 31, 2001, due primarily to expenses incurred for leasehold improvements
in connection with the new office space, which we initially occupied during
April 2001.
The net cash provided by financing activities was $399,329 during the year ended
December 31, 2001, due primarily to the issuance of the issuance of the Series B
Convertible Preferred Stock.
Pro Tech has no lines of credit with banks or other lending institutions.
Due to Pro Tech's need to fund new product development and increase
manufacturing capacity in order to meet new business demands in 2001, it was
necessary to enter into certain transactions, which provided additional funding
as follows:
Series B Redeemable Convertible Preferred Stock
On July 30, 2001, we entered into an agreement to issue 500 shares of Series B
Redeemable Convertible Preferred Stock (Preferred Stock-B) for $500,000. We
received approximately $419,000 in cash, net of fees and expenses, in exchange
for the Preferred Stock-B. Under such agreement, the shares of Preferred Stock-B
may be converted into shares of Pro Tech common stock or exchanged for shares of
NCT Group, Inc. (NCT) common stock. The conversion rate into Pro Tech common
stock is the lesser of: (i) the then
16
lowest average of the average closing bid price for a share of Pro Tech common
stock for any consecutive five day period out of fifteen trading days preceding
the date of such conversion, less a discount of 20%; or (ii) $0.25. The exchange
rate into NCT common stock is the then lowest average of the average closing bid
price for a share of NCT common stock for any consecutive five trading days out
of the fifteen trading days preceding the date of such conversion, less a
discount of 20%.
In addition, under the agreement, we issued a warrant to purchase 1,000,000
shares of our common stock. The warrant is exercisable at $0.13 per share and
expires on July 30, 2004. We have the right to require the warrant holder to
exercise upon a call by Pro Tech under the following conditions: (1) one-third
of the warrant is callable if the closing bid price of the common stock for each
of the previous fifteen days equals or exceeds $0.177 per share and the average
daily trading volume during such period is at least 150,000 shares; (2)
two-thirds of the warrant is callable if the closing bid price of the common
stock for each of the previous fifteen days equals or exceeds $0.244 per share
and the average daily trading volume during such period is at least 150,000
shares; and (3) the entire warrant is callable if the closing bid price of the
common stock for each of the previous fifteen days equals or exceeds $0.295 per
share and the average daily trading volume during such period is at least
150,000 shares.
Goodman Factoring Agreement
On March 26, 2001, Pro Tech entered into a factoring agreement with Goodman
Factors, Inc., or Goodman. We are required to factor substantially all of our
trade receivables on a non-recourse basis in return for immediate cash credit
equal to eighty-five percent (85%) of these factored receivables, less factoring
fee. The factoring fee is 1.9% of the invoice amount and 3.5% over the prime
rate on the amount advanced under the factoring agreement. The prime rate was
4.75% at December 31, 2001. In addition, at December 31, 2001 we had $10,402 in
reserve at Goodman representing not less than fifteen percent (15%) of the
aggregate unpaid gross amount of all outstanding accounts factored under this
factoring agreement. If the net amount of accounts submitted for any one month
does not exceed $100,000, Goodman may charge an additional commitment fee, as
described in the agreement. Such factored receivables are subject to acceptance
by Goodman. Goodman also has the option to accept factored receivables with
recourse. If such recourse receivables are not paid within 46 days, we must buy
back the total outstanding receivable. Obligations due to the factor under the
factoring agreement are collateralized by a continuing security interest in all
of our accounts receivable, notes receivable, chattel paper, documents,
instruments and general intangibles now existing or hereafter acquired of every
kind wherever located, together with merchandise returns and goods represented
thereby, and all proceeds therefrom of every kind and nature.
Capital Expenditures
There were no material commitments for capital expenditures as of December 31,
2001, and no other material commitments are anticipated in the near future.
17
ITEM 7A. QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Pro Tech's primary market risk exposures are fluctuations in interest rates and
foreign exchange 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 such 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 8. FINANCIAL STATEMENTS
The Reports of the Independent Auditors, Morgan, Jacoby, Thurn, Boyle &
Associates, P.A., and the financial statements and accompanying notes are
attached.
Page
Independent Auditors' Report F-1
Balance Sheets as of October 31, 2000; December 31, 2000
and 2001 F-2
Statements of Operations for the years ended October 31,
1999 and 2000; the two months ended December 31, 2000;
and the year ended December 31, 2001 F-3
Statements of Stockholders' Equity for the years ended
October 31, 1999 and 2000; the two months ended December 31,
2000; and the year ended December 31, 2001 F-4
Statements of Cash Flows for the years ended October 31, 1999
and 2000; the two months ended December 31, 2000; and the
year ended December 31, 2001 F-5
Notes to Financial Statements F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages, positions and the offices held
by each of the executive officers and directors of Pro Tech as of March 11,
2002.
Name Age Positions and Offices
- --------------------- ------ -----------------------------------------------
Keith Larkin 78 Chairman of the Board
Richard Hennessey 42 President, Chief Operating Officer and Director
Michael J. Parrella 53 Director
Irene Lebovics 48 Director
Cy E. Hammond 47 Director
Mark Melnick 43 Secretary
Debra Kirven 37 Chief Financial Officer and Treasurer
Keith Larkin is the founder and Chairman of the Board of Directors of Pro Tech.
He served as the company's Chief Executive Officer and Treasurer from inception
in 1994 until his resignation from these positions on February 1, 2002. Mr.
Larkin's 40-year professional career has been devoted to designing,
manufacturing and marketing his new designs in lightweight telephone headsets.
In 1961, Mr. Larkin founded Plantronics, the current industry leader in
lightweight telephone headsets with annual sales of all
18
its products (including the electronic amplifier) in 2000 of approximately $320
million. From 1961 until he sold his interest in 1967, Mr. Larkin served as the
President and Chairman of Plantronics, during which Plantronics established
itself as the main source of lightweight telephone headsets to the telephone
industry and provided the headsets for NASA Mercury, Gemini and Apollo moon
flights. In the late 1970's, Mr. Larkin conceived, developed and patented a new
design in headsets to compete against Plantronics' headsets. With Mr. Larkin as
its President, ACS Wireless attained $1 million monthly sales figures to the
telephone market within three years of operation and replaced Plantronics'
headsets on the NASA Space Shuttle. In 1986, he left ACS Wireless to become
involved in Christian children's relief programs in Haiti and Honduras for a
period of three years. From January 1989 to August 1991, Mr. Larkin served as
the President of Advanced Recreational Technology, Inc., an engineering research
and development company owned by Mr. Larkin. In August 1991, Mr. Larkin founded
Pro Tech Systems, a California limited partnership that he managed as general
partner. Pro Tech Systems was formed to design, manufacture, and market
lightweight telephone headsets. Upon the transfer of all of the assets of Pro
Tech Systems to the company in November 1994, Mr. Larkin became the Chairman of
the Board of Directors, Chief Executive Officer, President and Treasurer of Pro
Tech, positions which he held until February 2, 1999, when he resigned as
President of Pro Tech then until February 1, 2002, when he resigned as Chief
Executive Officer and Treasurer but retained his position as Chairman of the
Board of Directors.
Richard Hennessey joined Pro Tech as Director of Marketing in August 1995 and
was appointed Vice President, Marketing on June 10, 1996. On August 4, 1998, Mr.
Hennessey was appointed Secretary and became a director of Pro Tech. On February
2, 1999, Mr. Hennessey was appointed President and Chief Operating Officer of
Pro Tech. On January 1, 2002, Mr. Hennessey resigned from the position of
Secretary but retained the positions of President and Chief Operating Officer.
From 1982 through 1984, Mr. Hennessey was a salesman with the computer sales
division of Lanier Business Products located in Boston, Massachusetts. From 1984
through April 1994, Mr. Hennessey held various new venture sales and sales
management positions with Digital Equipment Corporation.
Michael J. Parrella currently serves as a director of Pro Tech. Mr. Parrella is
Chief Executive Officer and Chairman of the Board of Directors of NCT Group, the
ultimate parent company of Pro Tech, and serves as Chairman of the Board of NCT
Hearing Products, Inc., the direct parent company of Pro Tech. Mr. Parrella was
elected Chairman of the Board of Directors of NCT Group on April 21, 2000, on
which date he relinquished the position of President. From August 1995 to April
21, 2000, Mr. Parrella served as NCT Group's President and Chief Executive
Officer. From November 1994 to July 1995, Mr. Parrella served as Executive Vice
President of NCT Group. Prior to that, from February 1988 until November 1994,
he served as President and Chief Operating Officer of NCT Group. He initially
became a director of NCT Group in 1986. Mr. Parrella also serves as Chief
Executive Officer and Acting President of NCT Audio Products, Inc., a subsidiary
of NCT Group, a position to which he was elected on September 4, 1997. He became
a director of NCT Audio on August 25, 1998. On January 5, 2001, Mr. Parrella was
elected Acting Chief Executive Officer of Advancel Logic Corporation, a
subsidiary of NCT Group. Mr. Parrella is a director of Advancel and serves as
Chairman of the Board of Distributed Media Corporation, a subsidiary of NCT
Group. Mr. Parrella became a director of subsidiaries acquired directly or
indirectly by NCT Group in 2000, including Midcore Software, Inc. and Pro Tech,
and NCT Group subsidiaries formed in 2000, including DMC Cinema, Inc., NCT Video
Displays, Inc., DMC New York, Inc., ConnectClearly.com, Inc., DMC HealthMedia
Inc., Distributed Media Corporation International Limited, Artera Group, Inc.
and Artera Group International Limited.
Irene Lebovics currently serves as a director of Pro Tech. She is a director and
President of NCT Group and director and President of NCT Hearing Products, Inc.
She served as Secretary of NCT Group from February 1999 until September 2001. On
April 25, 2001, Ms. Lebovics became a director of NCT Group. On January 5, 2000,
Ms. Lebovics was elected Acting Chief Marketing Officer and Secretary of
Advancel Logic Corporation. She joined NCT Group as Vice President of NCT Group
and President of NCT Medical Systems in July 1989. In January 1993, she was
appointed Senior Vice President of NCT Group. In November 1994, Ms. Lebovics
became President of NCT Hearing Products, Inc. In 1999, Ms. Lebovics was
appointed as Executive Vice President of NCT Group, and in April 2000, she
became President of NCT Group. She has held various positions in product
marketing with Bristol-Myers, a consumer products company, and in advertising
with McCaffrey and McCall. In addition to serving as a director of Pro Tech,
19
Ms. Lebovics serves as a director of various NCT Group subsidiaries as follows:
NCT Hearing Products, Inc., Distributed Media Corporation, ConnectClearly.com,
Inc., NCT Video Displays, Inc., DMC New York, Inc., Artera Group, Inc., Artera
Group International Limited, Midcore Software, Inc., Advancel Logic Corporation,
DMC HealthMedia Inc., Distributed Media Corporation International Limited and
DMC Cinema, Inc.
Cy E. Hammond currently serves as a director of Pro Tech. He is Senior Vice
President, Chief Financial Officer, Treasurer and Assistant Secretary of NCT
Group. He joined NCT Group as Controller in January 1990 and was appointed a
Vice President in February 1994. Mr. Hammond also serves as Treasurer of NCT
Hearing Products, Inc., a position to which he was elected on July 15, 1998, as
Acting Chief Financial Officer and Treasurer of NCT Audio Products, Inc.,
positions to which he was elected on September 4, 1997, and as Acting Chief
Financial Officer, Treasurer and Assistant Secretary for Advancel Logic
Corporation, positions to which he was elected on January 5, 2000. During 1989,
he was Treasurer and Director of Finance for Alcolac, Inc., a multinational
specialty chemical producer. Prior to 1989 and from 1973, Mr. Hammond served in
several senior finance positions at the Research Division of W.R. Grace & Co.,
the last of which included management of the division's worldwide financial
operations. Mr. Hammond also serves as a director of other NCT Group
subsidiaries as follows: NCT Video Displays, Inc., DMC New York, Inc., Artera
Group, Inc., Artera Group International Limited, Noise Cancellation Technologies
(Europe), Inc. and ConnectClearly.com, Inc.
Mark Melnick currently serves as Secretary of Pro Tech, the position which he
has held since January 1, 2002. Mr. Melnick is Vice President, General Counsel
and Secretary of NCT Group, Inc., positions he has held since September 2001. He
also serves as Secretary of Distributed Media Corporation, DMC Cinema, Inc., DMC
HealthMedia, Inc., NCT Audio Products, Inc., NCT Hearing Products, Inc., NCT
Medical Systems, Inc., ConnectClearly.com, Inc., Midcore Software, Inc., Artera
Group, Inc., Advancel Logic Corporation, NCT Muffler, Inc., Chaplin Patents
Holding Company, Inc., NCT Far East, Inc. and NCT Video Displays, Inc. From 1989
to 2000, Mr. Melnick was Counsel, Senior Counsel and then Assistant General
Counsel of CBS Cable and its predecessor-in-interest Group W Satellite
Communications (a division of Westinghouse Broadcasting Co.), in the cable
television field. From 1984 to 1988, he was an associate at the law firm of
Stults & Marshall (now known as Balber Pickard Battistoni Maldonado & Van Der
Tuin) in New York, NY. From 1982 to 1984, he was an associate at the law firm of
Seyfarth, Shaw, Fairweather & Geraldson in New York, NY.
Debra Kirven currently serves as Chief Financial Officer and Treasurer of Pro
Tech, positions that she has held since February 1, 2002. Ms. Kirven is
Assistant Controller of NCT Group Inc., the position which she has held since
November 27, 2000. From 1991 to 2000, Ms. Kirven held various accounting and
finance positions with Southern New England Telecommunications, Inc. in New
Haven, CT. From 1986 to 1991, Ms. Kirven was an accountant and then senior
accountant with Deloitte & Touche.
Section 16(a) of the Securities Exchange Act of 1934 requires Pro Tech's
directors, executive officers and persons who own more than 10% of a registered
class of our equity securities to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership in
the Common Stock. Executive officers, directors and persons who own more than
10% of a registered class of our equity securities are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file with
the SEC.
To Pro Tech's knowledge, based solely on review of the copies of such reports
furnished to us and representations that no other reports were required, Pro
Tech believes that all filing requirements applicable to its officers,
directors, and greater than 10% shareholders were complied with during the
period from January 1, 2001 to December 31, 2001, except that Mr. Larkin did not
timely file Form 4s with the SEC in conjunction with the grant of options in
June 2001.
20
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid to or
accrued by all persons who served as Chief Executive Officer during the last
calendar year and by each other executive officer receiving in excess of
$100,000 (the "Named Executive Officers") for services rendered to Pro Tech
during the fiscal years ended October 31, 1999 and 2000; the two months ended
December 31, 2000 and the fiscal year ended December 31, 2001.
Securities
Other Underlying All
Name and Annual Options/Warrants Other
Principal Position Year Salary Bonus Compensation SARs(#) Compensation
- --------------------------- --------------- ----------------- ------------ ------------------ --------------------- --------------
Keith Larkin
Chairman of the Board 10/31/99 $ 25,000 - - 540,000 -
10/31/00 $ 22,500 - - - -
12/31/00 $ 7,500 - - - -
12/31/01 $ 56,750 - - 540,000 -
Richard Hennessey
President 10/31/99 $ 51,000 - - 200,000 -
10/31/00 $ 77,000 - - - -
12/31/00 $ 16,000 - - 250,000 -
12/31/01 $ 142,896 - - - -
Compensation Arrangements with Certain Officers and Directors
Pro Tech had an employment agreement with Keith Larkin, which was terminated on
February 2, 1999. The agreement provided for a maximum annual salary of $90,000
with additional amounts added using the consumer price index as a minimum. Mr.
Larkin was eligible for the maximum annual salary during a given year only if
Pro Tech generated annual sales of at least $2,000,000 and pre-tax income equal
to at least 20% of annual sales. Since we did not meet the minimum requirements
during fiscal years ended October 31, 1999 or 2000; the two months ended
December 31, 2000; or the fiscal year ended December 31, 2001, Pro Tech paid Mr.
Larkin the compensation set forth in the preceding table.
Pro Tech has no set salary obligations to Mr. Larkin for his services for the
current or future fiscal years. However, Mr. Larkin has agreed to assign to Pro
Tech all of his rights, title and interest in and to any and all inventions,
discoveries, developments, improvements, processes, trade secrets, trademark,
copyright and patent rights of which he conceives during his tenure as Chairman
of the Board of Directors.
Pro Tech does not have a written employment agreement with Richard Hennessey.
Messrs. Larkin and Hennessey did not receive any additional compensation for
serving as directors.
Compensation of Directors
No directors of Pro Tech have received any fees for serving as a director.
Stock Option Plans
On November 28, 2000, Pro Tech issued to its employees, options to purchase
500,000 shares of common stock at $0.4375 per share under the 1998 Stock Option
Plan, which vest as follows: 125,000 immediately, 125,000 on November 28, 2001,
125,000 on November 28, 2002, and 125,000 on November 28, 2003. The options
expire on November 28, 2007.
On June 1, 2001, Pro Tech issued options to the Chairman to purchase up to
540,000 shares at an exercise price of $0.17 per share under the 1998 Stock
Option Plan, which options vested immediately upon
21
issuance. In addition, on June 1, 2001 Pro Tech issued options to two other
employees to purchase up to 400,000 shares at an exercise price of $0.17 per
share under the 1998 Stock Option Plan, which options vested or vest as follows:
160,000 immediately upon issuance; 120,000 on June 1, 2002; and 120,000 on June
1, 2003. In January 2002 employment of these two employees was terminated and,
according to the option agreement, such granted options will expire in April
2002. The exercise prices of the options granted above were equal to the fair
market value of the common stock on the grant dates and expire seven years from
date of grant.
2001 Aggregated Option and Warrant Exercises and
December 31, 2001 Option and Warrant Values
The following table sets forth certain information with respect to the exercise
of options and warrants to purchase common stock during the year ended December
31, 2001 and the unexercised options and warrants held and the value thereof at
that date, by each of Mr. Larkin and Mr. Hennessey.
Number of Shares
Number of Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired and Warrants at And Warrants at
On Value December 31, 2001 December 31, 2001
------------------------------------- ---------------------------------
Name Exercise (#) Realized Exercisable (#) Unexercisable (#) Exercisable Unexercisable
- -------------------- ------------- ------------- --------------- -------------------- --------------- ---------------
Keith Larkin - - 540,000 - $ - $ -
Richard Hennessey - - 425,000 125,000 $ - $ -
During the fiscal year ended October 31, 2000; the two months ended December 31,
2000; and the fiscal year ended December 31, 2001, neither Mr. Larkin nor Mr.
Hennessey exercised any stock options. The fair market value of Pro Tech's
common stock as of December 31, 2001 was less than the exercise price for both
Mr. Larkin's and Mr. Hennessey's stock options. Accordingly, as of December 31,
2001, Mr. Larkin's and Mr. Hennessey's unexercised stock options had no value as
indicated above.
1996 Stock Option Plan
On April 15, 1996, the Board of Directors adopted the 1996 Stock Option Plan.
The 1996 Plan provides for the grant of options to purchase up to an aggregate
of 590,000 of authorized but unissued shares of common stock (subject to
adjustment in certain cases including stock splits, recapitalizations and
reorganizations) to officers, directors, consultants, and other persons
rendering services to Pro Tech.
The purposes of the 1996 Plan are to provide incentive to employees, including
officers, directors and consultants, to encourage such persons to remain in the
employ of Pro Tech and to attract persons of experience and ability. The 1996
Plan terminates on April 15, 2002. The Board of Directors determined in 2000
that no further grants would be made under the 1996 Plan.
Options granted under the 1996 Plan may be either incentive stock options within
the meaning of the Internal Revenue Code of 1986, as amended, or options that do
not qualify as incentive options. The exercise price of incentive options must
be at least equal to the fair market value of the shares of common stock on the
date of grant provided, however, that the exercise price of any incentive option
granted to any person who, at the time of the grant of the option, owns stock
aggregating 10% or more of the total combined voting power of Pro Tech or any
parent or subsidiary of Pro Tech, must not be less than 110% of the fair market
value.
On April 15, 1996, options to purchase 540,000 and 50,000 shares of common stock
were granted to the then President and officers, respectively, at an exercise
price of $0.50 per share. The exercise price was the fair value of a share of
common stock at the date of the grant, which was determined from the price paid
per share during Pro Tech's stock offering carried out in 1996. The stock
options were exercisable upon the grant date, extending over a period of three
years.
22
Prior to fiscal year 1998, Pro Tech received $25,000 upon issuance of 50,000
shares of common stock upon the exercise of 50,000 options by its officers. On
April 13, 1999, the remaining 540,000 options issued to Pro Tech's previous
President were extended for 2 years to April 15, 2001. Such options have
expired.
1998 Stock Option Plan
On March 5, 1998, the Board of Directors adopted the 1998 Stock Option Plan for
the benefit of directors, officers and employees of and consultants to Pro Tech.
The 1998 Plan originally authorized the issuance of options to purchase up to
500,000 shares of common stock and was increased to 2,000,000 shares of common
stock on August 11, 2000. On August 4, 1998, options to purchase 200,000 and
100,000 shares were granted to officers and employees, respectively, at an
exercise price of $0.375 per share. The exercise price was the fair market value
of a share of common stock at the date of the grant. Of these, options to
purchase 150,000 shares of common stock were granted to Richard Hennessey and
vested as follows: 50,000 immediately, 50,000 on August 4, 1999 and 50,000 on
August 4, 2000. The remaining options vested immediately. All options are
exercisable over a three-year period from the date of vesting.
On April 13, 1999, the remaining 1998 Plan options to purchase 200,000 shares of
common stock were granted to Richard Hennessey at an exercise price of $0.38 per
share. The exercise price was greater than the fair market value of a share of
common stock at the date of the grant. The options vest and are exercisable as
follows: 100,000 immediately; 50,000 on April 13, 2000; and 50,000 on April 13,
2001. The options expire April 13, 2004.
On November 28, 2000, the Board of Directors authorized the issuance to Pro Tech
employees of options to purchase an aggregate of 500,000 shares of common stock
at an exercise price of $0.4375 per share, the fair market value on the date of
grant. Included in these grants was a grant to Mr. Hennessey to acquire 250,000
shares of common stock. The shares underlying Mr. Hennessey's stock option vest
as follows: 25% (or 62,500 shares) on the date of grant and 25% on each of the
first, second and third anniversaries of the date of grant. The options expire
on November 28, 2007.
On June 1, 2001, the Board of Directors granted options to three employees of
Pro Tech for the purchase of an aggregate of 940,000 shares of common stock,
including an option to Mr. Larkin to acquire 540,000 shares. Mr. Larkin's
options have an exercise price of $0.17 per share, the fair market value on the
date of grant, and vest on the date of grant. The options expire on June 1,
2008.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table sets forth information concerning the shares of common stock
beneficially owned as of March 11, 2002 by each person who: (1) to the knowledge
of Pro Tech, was the holder of 5% or more of the common stock of Pro Tech as of
such date; (2) serves as a director of Pro Tech; (3) was among the five most
highly compensated executive officers of Pro Tech (including Pro Tech's Chief
Executive Officer) in the fiscal year ending December 31, 2001; and by all
executive officers and directors of Pro Tech as a group. Except as otherwise
noted, each beneficial owner has sole investment and voting power with respect
to the listed shares.
23
Amount and
Nature of Approximate
Beneficial Percentage
Name of Beneficial Owner Ownership (1) Of Class (1)
-------------------------------------- -------------- -----------
Keith Larkin 1,550,000 (2) 4.6%
Richard Hennessey 425,000 (3) 1.3%
Michael J. Parrella - (4) -
Irene Lebovics - (4) -
Cy E. Hammond - (4) -
NCT Hearing Products, Inc. 27,102,174 (5) 81.6%
Carole Salkind 129,462,019 (6) 79.6%
Alpha Capital Aktiengesellschaft 11,672,374 (7) 26.0%
Zakeni Limited 3,351,941 (8) 9.2%
All Executive Officers and Directors
as a Group (7 persons) 1,975,000 5.7%
- ----------------
(1) Assumes the exercise of currently exercisable options or warrants to
purchase shares of common stock and the conversion of convertible securities.
The percentage of class ownership is calculated separately for each person based
on the assumption that the person listed on the table has exercised all options
and warrants currently exercisable by that person and converted the convertible
securities held by that person, but that no other holder of options or warrants
has exercised such options or warrants or converted such convertible securities.
(2) Includes 790,000 shares of common stock underlying stock options that are
presently exercisable. 540,000 of such stock options are exercisable at $0.17
per share and expire on June 1, 2008; 250,000 of such stock options are
exercisable at $0.06 per share and expire on February 1, 2009. Also includes
240,000 shares of common stock owned by The Seek Foundation, an organization
described in Section 501(c)(3) of the Internal Revenue Code of 1954, as amended.
The directors of such organization are Keith Larkin and his wife, Cynthia
Larkin. Excludes 40,000 shares held by Westek Communications, a company
controlled by Mr. Larkin's son and 400 shares held by Mr. Larkin's
grandchildren, shares over which Mr. Larkin disclaims beneficial ownership.
(3) Includes shares of common stock from stock option agreements, as follows:
(1) 300,000 shares of common stock underlying stock option agreements, all of
which are presently exercisable (of such options, 50,000 expire on August 4,
2002, 50,000 expire on August 4, 2003 and 200,000 expire on August 13, 2004);
and (2) 250,000 shares of common stock underlying a stock option agreement, of
which 125,000 are presently exercisable (the 250,000 options expire on November
28, 2007).
(4) Messrs. Parrella and Hammond, and Ms. Lebovics are officers of, and Mr.
Parrella and Ms. Lebovics serve as directors of, NCT Group. NCT Hearing is a
wholly-owned subsidiary of NCT Group. Messrs. Parrella and Hammond, and Ms.
Lebovics are directors of NCT Hearing and disclaim beneficial ownership in
respect of Pro Tech's common stock held by NCT Hearing.
(5) The address of NCT Hearing Products, Inc. is 20 Ketchum Street, Westport,
Connecticut 06880. Mr. Parrella, Chairman of the Board of NCT Hearing Products,
Inc., has voting and dispositive control over Pro Tech shares on behalf of NCT
Hearing.
(6) Ms. Salkind's business address is c/o Sills, Cummis, Radin, Tishman, Epstein
& Gross, One Riverfront Plaza, Newark, New Jersey 07102. Includes 119,326,272
shares issuable upon the exchange of convertible notes in aggregate principal
amount of $8,608,416 and 1,802,414 shares for interest thereon through March 11,
2002, calculated at an exchange price of $0.14 on $2,535,469 of convertible
secured
24
notes and at an exchange price of $0.06 on the remaining aggregate principal of
$6,072,947 of convertible notes. Also includes 8,333,333 shares deliverable to
Ms. Salkind upon the exercise of a currently exercisable warrant, delivery of
which shares would be an obligation of NCT Group.
(7) Alpha Capital Aktiengesellschaft's business address is Pradafant 7, 9490
Furstentums, Vaduz, Lichtenstein. Konrad Ackermann, Director, has voting and
dispositive control of Pro Tech's shares on behalf of Alpha Capital. In addition
to shares owned, includes shares of common stock that Alpha Capital has the
right to acquire pursuant to the exercise of a currently exercisable warrant for
1,000,000 shares. Also includes shares of common stock that Alpha Capital has
the right to acquire pursuant to its right to convert its 500 shares of our
Series B Convertible Preferred Stock for our common stock plus accretion thereon
at 4% per annum through March 11, 2002. Such conversion shares were determined
using 80% of an assumed $0.06 price per share five-day average closing bid price
of the 15-day trading period immediately preceding the assumed conversion.
(8) Includes shares of common stock that Zakeni Limited has the right to acquire
pursuant to the exercise of a currently exercisable warrant for 2,250,000
shares. Also includes shares of common stock that Zakeni Limited has the right
to acquire pursuant to its right to convert its 50 shares of Pro Tech Series A
Convertible Preferred Stock for our common stock plus accretion thereon at 4%
per annum through March 11, 2002. Such conversion shares were determined using
80% of an assumed $0.06 price per share five-day average closing bid price of
the 15-day trading period immediately preceding the assumed conversion. The
business address of Zakeni Limited is 620 Wilson Avenue, Suite 501, Toronto,
Ontario, Canada MSK 1Z3. Sheldon Salcman, Vice President, has voting and
dispositive control of Pro Tech's shares on behalf of Zakeni Limited.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
25
PART IV
ITEM 14. Exhibits, Financial Statements Schedules and
Reports on Form 8-K.
(a) (1) Financial Statements. The following financial statements are filed
as part of this Form 10-K.
Independent Auditors' Report
Balance Sheets as of October 31, 2000; December 31, 2000 and 2001
Statements of Operations for the years ended October 31, 1999 and 2000; for the
two months ended December 31, 2000; and for the year ended December 31, 2001
Statements of Stockholders' Equity for the years ended October 31, 1999 and
2000; for the two months ended December 31, 2000; and for the year ended
December 31, 2001
Statements of Cash Flows for the years ended October 31, 1999 and 2000; for the
two months ended December 31, 2000; and for the year ended December 31, 2001
Notes to Financial Statements
(2) Financial Statements Schedules- Schedules are omitted as not
applicable or not required
(3) Exhibits including those Incorporated by Reference.
3(a) Amended and Restated Articles of Incorporation of Pro Tech, as adopted
by Pro Tech and filed with the Department of State of the State of
Florida on July 30, 2001, incorporated herein by reference to Exhibit
3(a) of Pro Tech's Form 10-Q filed on August 13, 2001.
4(a) Warrant to purchase 1,000,000 shares of common stock of Pro Tech at a
purchase price of $0.13 per share issued to Alpha Capital
Aktiengesellschaft, incorporated herein by reference to Exhibit 4(a)
of Pro Tech's Form 10-Q filed on August 13, 2001.
10(a) *Stock Option, dated November 28, 2000, issued by Pro Tech to Richard
Hennessey, incorporated herein by reference to Exhibit 10(f) of Pro
Tech's Form 10-K filed on March 30, 2001.
10(b) *Stock Option, dated June 1, 2001, issued by Pro Tech to Keith Larkin,
incorporated by reference to Exhibit 10(b) of Pro Tech's Form 10-Q
filed on August 13, 2001.
10(c) *Stock Option, dated June 1, 2001, issued by Pro Tech to Carl Cacarro,
incorporated by reference to Exhibit 10(c) of Pro Tech's Form 10-Q
filed on August 13, 2001.
10(d) *Stock Option, dated June 1, 2001, issued by Pro Tech to Michael
Naparstek, incorporated by reference to Exhibit 10(d) of Pro Tech's
Form 10-Q filed on August 13, 2001.
10(e) Shareholder's Agreement dated September 13, 2000 by and between Pro
Tech and NCT Hearing Products, Inc., incorporated herein by reference
to Exhibit 10(n) of Pro Tech's Form 10-K filed on February 14, 2001.
10(f) Lease Agreement between Pro Tech and Fort Pierce Properties,
LLC, dated October 17, 2000, for rental of space at Orange
Blossom Mall, Ft. Pierce, FL, incorporated herein by reference
to Exhibit 10(q) of Pro Tech's Form 10-Q filed on May 15, 2001.
26
10(g) Amendment #1, dated January 26, 2001, to October 17, 2000
Lease Agreement, incorporated herein by reference to Exhibit
10(r) of Pro Tech's Form 10-Q filed on May 15, 2001.
10(h) Amendment #2, dated January 26, 2001, to October 17, 2000
Lease Agreement, incorporated herein by reference to Exhibit
10(s) of Pro Tech's Form 10-Q filed on May 15, 2001.
10(i) Securities and Purchase Agreement, dated July 30, 2001, among
Pro Tech, NCT Group, Inc. and Alpha Capital
Aktiengesellschaft, incorporated herein by reference to
Exhibit 10(i) of Pro Tech's Form 10-Q filed on August 13, 2001.
10(j) Registration Rights Agreement, dated July 30, 2001, among Pro
Tech, NCT Group Inc. and Alpha Capital Aktiengesellschaft,
incorporated herein by reference to Exhibit 10(j) of Pro
Tech's Form 10-Q filed on August 13, 2001.
* Denotes a management contract or compensatory plan or arrangement.
27
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 19, 2002.
PRO TECH COMMUNICATIONS, INC.
(Registrant)
By: /s/RICHARD HENNESSEY
--------------------------------------
Richard Hennessey, President
By: /s/DEBRA KIRVEN
-------------------------------------
Debra Kirven, Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signature Capacity Date
---------------------------------- ------------------------ ------------------
/s/RICHARD HENNESSEY Director and President March 19, 2002
----------------------------------
Richard Hennessey
/s/KEITH LARKIN Chairman of the Board March 19, 2002
----------------------------------
Keith Larkin
/s/MICHAEL J. PARRELLA Director March 19, 2002
----------------------------------
Michael J. Parrella
/s/CY E. HAMMOND Director March 19, 2002
----------------------------------
Cy E. Hammond
/s/IRENE LEBOVICS Director March 19, 2002
----------------------------------
Irene Lebovics
28
Independent Auditors' Report
The Board of Directors
Pro Tech Communications, Inc.:
We have audited the accompanying balance sheets of Pro Tech Communications, Inc.
as of October 31, 2000, December 31, 2000 and 2001 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
two-year period ended October 31, 2000; for the two months ended December 31,
2000; and for the year ended December 31, 2001. These financial statements are
the responsibility of Pro Tech's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pro Tech Communications, Inc.
as of October 31, 2000, December 31, 2000 and 2001, and the results of its
operations and its cash flows for each of the years in the two-year period ended
October 31, 2000; for the two months ended December 31, 2000; and for the year
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Morgan, Jacoby, Thurn, Boyle & Associates, P.A.
- ---------------------------------------------------
Morgan, Jacoby, Thurn, Boyle & Associates, P.A.
Vero Beach, Florida
March 1, 2002
F-1
PRO TECH COMMUNICATIONS, INC.
BALANCE SHEETS October 31, December 31,
------------- ------------------------------
2000 2000 2001
------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,070,408 $ 776,381 $ 46,881
Accounts receivable, less allowance for doubtful accounts
of $26,557; $28,131; and $24,784, respectively 421,372 421,805 219,434
Inventories, net of reserves (note 2) 558,860 650,588 945,744
Due from officers and employees 365 400 2,876
Other current assets 31,770 7,825 5,926
------------- ------------- -------------
Total current assets 2,082,775 1,856,999 1,220,861
Property and equipment, net (note 3) 278,805 271,090 758,530
Intangible assets, net of accumulated amortization of
$77,655; $232,964; and $1,164,821, respectively 16,229,837 16,074,528 15,142,671
Due from officer 56,824 57,206 59,670
Other assets 4,424 4,307 3,188
------------- ------------- -------------
$ 18,652,665 $ 18,264,130 $ 17,184,920
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 216,807 $ 168,750 $ 546,917
Accrued expenses (note 4) 102,165 105,198 199,526
Current portion of capital lease obligations (note 11) 6,757 5,590 10,083
Other liabilities (notes 5 and 10) 187,227 221,775 620,172
Notes payable (note 6) 150,000 150,000 173,299
------------- ------------- -------------
Total current liabilities 662,956 651,313 1,549,997
Capital lease obligations (note 11) 3,687 3,115 36,021
------------- ------------- -------------
Total liabilities 666,643 654,428 1,586,018
Commitments (note 11)
Series B Redeemable Convertible Preferred stock, $.01 par value, $1,000
stated value, authorized, issued and outstanding 0; 0; and
500 shares, respectively (note 7) - - 633,438
Stockholders' equity (notes 8 and 9):
Preferred stock, $.01 par value, authorized 998,000 shares, none
issued and outstanding - - -
Series A Convertible Preferred stock, $.01 par value, $1,000
stated value, authorized 1,500 shares, issued and outstanding
1,500; 1,500; and 50 shares, respectively 1,505,425 1,515,452 52,521
Common stock, $.001 par value, authorized 40,000,000 shares,
issued and outstanding 28,248,438; 28,248,438; and 33,200,311
shares, respectively 28,248 28,248 33,200
Additional paid-in-capital 17,239,973 17,229,946 18,473,079
Accumulated deficit (787,624) (1,163,944) (3,593,336)
------------- ------------- -------------
Total stockholders' equity 17,986,022 17,609,702 14,965,464
------------- ------------- -------------
$ 18,652,665 $ 18,264,130 $ 17,184,920
============= ============= =============
The accompanying notes are an integral part of the financial statements.
F-2
PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
For the Year Two Months For the Year
Ended Ended Ended
October 31, December 31, December 31,
------------------------- ------------ ------------
1999 2000 2000 2001
----------- ------------ ------------ ------------
Net sales $ 1,090,551 $ 1,562,484 $ 307,902 $ 2,175,306
Cost of goods sold 414,931 623,555 113,920 860,277
----------- ------------ ------------ ------------
Gross profit 675,620 938,929 193,982 1,315,029
Selling, general and administrative 893,384 1,275,290 561,044 3,715,561
Provision for doubtful accounts 3,771 7,990 1,574 9,958
----------- ------------ ------------ ------------
Loss from operations (221,535) (344,351) (368,636) (2,410,490)
Other income (expense) :
Interest income 10,202 4,877 721 4,530
Interest expense (1,021) (36,592) (9,434) (24,792)
Miscellaneous income 697 1,726 1,029 4,305
Loss on disposal of fixed assets (9,408) - - (2,945)
----------- ------------ ------------ ------------
Loss before income taxes (221,065) (374,340) (376,320) (2,429,392)
Income tax expense (benefit)(note 9) - - - -
----------- ------------ ------------ ------------
NET LOSS $ (221,065) $ (374,340) $ (376,320) $ (2,429,392)
=========== ============ ============ ============
Adjustments attributable to preferred stock (notes 7 and 8):
Preferred stock beneficial conversion feature $ - $ 3,569,000 $ - $ 79,190
Preferred stock embedded dividend requirement - 375,000 - 62,661
Preferred stock dividend (accretion) - 5,425 10,027 24,085
----------- ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (221,065) $ (4,323,765) $ (386,347) $ (2,595,328)
=========== ============ ============ ============
Basic and diluted loss per share $ (0.05) $ (0.57) $ (0.01) $ (0.08)
=========== ============ ============ ============
Weighted average common shares outstanding -
basic and diluted 4,254,000 7,537,855 28,248,438 32,281,034
=========== ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-3
PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (note 8)
Series A Additional
Preferred Common Paid in Accumulated
Stock Stock Capital Deficit Total
------------------ --------------------- ------------- ------------ --------------
Shares Amount Shares Amount
Balance, October 31, 1998 - $ - 4,254,000 $ 4,254 $ 1,137,018 $ (192,219) $ 949,053
Net loss - - - - - (221,065) (221,065)
------------------ --------------------- ------------- ------------ --------------
Balance, October 31, 1999 - - 4,254,000 4,254 1,137,018 (413,284) 727,988
Issue common stock under
stock option plans (note 9) - - 12,000 12 4,548 - 4,560
Issue common stock in exchange for certain
intangible assets including 279,688
shares issued as issuance costs, net of
related issuance costs of $179,678 - - 23,982,438 23,982 16,103,832 - 16,127,814
Sale of preferred stock 1,500 1,500,000 - - - - 1,500,000
Dividend on preferred stock - 5,425 - - (5,425) - -
Net loss - - - - - (374,340) (374,340)
------------------ --------------------- ------------- ------------ --------------
Balance, October 31, 2000 1,500 1,505,425 28,248,438 28,248 17,239,973 (787,624) 17,986,022
Dividend on preferred stock - 10,027 - - (10,027) - -
Net loss - - - - - (376,320) (376,320)
------------------ --------------------- ------------- ------------ --------------
Balance, December 31, 2000 1,500 1,515,452 28,248,438 28,248 17,229,946 (1,163,944) 17,609,702
Exchange/conversion of preferred stock (1,450)(1,478,578) 4,951,873 4,952 1,473,626 - -
Issuance costs on sale of Series B
Preferred Stock (note 7) - - - - (81,408) - (81,408)
Redemption adjustment on Series B
Preferred Stock (note 7) - - - - (125,000) - (125,000)
Dividend on preferred stock - 15,647 - - (24,085) - (8,438)
Net loss - - - - - (2,429,392) (2,429,392)
------------------ --------------------- ------------- ------------ --------------
Balance, December 31, 2001 50 $ 52,521 33,200,311 $ 33,200 $ 18,473,079 $(3,593,336) $ 14,965,464
================== ===================== ============= ============ ==============
The accompanying notes are an integral part of the financial statements.
F-4
PRO TECH COMMUNICATIONS, INC. For the Year For the For the Year
STATEMENTS OF CASH FLOWS Ended Two Months Ended Ended
October 31, December 31, December 31,
-------------------------- ---------------- -------------
1999 2000 2000 2001
----------- ----------- ---------------- -------------
Cash flows from operating activities:
Net loss $ (221,065) $ (374,340) $ (376,320) $ (2,429,392)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 45,222 128,658 164,153 1,052,737
Provision for doubtful accounts 3,771 7,990 1,574 9,958
Loss on disposal of fixed assets 9,408 - - 2,945
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (9,459) (223,439) (2,007) 192,413
Increase in inventories, net (40,273) (272,977) (91,728) (295,156)
(Increase) decrease in due from officers and employees (590) 852 (417) (4,940)
(Increase) decrease in other assets (17,519) 2,161 24,062 2,316
Increase(decrease) in accounts payable 63,724 116,703 (48,057) 378,167
Increase (decrease) in accrued expenses (73,077) 1,777 8,235 101,876
Increase in other liabilities - 101,057 115,516 403,599
----------- ----------- ---------------- -------------
Net cash used in operating activities $ (239,858) $ (511,558) $ (204,989) $ (585,477)
----------- ----------- ---------------- -------------
Cash flows from investing activities:
Capital expenditures (49,482) (130,152) (1,129) (543,702)
Proceeds on sale of fixed asset - - - 350
Proceeds on maturity of short-term investments 254,545 - - -
----------- ----------- ---------------- -------------
Net cash provided by (used in) investing activities $ 205,063 $ (130,152) $ (1,129) $ (543,352)
----------- ----------- ---------------- -------------
Cash flows from financing activities:
Proceeds from:
Notes payable - 536,145 - -
Sale of preferred stock (net) (notes 7 and 8) - 1,020,347 - 500,000
Sale of common stock (net) - 4,560 - -
Payment made on:
Notes payable - - (86,170) (797)
Issuance/conversion costs on preferred stock - - - (81,408)
Capital lease obligations (3,574) (9,362) (1,739) (18,466)
----------- ----------- ---------------- -------------
Net cash (used in) provided by financing activities $ (3,574) $ 1,551,690 $ (87,909) $ 399,329
----------- ----------- ---------------- -------------
Net (decrease) increase in cash and cash equivalents $ (38,369) $ 909,980 $ (294,027) $ (729,500)
Cash and cash equivalents - beginning of period 198,797 160,428 1,070,408 776,381
----------- ----------- ---------------- -------------
Cash and cash equivalents - end of period $ 160,428 $ 1,070,408 $ 776,381 $ 46,881
=========== =========== ================ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for Interest $ 1,021 $ 36,592 $ 2,072 $ 10,883
=========== =========== ================ ===========
Supplemental disclosures of non-cash investing and financing activities:
During the year ended October 31, 1999; the year ended October 31, 2000; and the
year ended December 31, 2001, Pro Tech acquired assets under capital leases
for $20,471, $2,909, and $55,865 respectively.
During the year ended December 31, 2001, Pro Tech acquired an asset under a loan
for $11,346.
During the year ended October 31, 2000, Pro Tech acquired licenses and patent
rights through issuance of 23,982,438 shares of common stock valued at
$16,307,492.
During the year ended October 31, 2000, Pro Tech issued Series A Convertible
Preferred Stock in exchange for the satisfaction of notes payable amounting
to $299,975.
During the year ended October 31, 2000; the two months ended December 31, 2000;
and the year ended December 31, 2001, Pro Tech adjusted the carrying value
of preferred stock and additional paid-in capital for a 4% dividend totaling
$5,425; $10,027; and $24,085, respectively.
The accompanying notes are an integral part of the financial statements.
F-5
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
(1) Organization and Summary of Significant Accounting Policies
(a) Organization
Pro Tech Communications, Inc., herein referred to as "Pro Tech," "we,"
or "our," was organized and incorporated under the laws of the State
of Florida for the purpose of designing, developing, producing and
marketing lightweight telephone headsets. We presently manufacture and
market headsets primarily for fast food companies and other large
quantity users of headset systems. We are in the process of completing
the development of several designs for the telephone user market,
which includes telephone operating companies, government agencies and
business offices. Our business strategy is to offer lightweight
headsets with design emphasis on performance and durability at a cost
below that of our competitors.
As a result of the issuance of common stock on September 13, 2000 (see
note 8 - Capital Stock), Pro Tech became a subsidiary of NCT Hearing
Products, Inc., herein referred to as "NCT Hearing," a wholly-owned
subsidiary of NCT Group, Inc., herein referred to as "NCT." As of
December 31, 2001, NCT Hearing owned approximately 81.6% of the
outstanding common stock of Pro Tech.
On December 28, 2000, we decided to change our year-end to conform
with NCT, which is December 31. Accordingly, we reported on the
two-month transition period in our Form 10-K as of December 31, 2000
and the current Form 10-K represents the first full twelve months
ended as of December 31, 2001.
(b) Cash and Cash Equivalents
Pro Tech considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
(c) Inventory
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(d) Revenue and Cost Recognition
Pro Tech recognizes revenues as products are shipped. Generally, each
headset, depending on the model, is sold with a warranty ranging from
90 days to two years. We provide, by a current charge to income, an
amount we estimate that will be needed to cover future warranty
obligations for products sold with a warranty during the year. The
accrued liability for warranty costs is included in accrued expenses
in the balance sheet.
(e) Property and Equipment
Property and equipment is carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets, which are generally 3-10 years. Repair and maintenance costs
are charged to expense when incurred.
F-6
(f) Intangible Assets
Intangible assets consist of licensing rights of certain technologies
acquired from NCT Hearing through the issuance of common stock (see
note 8 - Capital Stock). Amortization is computed using the
straight-line method over the estimated useful lives of the assets of
17.5 years. Intangible assets are periodically reviewed for
impairments (see note 1 (o)) where the fair value is less than the
carrying value. Amortization expense was $77,655 for the year ended
October 31, 2000; $155,309 for the two months ended December 31, 2000;
and $932,857 for the year ended December 31, 2001.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets or liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
(h) Advertising
The costs of advertising, promotion and marketing programs are charged
to operations in the year incurred and are included in selling,
general and administrative expenses in the accompanying statements of
operations. Advertising costs were $98,738 and $54,424 for the years
ended October 31, 1999 and 2000; $5,088 for the two months ended
December 31, 2000; and $42,242 for the year ended December 31, 2001.
(i) Research and Development
Research and development costs are expensed when incurred and are
included in selling, general and administrative expenses. The amounts
charged to expense were $70,809 and $41,554 for the years ended
October 31, 1999 and 2000; $11,517 for the two months ended December
31, 2000; and $71,097 for the year ended December 31, 2001.
(j) Fair Value of Financial Instruments
The estimated fair value of Pro Tech's cash and cash equivalents,
accounts receivable and current liabilities approximate the carrying
amount due to the short-term nature of such financial instruments.
(k) Use of Estimates
The preparation of Pro Tech's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and contingent assets and
liabilities. Actual results could differ from those estimates.
(l) Reclassifications
We have reclassified some amounts in prior period financial statements
to comform to the current period's presentation.
F-7
(m) Loss Per Common Share
Pro Tech reports loss per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share."
Generally, the per share effects of potential common shares such as
warrants, options, convertible debt and convertible preferred stock
have not been included, as the effect would be antidilutive (see note
8 - Capital Stock). However, when preferred stock will be convertible
to common stock at a conversion rate that is at a discount from the
common stock market price at the time of issuance, the discounted
amount is an assured incremental yield, the "beneficial conversion
feature," to the preferred shareholders and is accounted for as an
embedded dividend to preferred shareholders. We have reflected such
beneficial conversion feature as a preferred stock dividend and as an
adjustment to the net loss attributable to common stockholders.
(n) Stock Options
Pro Tech has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," and continues to apply Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for our
stock-based compensation plans.
(o) Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. There
were no such impairments for the years ending October 31, 1999 and
2000; for the two months ended December 31, 2000; and for the year
ended December 31, 2001.
(p) Concentrations of Credit Risk
Financial instruments, which potentially subject Pro Tech to
concentration of credit risk, consist of cash and cash equivalents and
trade receivables. We maintain cash and cash equivalents in accounts
with various financial institutions in amounts, which at times, may be
in excess of the FDIC insurance limit. As of December 31, 2001, our
cash and cash equivalent balances did not exceed the FDIC insurance
limit. Pro Tech has not experienced any losses on such accounts and
does not believe it is exposed to any significant risk with respect to
cash and cash equivalents.
We sell our products and services to distributors and end users in
various industries worldwide. We regularly assess the realizability of
accounts receivable and take into consideration the value of past due
receivables and the collectibility of such receivables, based on
credit worthiness. We do not require collateral or other security to
support customer receivables.
Pro Tech is currently outsourcing all components from several Far East
suppliers who build each component to our specifications. An
interruption in the supply of a component for which we are unable to
readily procure a substitute source of supply could temporarily result
in Pro Tech's inability to deliver products on a timely basis, which
in turn could adversely affect our operations. To date, Pro Tech has
not experienced any shortages of supplies; however, during 2001, we
experienced a temporary quality control issue with one supplier that
required us to obtain
F-8
alternative means and, in effect, double up on that portion of our
inventory to cover the anticipated returns under warranty.
(q) Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board, or the FASB,
issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions
of Accounting Principles Board No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions," for the disposal of a segment of a business. SFAS
144 also amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for
a subsidiary for which control is likely to be temporary. The
provisions of SFAS 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early application encouraged.
The provisions are to be applied prospectively. Management does not
anticipate that adoption of SFAS 144 will have a material impact on
our financial position or results of operations as we have not
disposed of, and do not anticipate disposing of, a segment of the
business.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value
can be made. Management does not anticipate that adoption of SFAS 143
will have a material impact on our financial position or results of
operations as we currently do not have any asset retirement
obligations.
In July 2001, the FASB, issued Statement of Financial Accounting
Standards No. 141, "Business Combinations," and SFAS 142, "Goodwill
and Other Intangible Assets." SFAS 141 requires the purchase method of
accounting be used for all business combinations subsequent to June
30, 2001 and specifies the criteria for the recognition of intangible
assets acquired in a business combination. Under SFAS 142, we will be
required to reassess the value of goodwill and other intangible assets
previously recorded in connection with prior acquisitions, as well as
their useful lives. SFAS 142 is effective for fiscal years beginning
after December 15, 2001 and will require that goodwill not be
amortized, but rather be subject to an impairment test at least
annually. Separately identified and recognized intangible assets
resulting from business combinations completed before July 1, 2001
that do not meet the new criteria for separate recognition of
intangible assets will be subsumed into goodwill upon adoption. In
addition, the useful lives of recognized intangible assets acquired in
transactions completed before July 1, 2001 will be reassessed and the
remaining amortization periods adjusted accordingly. Adoption of SFAS
141 did not have a significant impact on our financial statements.
Management does anticipate that we will have an impairment on our
Intangible Asset with the adoption of SFAS 142; however, we are
currently still evaluating the factors involved in determining that
impairment.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities -a Replacement of FASB Statement No. 125." SFAS 140
revises the criteria for accounting for securitizations and other
transfers of financial assets and collateral. In addition, SFAS 140
requires additional disclosures. Except for the new disclosure
provisions, which were effective for the year ended December 31, 2000,
SFAS 140 is effective for the transfer of financial assets occurring
after March 31, 2001. The application of SFAS 140 has not had a
material impact on the business, results of operations or financial
condition of Pro Tech. We follow the provisions of SFAS 140 to account
for our factoring agreement discussed in note 10 - Factoring
Agreement.
F-9
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments - an Amendment of SFAS 133." SFAS 138
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives). SFAS 138 is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. In June 1998, the FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
133 requires us to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives are
either offset against the change in fair value of assets, liabilities,
or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of SFAS 133 and SFAS
138 on January 1, 2001 did not have a material impact on our financial
statements as we currently do not use derivative instruments.
(r) Liquidity
Pro Tech has incurred recurring losses from operations since its
inception, aggregating $3,593,336 through December 31, 2001. These
losses, which include the cost for development of products for
commercial use, have been funded primarily from product sales and the
sale of common stock and preferred stock convertible into common
stock.
In addition, Pro Tech had negative working capital of $329,126 at
December 31, 2001, including the amount due to the parent and other
affiliated companies of $556,142. Pro Tech has taken steps to reduce
its working capital requirements. These steps include the
reorganization of the call center operations, the reduction of
workforce levels in all areas of the products operations, and the
institution of tighter controls over all expenditures.
As a result of the restructuring that Pro Tech has put into place (see
note 17 - Subsequent Events), management believes Pro Tech will have
sufficient funds to meet anticipated working capital requirements for
the next 12 months, provided the parent and other affiliated companies
do not require immediate payment on the amounts outstanding.
(2) Inventory
Inventory consisted of the following:
October 31, December 31,
------------------------------------
2000 2000 2001
------------------ ----------------- ----------------
Finished goods $ 300,747 $ 322,411 $ 609,852
Raw materials 180,347 178,540 273,202
Work in progress 77,766 149,637 62,690
------------------ ----------------- ----------------
Total Inventory $ 558,860 $ 650,588 $ 945,744
================== ================= ================
F-10
(3) Property and Equipment, Net
The following is a summary of property and equipment:
October 31, December 31,
-------------------------------------
2000 2000 2001
---------------- ----------------- -----------------
Production molds $ 295,621 $ 296,583 $ 454,331
Office equipment 66,918 67,068 145,546
Production equipment 36,049 36,067 39,140
Leased equipment 23,380 23,380 79,235
Leasehold improvements 29,577 29,577 329,626
Vehicles 3,573 3,573 12,414
Marketing displays 16,160 16,160 16,160
---------------- ----------------- ----------------
Total cost 471,278 472,408 1,076,452
Less accumulated depreciation
and amortization 192,473 201,318 317,922
---------------- ----------------- ----------------
Total Property and equipment, net $ 278,805 $ 271,090 $ 758,530
================ ================= ================
Total depreciation and amortization expense, with respect to property and
equipment, was $45,067, $51,546, $8,844 and $120,194 for the years ended October
31, 1999 and 2000; for the two months ended December 31, 2000; and for the year
ended December 31, 2001, respectively.
(4) Accrued Expenses
Accrued expenses consisted of the following:
October 31, December 31,
-----------------------------
2000 2000 2001
---------------- ------------- -------------
Accrued warranty expense $ 78,879 $ 74,753 $ 96,391
Accrued payroll and vacation 12,531 20,329 69,554
Other accrued expenses 10,755 10,116 33,581
---------------- ------------- -------------
Total Accrued expenses $ 102,165 $ 105,198 $ 199,526
================ ============= =============
(5) Other Liabilities
Other liabilities consisted of the following:
October 31, December 31,
-------------------------------------
2000 2000 2001
----------------- ----------------- -----------------
Due to NCT (see note 14) $ 101,057 $ 216,573 $ 195,298
Due to NCT Hearing (see note 14) - - 325,733
Due to NCT Europe (see note 14) - - 35,111
Due to Factor (see note 10) 86,170 5,202 64,030
----------------- ----------------- -----------------
Total Other liabilities $ 187,227 $ 221,775 $ 620,172
================= ================= =================
(6) Notes Payable
On March 27, 2000, Pro Tech received a loan of $150,000 from a stockholder. The
loan matured on March 27, 2001 and bore interest at 8.5% per annum, payable at
maturity. On the maturity date, Pro Tech was
F-11
allowed to roll this note into a new note which included the original principal
amount plus accrued interest to date. This $162,750 note matures on March 27,
2002 and bears interest at 8.5% per annum, payable at maturity.
On May 13, 2001, Pro Tech received a bank loan of $11,346. The loan provides for
payments of $245, including interest at prime plus 2.3% (7.05% at December 31,
2001), through May 13, 2006. The loan is secured by a vehicle with a net book
value of $9,800. As of December 31, 2001, the balance outstanding was $10,549
and future maturities are: 2002, $1,938; 2003, $2,150; 2004, $2,385; 2005,
$2,646; and 2006 $1,430.
(7) Series B Redeemable Convertible Preferred Stock
On July 30, 2001, we entered into an agreement to issue 500 shares of Series B
Redeemable Convertible Preferred Stock (Preferred Stock-B) for $500,000. We
received approximately $419,000 in cash, net of fees and expenses, in exchange
for the Preferred Stock-B. The Preferred Stock-B has a dividend of 4% per annum
on the stated value, payable upon conversion or exchange in either cash or
common stock. Under such agreement, the shares of Preferred Stock-B may be
converted into shares of Pro Tech common stock or exchanged for shares of NCT
common stock. The conversion rate into Pro Tech common stock is the lesser of:
(i) the then lowest average of the average closing bid price for a share of Pro
Tech common stock for any consecutive five-day period out of fifteen trading
days preceding the date of such conversion, less a discount of 20%; or (ii)
$0.25. The exchange rate into NCT common stock is the lowest average of the
average closing bid price for a share of NCT common stock for any consecutive
five trading days out of the fifteen trading days preceding the date of such
conversion, less a discount of 20%. In accordance with Emerging Issues Task
Force 98-5, as codified in EITF 00-27, we recorded a beneficial conversion
feature of $125,000 in connection with the Preferred Stock-B issuance. This
entry was a reduction to the outstanding balance of the preferred stock and an
increase to additional paid in capital. The beneficial conversion feature is to
be recognized as an increase to preferred stock and a decrease to additional
paid in capital over the period from the date of issuance to the date of
earliest conversion (50% on January 30, 2002 and 50% on July 30, 2002). As of
December 31, 2001 we recognized $79,190 of beneficial conversion. This amount is
included in the calculation of net loss attributable to common stockholders on
the statements of operations for the year ended December 31, 2001.
For purposes of determining net loss attributable to common stockholders, we
calculated the difference between the carrying amount and the redemption amount
of the Preferred Stock-B. Using a cumulative dividend of four percent (4%) per
annum on the stated value, which is payable upon conversion in either cash or
common stock, the total dividends on the Preferred Stock-B was $8,438 for the
year ended December 31, 2001.
We have classified the Preferred Stock-B as temporary equity rather than
stockholders' equity because, at December 31, 2001, under the terms of the
agreements entered into in connection with the issuance of the Preferred
Stock-B, the holders of those shares may have had a right to require Pro Tech to
redeem the shares. Because any such redemption would not be within the sole
control of Pro Tech, Rule 5-02.28 of Regulation S-X applies and mandates
treatment of the shares as temporary equity.
The Preferred Stock-B is carried on our balance sheet as of December 31, 2001 at
$633,438, the redemption value, which is comprised of 125% of the stated value
of $500,000; plus the accrued accretion of $8,438.
(8) Capital Stock
On August 11, 2000, Pro Tech's shareholders approved an amendment to the
Articles of Incorporation to increase the number of authorized shares of common
stock from 10,000,000 to 40,000,000 and to authorize the creation of 1,000,000
shares of non-voting, blank check preferred stock.
F-12
Series A Convertible Preferred Stock
On August 14, 2000, Pro Tech's Board of Directors designated the Series A
Convertible Preferred Stock (Preferred Stock-A) with 1,500 authorized shares, a
par value of $0.01 per share, and a stated value of $1,000 per share. On
September 29, 2000, Pro Tech entered into an agreement to issue 1,500 shares of
Preferred Stock-A for $1,500,000. We received $1,200,025 cash and satisfied
$299,975 of notes payable in exchange for the Preferred Stock-A. The Preferred
Stock-A has a dividend of 4% per annum on the stated value, payable upon
conversion or exchange in either cash or common stock. Under such agreement, the
shares of Preferred Stock-A may be converted into shares of Pro Tech common
stock or exchanged for shares of NCT common stock. Each share of stock is
convertible into Pro Tech's common stock based on a conversion price that is the
lower of: the lowest average closing bid price for a five-day consecutive period
out of fifteen trading days, less a discount of 20%; or a fixed price of $0.50.
The exchange rate into NCT common stock is the lowest average of the average
closing bid price for a share of NCT common stock for any consecutive five
trading days out of the fifteen trading days preceding the date of such
conversion, less a discount of 20%. In accordance with EITF 98-5, as codified in
EITF 00-27, we recorded a beneficial conversion feature of $375,000 in
connection with the Preferred Stock-A issuance. Because these shares were
convertible immediately upon issuance, we recognized the entire beneficial
conversion amount on the date of issuance. This amount is included in the
calculation of net loss attributable to common stockholders on the statements of
operations for the year ended October 31, 2000.
Pro Tech, at its option, may redeem up to $500,000 of the Preferred Stock-A if
the closing bid price of Pro Tech's common stock is less than $0.50 per share.
The redemption price is equal to 125% of the stated value plus 100% of the
cumulative 4% dividend. The stock may be redeemed at the holders' option if
two-thirds of all preferred stockholders require such redemption upon certain
events of noncompliance with the terms of the Series A Preferred Stock Purchase
Agreement or Registration Rights Agreement. Any outstanding shares will be
mandatorily converted on March 31, 2005.
For purposes of determining net loss attributable to common stockholders, we
calculated the difference between the carrying amount and the redemption amount
of the Preferred Stock-A. Using a cumulative dividend of four percent (4%) per
annum on the stated value, which is payable upon conversion in either cash or
common stock, the total dividends on the Preferred Stock-A was $5,425; $10,027;
and $15,647 for the year ended October 31, 2000; the two months ended December
31, 2000; and the year ended December 31, 2001, respectively.
During the year ended December 31, 2001, 1,162 shares of Preferred Stock-A were
converted into 4,951,873 shares of our common stock and 288 shares were
exchanged into 2,975,978 shares of common stock of NCT.
Common Stock
On September 12, 2000, Pro Tech acquired licensing rights for certain
technologies from NCT Hearing Products, Inc. in consideration of the issuance of
23,982,438 shares of common stock, including 279,688 shares of common stock for
costs of issuance. The intangible assets received in the exchange were valued at
the fair value of our stock, which was $16,307,492.
At October 31, 2000, December 31, 2000 and December 31, 2001, $4,000 was held in
escrow for the benefit of Pro Tech pending completion of the subscription
agreements by two investors for 4,000 shares of common stock each. These
receivables are netted against additional paid-in capital.
The number of shares of common stock required to be reserved for was 89.1
million at December 31, 2001. This reserve includes amounts for the conversion
of preferred stock and for the exercise of options and warrants. In addition,
the required reserve includes approximately 65.5 million shares for the exchange
of $6,223,132 worth of NCT notes payable, plus accrued interest, into Pro Tech
common stock. These notes give the holder the right, among other rights, to
exchange such notes into Pro Tech common stock at prices ranging from $0.06 to
$0.14 per share.
F-13
Common stock issued and required to be reserved for issuance exceeded the number
of shares authorized at December 31, 2001. Pro Tech plans to request
authorization for additional shares of common stock at the next stockholders'
meeting.
Warrants
In connection with the Preferred Series-A, we provided warrants to purchase
4,500,000 shares of Pro Tech's common stock. The warrants are exercisable at
$0.50 per share and expire on October 28, 2003. We have the right to require the
warrant holders to exercise upon a call by Pro Tech under the following
conditions: (1) one-third of the warrants are callable if the closing bid price
of the common stock for each of the previous fifteen days equals or exceeds
$0.68 per share and the average daily trading volume during such period is at
least 150,000 shares; (2) two-thirds of the warrants are callable if the closing
bid price of the common stock for each of the previous fifteen days equals or
exceeds $0.94 per share and the average daily trading volume during such period
is at least 150,000 shares; and (3) all of the warrants are callable if the
closing bid price of the common stock for each of the previous fifteen days
equals or exceeds $1.135 per share and the average daily trading volume during
such period is at least 150,000 shares.
We estimated the fair value of this warrant to be approximately $3,569,000,
using the following assumptions in applying the Black-Scholes valuation method:
dividend yield of 0%; risk-free interest rate of 5.97%, volatility of 100%, and
an expected life of three years. The $3,569,000 is included in the calculation
of net loss attributable to common stockholders on the statements of operations
for the year ended October 31, 2000.
In connection with the Preferred Series-B, we issued a warrant to purchase
1,000,000 shares of our common stock. The warrant is exercisable at $0.13 per
share and expires on July 30, 2004. We have the right to require the warrant
holder to exercise upon a call by Pro Tech under the following conditions: (1)
one-third of the warrant is callable if the closing bid price of the common
stock for each of the previous fifteen days equals or exceeds $0.177 per share
and the average daily trading volume during such period is at least 150,000
shares; (2) two-thirds of the warrant is callable if the closing bid price of
the common stock for each of the previous fifteen days equals or exceeds $0.244
per share and the average daily trading volume during such period is at least
150,000 shares; and (3) the entire warrant is callable if the closing bid price
of the common stock for each of the previous fifteen days equals or exceeds
$0.295 per share and the average daily trading volume during such period is at
least 150,000 shares.
We estimated the fair value of this warrant to be approximately $63,000, using
the following assumptions in applying the Black-Scholes valuation method:
dividend yield of 0%; risk-free interest rates of 4.25%, volatility of 100%, and
an expected life of three years. The $63,000 is included in the calculation of
net loss attributable to common stockholders on the statements of operations for
the year ended December 31, 2001.
The following table summarizes warrants to purchase common stock during the
years ended October 31, 2000 (no warrants were outstanding during the year ended
October 31, 1999), during the two months ended December 31, 2000 and during the
year ended December 31, 2001:
F-14
October 31, 2000 December 31, 2000 December 31, 2001
------------------------------ ------------------------------ --------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- --------------- ------------- -------------- ------------- -----------------
Warrants outstanding
beginning of period - $ - 4,500,000 $ 0.500 4,500,000 $ 0.500
Warrants granted 4,500,000 0.500 - - 1,000,000 0.130
Warrants terminated - - - - - -
------------- --------------- ------------- -------------- ------------- -----------------
Warrants outstanding
end of period 4,500,000 $ 0.500 4,500,000 $ 0.500 5,500,000 $ 0.433
============= =============== ============= ============== ============= =================
As of December 31, 2001, the outstanding warrants have exercise prices ranging
from $0.13 to $0.50 and a weighted average remaining contractual life of
approximately 2 years.
(9) Stock Option Plans
On April 15, 1996, the Board of Directors adopted the 1996 Stock Option Plan,
for the benefit of directors, officers and employees of and consultants to Pro
Tech. The 1996 Plan authorized the issuance of up to 590,000 shares of common
stock. On April 15, 1996, 540,000 and 50,000 shares were granted to the
President and officers, respectively, at an exercise price of $0.50 per share.
The exercise price was the fair value of a share of common stock at the date of
the grant. On April 13, 1999, the original expiration date of the options, the
remaining 540,000 options were extended to April 15, 2001, at which point they
expired. The 1996 Plan terminates on April 15, 2002. The Board of Directors
determined in 2000 that no further grants would be made under the 1996 Plan.
On March 5, 1998, the Board of Directors adopted the 1998 Stock Option Plan for
the benefit of directors, officers and employees of and consultants to Pro Tech.
This plan originally authorized the issuance of up to 500,000 shares of common
stock and was increased to 2,000,000 shares of common stock on August 11, 2000.
On August 4, 1998, 200,000 and 100,000 shares were granted to officers and
employees, respectively, at an exercise price of $0.375 per share. The exercise
price was the fair market value of a share of common stock at the date of the
grant. Of these, options to purchase 150,000 shares of common stock were granted
to Richard Hennessey and vested as follows: 50,000 immediately; 50,000 on August
4, 1999; and 50,000 on August 4, 2000. The remaining options vested immediately.
All options are exercisable over a three-year period from the date of vesting.
Of the 300,000 options granted on August 4, 1998, 12,000 were exercised during
March and April 2000, total proceeds received by Pro Tech amounted to $4,560,
188,000 options expired during the year ended December 31, 2001 and 100,000
remain outstanding and exercisable.
On April 13, 1999, the remaining 1998 Plan options to purchase 200,000 shares
were granted an officer at an exercise price of $0.38 per share. The exercise
price was greater than the fair market value of a share of common stock at the
date of the grant. The options vest and are exercisable as follows: 100,000
immediately; 50,000 on April 13, 2000; and 50,000 on April 13, 2001. The options
expire on April 13, 2004.
On November 28, 2000, Pro Tech issued options to purchase 500,000 shares of
common stock at $0.4375 per share under the 1998 Stock Option Plan, which vest
as follows: 125,000 immediately, 125,000 on November 28, 2001, 125,000 on
November 28, 2002, and 125,000 on November 28, 2003. The options expire on
November 28, 2007.
On June 1, 2001, Pro Tech issued options to the Chief Executive Officer to
purchase up to 540,000 shares at an exercise price of $0.17 per share under the
1998 Stock Option Plan, which options vested immediately upon issuance. In
addition, on June 1, 2001 Pro Tech issued options to two other employees to
purchase up to 400,000 shares at an exercise price of $0.17 per share under the
1998 Stock Option Plan, which options
F-15
vested or vest as follows: 160,000 immediately upon issuance; 120,000 on June 1,
2002; and 120,000 on June 1, 2003. In January 2002 employment of these two
employees was terminated and, according to the option agreement, such granted
options will expire in April 2002. The exercise prices of the options granted
above were equal to the fair market value of the common stock on the grant dates
and expire seven years from date of grant.
The following table summarizes stock option activity for the years ended October
31, 1999 and 2000; for the two months ended December 31, 2000; and for the year
ended December 31, 2001:
October 31, 1999 October 31, 2000
---------------------------------- ------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ------------------- --------------- -------------------
Option outstanding,
beginning of the period 840,000 $ 0.455 1,040,000 $ 0.441
Options granted 200,000 0.380 - -
Options exercised - - (12,000) (0.380)
Options expired - - - -
------------- ------------------- --------------- -------------------
Options outstanding,
end of period 1,040,000 $ 0.441 1,028,000 $ 0.442
============= =================== =============== ===================
Options exercisable,
end of period 890,000 $ 0.451 978,000 $ 0.445
============= =================== =============== ===================
December 31, 2000 December 31, 2001
---------------------------------- ------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ------------------- --------------- -------------------
Option outstanding,
beginning of the period 1,028,000 $ 0.442 1,528,000 $ 0.440
Options granted 500,000 0.438 940,000 0.170
Options exercised - - - -
Options expired - - (728,000) (0.468)
------------- ------------------- --------------- -------------------
Options outstanding,
end of period 1,528,000 $ 0.440 1,740,000 $ 0.283
============= =================== =============== ===================
Options exercisable,
end of period 1,103,000 $ 0.444 1,187,500 $ 0.265
============= =================== =============== ===================
As of December 31, 2000, Pro Tech's outstanding stock options have exercise
prices ranging from $0.17 to $0.4375 and a weighted average remaining
contractual life of approximately 5.5 years.
No compensation expense was recorded during the years ended October 31, 1999 and
2000; during the two months ended December 31, 2000; and during the year ended
December 31, 2001 for the options issued to officers and employees, in
accordance with APB 25. Had compensation expense been determined on the fair
value at the date of grant in accordance with the provisions of SFAS 123, the
net loss and loss per share attributable to common stockholders would have been
adjusted to the pro forma amounts indicated below:
F-16
October 31, December 31,
------------------------------------- -------------------------------------
1999 2000 2000 2001
------------------ ----------------- ----------------- -----------------
Net loss:
As reported $ (221,065) $ (4,323,765) $ (386,347) $ (2,595,328)
================== ================= ================= =================
Pro forma $ (369,295) $ (4,341,632) $ (443,642) $ (2,784,121)
================== ================= ================= =================
Loss per common share:
As reported $ (0.05) $ (0.57) $ (0.01) $ (0.08)
================== ================= ================= =================
Pro forma $ (0.09) $ (0.58) $ (0.02) $ (0.09)
================== ================= ================= =================
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the year ended October 31, 1999: dividend
yield of 0%; expected volatility of 141%; risk-free interest rate of 5.76%; and
expected lives ranging from three to five years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants during the two months ended December 31, 2000: dividend
yield of 0%; expected volatility of 100%; risk-free interest rate of 5.54%; and
expected lives ranging from four to seven years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants during the year ended December 31, 2001: dividend yield
of 0%; expected volatility of 100%; risk-free interest rate of 4.25%; and
expected lives ranging from five to seven years.
(10) Factoring Agreement and Financing Arrangement
On December 22, 1999, Pro Tech entered into a short-term factoring arrangement
providing for advances of up to $300,000, based on 80% of selected accounts
receivable factored under the agreement on a recourse basis. We were charged a
factoring fee of 1% on each advance, plus 2% per month on advances outstanding.
In addition, the minimum fee charged per month was 1% of the total factoring
plan, or $3,000, during the life of the agreement, which was for six months and
automatically renewable for additional six-month terms, unless terminated by Pro
Tech with 30 days notice. Obligations under this agreement were collateralized
by all of our accounts receivable, inventory, and equipment. This agreement was
terminated in December 2000.
At October 31, 2000, accounts receivable factored under this agreement and still
outstanding were $103,223, of which, $86,170 had been received under the
borrowing arrangement and was classified as Other Liabilities in the
accompanying balance sheet. At December 31, 2000, accounts receivable factored
under this agreement and still outstanding were $15,279, no borrowings were
outstanding, and amounts payable to the finance company representing accrued
fees totaled $5,202. Total fees incurred under this arrangement amounted to
$25,167 and $6,991 during the year ended October 31, 2000 and for the two months
ended December 31, 2000, respectively, and are classified as interest expense in
the accompanying statements of operations.
On March 26, 2001, Pro Tech entered into a factoring agreement with Goodman
Factors, Inc., referred to as "Goodman." We are required to factor substantially
all of our trade receivables on a non-recourse basis in return for immediate
cash credit equal to eighty-five percent (85%) of these factored receivables,
less a factoring fee. The factoring fee is 1.9% of the invoice amount and 3.5%
over the prime rate on the amount advanced under the factoring agreement. The
prime rate was 4.75% at December 31, 2001. In addition, at December 31, 2001 we
had $10,402 in reserve at Goodman representing not less than fifteen percent
(15%) of the aggregate unpaid gross amount of all outstanding accounts factored
under this factoring agreement. If the net amount of accounts submitted for any
one month does not exceed $100,000, Goodman may charge an additional commitment
fee, as described in the agreement. As of December 31, 2001, no such fees were
required. Such factored receivables are subject to acceptance by Goodman.
Goodman also has
F-17
the option to accept factored receivables with recourse. If such recourse
receivables are not paid within 46 days, we must buy back the total outstanding
receivable. Obligations due to the factor under the factoring agreement are
collateralized by a continuing security interest in all of our accounts
receivable, notes receivable, chattel paper, documents, instruments and general
intangibles now existing or hereafter acquired of every kind wherever located,
together with merchandise returns and goods represented thereby, and all
proceeds therefrom of every kind and nature.
At December 31, 2001, accounts receivable factored under this agreement and
still outstanding were $74,432, of which, $64,030 had been received under the
factoring agreement, under the recourse provisions, and is included in Other
Liabilities (see note 5 - Other Liabilities). Total fees incurred under this
arrangement amounted to $13,008 during the year ended December 31, 2001.
Interest expense incurred under this arrangement amounted to $5,901 during the
year ended December 31, 2001.
(11) Commitments
Future minimum lease payments under noncancelable operating leases for buildings
and equipment and the present value of future minimum capital lease payments as
of December 31, 2001 are:
Year ended December 31 Capital Leases Operating Leases
- ----------------------
------------------ -----------------
2002 $ 14,594 $ 93,469
2003 11,937 99,942
2004 11,748 95,924
2005 11,748 96,563
2006 8,513 16,184
------------------ -----------------
Total minimum lease payments 58,540 $ 402,082
=================
Less amount representing interest 12,436
------------------
Present value of net minimum capital
lease payments 46,104
Less current installments 10,083
------------------
Obligations under capital leases, excluding
current installments $ 36,021
==================
Rent expense under lease agreements totaled $32,559, $41,696, $6,421 and
$127,099 for the years ended October 31, 1999 and 2000; for the two months ended
December 31, 2000; and for the year ended December 31, 2001, respectively.
(12) Income Taxes
There was no provision for income taxes for the years ended October 31, 1999 and
2000, for the two months ended December 31, 2000, nor for the year ended
December 31, 2001 due to operating losses incurred.
The tax benefit differs from the "expected" amount computed by applying the U.S.
federal corporate income tax rate of 34% to loss before income taxes as follows:
F-18
For the two For the year
For the year ended months ended ended
October 31, December 31, December 31,
-------------------------------
1999 2000 2000 2001
-------------- --------------- ---------------------- --------------------
Computed "expected" tax benefit $ (75,162) $ (127,276) $ (127,949) $ (825,993)
Increase in income tax resulting from:
Net operating loss not
currently utilizable 75,016 127,276 127,949 825,582
Other nondeductible expenses 146 - - 411
-------------- --------------- ---------------------- --------------------
$ - $ - $ - $ -
============== =============== ====================== ====================
The exercise of stock options during the years ended October 31, 1997 and 2000,
which had been granted under Pro Tech's 1996 and 1998 Stock Option Plans (see
note 9 - Stock Option Plans), gave rise to compensation totaling $225,000 and
$8,952, respectively, that is includable in the taxable income of the employees
and deductible by Pro Tech for federal and state income tax purposes. Such
compensation resulted from increases in the fair market value of Pro Tech's
common stock subsequent to the date of grant of the applicable exercised stock
options and, accordingly, in accordance with APB 25, such compensation was not
recognized as an expense for financial reporting purposes. The related tax
benefits will be reflected as contributions to additional paid-in capital in the
periods in which the compensation deduction is utilized by Pro Tech and, in
accordance with APB 25 and Statement 109, such compensation deductions are not
considered to be temporary differences. Such deductions have not been utilized
by Pro Tech due to the net operating losses generated during the years ended
October 31, 1999 and 2000; the two months ended December 31, 2000; and the year
ended December 31, 2001.
Pro Tech has net operating loss carryforwards for federal and state income tax
purposes amounting to $4,216,000 and $4,292,000, respectively, which expire
through the year 2021. In accordance with Internal Revenue Code Section 382, Pro
Tech's net operating loss carryforwards are subject to certain limitations
resulting from the issuance of common stock to NCT Hearing, as discussed in note
8 - Capital Stock.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the period in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Pro Tech's deferred tax assets and liabilities are as follows:
F-19
October 31, December 31, December 31,
2000 2000 2001
-------------- --------------- ----------------
Accounts receivable principally due to
allowance for doubtful accounts $ 5,200 $ 5,500 $ 4,900
Accrued warranty expense 15,400 14,700 19,000
Net operating loss carryforwards 124,900 199,200 787,600
Contribution carryforwards 500 500 500
-------------- --------------- ----------------
146,000 219,900 812,000
Less valuation allowance 139,200 188,200 755,700
-------------- --------------- ----------------
Total deferred tax assets 6,800 31,700 56,300
-------------- --------------- ----------------
Property and equipment principally due to
differences in depreciaton 6,800 6,400 300
Intellectual property principally due to
differences in amortization - 25,300 56,000
-------------- --------------- ----------------
Total deferred tax liabilities 6,800 31,700 56,300
-------------- --------------- ----------------
Net deferred taxes $ - $ - $ -
============== =============== ================
(13) Business Segment Information
During 2001, management identified two new business segments that we have added
to our business focus. These two new identifiable business segments are: (1) the
Telecommunications Systems Integration Business Segment; and (2) the Call Center
Operations Business Segment. At December 31, 2001 neither of these segments is
deemed to be reportable segments in accordance with SFAS 131. Prior to
establishment of these two new business segments, we were predominately in the
design, development, manufacture and marketing of lightweight telecommunications
headsets, currently known as the Product Business Segment. We evaluate segment
performance based on net sales and operating income. Management does not track
segment data or evaluate segment performance on additional financial
information. As such, there are no separately identifiable segment assets nor
are there any separately identifiable statements of income data (below operating
income). Pro Tech does not track or assign assets to individual business
segments. Likewise, depreciation expense and capital additions are also not
tracked by business segments.
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 segment data is as follows:
F-20
Segment
---------------------------------------------------------------
Telecom
Product Systems Call Center Total
Business Integration Operations Segments
---------------------------------------------------------------
For the year ended October 31, 1999:
Sales to external customers $ 1,090,551 - - $ 1,090,551
Loss from operations $ (221,535) - - $ (221,535)
For the year ended October 31, 2000:
Sales to external customers $ 1,562,484 - - $ 1,562,484
Loss from operations $ (344,351) - - $ (344,351)
For the two months ended December 31, 2000:
Sales to external customers $ 307,902 - - $ 307,902
Loss from operations $ (368,636) - - $ (368,636)
For the year ended December 31, 2001:
Sales to external customers $ 2,001,348 99,376 74,582 $ 2,175,306
Loss from operations $ (2,222,216) (51,916) (136,358) $ (2,410,490)
Pro Tech is divided into the following three business segments:
The Product Business Segment: We presently design, develop, manufacture and
market lightweight telecommunications headsets. Our headsets employ new concepts
in advanced lightweight design, and our marketing strategies involve the sale of
our product directly to the commercial headset market as a replacement for our
competitors' products. We presently sell our first design for the commercial
headset market comprised of fast food companies and other large quantity users
of headset systems. We are also in the process of completing development of
several other headsets for the telephone user market, to include telephone
operating companies, government agencies, business offices, and professional
telephone centers.
The Telecommunications Systems Integration Business Segment: On March 1, 2001,
we launched the Telecommunications Systems Integration Business to sell and
install simple to sophisticated analog, digital and Internet Protocol phone
systems. This decision was made to take advantage of increasing market demand
for telecommunications system integration support to the small office and the
large corporate call center clients.
The Call Center Operations Business Segment: During 2001, we launched the Call
Center Operations Business. We have the expertise needed to develop and launch,
and the ability to sell and support, a specialized niche of the medical market.
We have adopted and installed the latest customer relationship management
technologies and strategies in order to achieve business segment objectives. As
of December 21, 2001, we have suspended operations in the Call Center Operations
Business due to poor performing contracts. We have reorganized this business
segment and intend to resume operations by the third quarter of 2002 (see note
17 - Subsequent Events).
(14) Related Party Transactions
During fiscal year 1996, Pro Tech loaned $28,882 to its Chairman. Outstanding
principal and interest, at 5% per annum, are due August 2, 2003. During the year
ended October 31, 1998, Pro Tech loaned an additional $3,650 to its Chairman,
which is due October 31, 2002, with interest at 5% per annum. On October 19,
2001, the outstanding balance from the 1996 loan and the outstanding balance
from the 1998 loan were combined into one loan. The new loan included an
additional amount of $10,594 loaned to the Chairman. Outstanding principal and
interest, at 5% per annum, are due October 19, 2003. Outstanding
F-21
principal and interest amounted to $56,824; $57,206; and $59,670 as of October
31, 2000; December 31, 2000; and December 31, 2001, respectively.
As of October 31, 2000; December 31, 2000; and December 31, 2001, Pro Tech owed
$101,057; $216,573; and $556,142, respectively, to NCT and its subsidiaries, for
various research, administrative and accounting services provided to Pro Tech.
As of January 1, 2001, Pro Tech began participating in NCT's Noise Cancellation
Employee Benefit Plan, referred to as the Benefit Plan. The Benefit Plan
provides, among other coverage, certain health benefits to employees and
directors of NCT's United States operations. NCT administers this modified
self-insured Benefit Plan through a commercial third-party administrative health
care provider. NCT's maximum aggregate benefit exposure in each Benefit Plan
fiscal year is limited to $1,000,000, while combined individual and family
benefit exposure in each Benefit Plan fiscal year is limited to $40,000. Benefit
claims in excess of these individual or maximum aggregate stop loss limits are
covered by a commercial insurance provider to which NCT pays a nominal premium
for such stop loss coverage. NCT records benefit claim expense in the period in
which the benefit claim is incurred. Any benefit claims incurred by Pro Tech are
submitted to NCT for payments and such claims are then charged to Pro Tech. As
of December 31, 2001, the total amount owed to NCT for benefit claims was
approximately $185,000, as is included in the amount due to NCT and its
subsidiaries discussed above.
As of January 1, 2001, Pro Tech began participating in NCT's 401(k) Plan,
referred to as the 401(k) Plan. The 401(k) Plan is qualified under Section
401(k) of the Internal Revenue Code of 1986. Each eligible employee may elect to
contribute up to 15% of the employee's annual compensation to the 401(k) Plan.
NCT, at the discretion of its Board of Directors, may match employee
contributions to the 401(k) Plan. There were no matching contributions for the
year ended December 31, 2001.
(15) Major Customers
During the year ended October 31, 1999, two customers accounted for
approximately 30% of net sales generated during the year. During the year ended
October 31, 2000, two customers accounted for approximately 34% of net sales
generated during the year. During the two months ended December 31, 2000, one
customer accounted for approximately 35% of net sales generated during the
period. Two customers accounted for approximately 35% of net sales generated
during the year ended December 31, 2001 and approximately 27% of the outstanding
accounts receivable at December 31, 2001.
(16) Prior Year Comparable Period Data (Unaudited)
The following sets forth the unaudited results of operations for the two months
ended December 31, 1999 and for the year ended December 31, 2000:
F-22
For the two For the
months ended year ended
December 31,
-------------------------------------
1999 2000
----------------- -----------------
Net sales $ 116,716 $ 1,729,875
================= =================
Gross profit $ 77,838 $ 1,087,592
================= =================
Loss from operations $ (67,581) $ (738,484)
================= =================
Income taxes $ - $ -
================= =================
Net loss $ (68,906) $ (779,342)
================= =================
Net loss attributable to
common shareholders $ (68,906) $ (4,738,794)
================= =================
Net loss per share $ (0.02) $ (0.42)
================= =================
Weighted average number
of shares outstanding 4,266,000 11,405,853
================= =================
(17) Subsequent Events
On January 11, 2002, NCT's August 22, 2001 note payable plus accrued interest
was rolled into a new note payable totaling $2,231,265, which is due January 11,
2003. The August 22, 2001 note gave the holder the right, among other rights, to
exchange such note into Pro Tech common stock (see note 8 - Capital Stock). The
January 11, 2002 note also gives the holder the right, among other rights, to
exchange such note into Pro Tech common stock at $0.06 per share, or a total of
37,187,751 shares.
On January 25, 2002, NCT issued a note payable for $650,000, which is due
January 25, 2003. The note agreement gives the holder the right, among other
rights, to exchange such note into Pro Tech common stock at $0.06 per share, or
a total of 10,833,333 shares.
On January 25, 2002, NCT issued a note payable for $250,000, which became due on
February 8, 2002. On February 27, 2002, this note, accrued interest and
additional advances of $550,000 were rolled into a new note payable totaling
$827,412, which is due February 27, 2003. The February 27, 2002 note gives the
holder the right, among other rights, to exchange such note into Pro Tech common
stock at $0.06 per share, or a total of 13,790,204 shares.
On February 1, 2002, Pro Tech issued options to Keith Larkin to purchase up to
250,000 shares at an exercise price of $0.06 per share under the 1998 Stock
Option Plan, which options vested immediately upon issuance and expire on
February 1, 2009.
On March 1, 2002, NCT issued a note payable for $350,000, which is due March 1,
2003. The note agreement gives the holder the right, among other rights, to
exchange such note into Pro Tech common stock at $0.06 per share, or a total of
5,833,333 shares.
Beginning in December 2001 and continuing through February 2002, Pro Tech
restructured its organization by temporarily suspending its call center
operations and reducing its workforce levels in other areas. Costs incurred in
2002 associated with this restructure were approximately $7,000, which were not
accrued for as of December 31, 2001 in accordance with EITF 94-3.
F-23