UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number: 000-28602
Pro Tech Communications, Inc.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-3281593
--------------------------------------- ----------------------------
(State or Other Jurisdiction of (I.R.S. Employer
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on June 28, 2002, was approximately $160,000 (based upon the last
sale price of $0.03 per share on June 28, 2002, on the National Association of
Securities Dealers Automated Quotation System).
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., herein referred to as
"NCT Hearing," a wholly-owned subsidiary of NCT Group, Inc., herein referred to
as "NCT," in exchange for exclusive rights to certain NCT 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
Divisions 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 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 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.
2
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 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 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.
3
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 Conference & Exposition held in February 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 a portion of 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 2003.
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.
4
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
also supplement the marketing efforts of our employees by using electronic
commerce from our web site along with independent sales representatives and
strategic marketing agreements.
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 included sales to more than 3,500
McDonald's restaurants. Penetration increased to more than 11,000 restaurants
during the fiscal year ending December 31, 2002.
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 minimal 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
5
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, 2002, Pro Tech had an internal sales and
marketing force of 3 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. Pro
Tech will continue to adhere to past cost reduction policies and will be
expanding its outsourced Far East manufacturing operations to support the
current and future projected sales volumes. Pro Tech plans a full migration of
this production capacity from U.S. operations to offshore operations as the
demand for its products increases. An interruption in the supply of a component
for which Pro 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; however, in order to meet forecasted customer
requirements, Pro Tech has under contract multiple suppliers for several key
components in order to reduce the risk in a disruption of the supply chain. At
December 31, 2002, the value of our inventory was $592,536.
Pro Tech believes that its Fort Pierce, Florida office presently possesses
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 four largest customers accounted
for approximately 46% of revenues during the fiscal year ended December 31, 2002
and 27% of gross accounts receivable at December 31, 2002. We do not require
collateral or other security to support customer receivables.
As of December 31, 2002,
And for the year then ended
--------------------------------------
Accounts
CUSTOMER Receivable Revenue
----------------------------- ---------------- ------------------
Muzak $ 6,871 $ 483,550
McDonalds 12,754 137,004
Ageis 13,284 70,928
3M Corporation 17,817 69,338
All Other 137,544 888,129
---------------- ------------------
Total $ 188,270 $ 1,648,949
================ ==================
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.
6
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 $311
million for the fiscal year 2002. Our other major competitor is GN Netcom, Inc.
In 1997, GN NetCom, Inc. purchased UNEX Corporation and ACS Wireless and in
calendar year 2000 announced the purchase 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 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.
7
J. Proprietary Protection
Pro Tech owns one technology patent which was granted in 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
(described below) in the area of noise reduction which are owned by NCT, its
ultimate parent company. NCT is highly experienced in noise reduction technology
and has developed headphone, headset and earmuff products incorporating noise
reduction for a wide variety of applications.
Active Noise Reduction ("ANR") processes a correcting signal that is equal to
but opposite from an offending noise. The two sound fields cancel each other to
give a greatly reduced noise level.
ClearSpeech(TM) noise reduction algorithm electronically strips background noise
from speech, even when the noise is in the same frequency band as the speech and
where there is no independent measure of the interfering noise. This is achieved
by noting the unique characteristics of speech as compared to general noise and
adaptively adjusting a multitude of complex filters to let through only those
signal components that represent the wanted speech signal.
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.
K. Employees
As of December 31, 2002, Pro Tech had 11 full-time employees, including 5
persons in administration and shipping, 3 persons in sales and marketing and 3
persons in assembly and production. None of our employees are represented by a
collective bargaining unit, and we believe that our relationship with our
employees is good.
L. Business Divisions
Pro Tech operates in three business divisions: headset products,
telecommunication integration, and call center operations. The headset division
encompasses the design, development, manufacturing and marketing of lightweight
headsets for commercial use. The telecommunication integration division 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 an expertise in a specialized niche of the medical market. In
December 2001, management suspended call center operations due to poor
performing contracts. Pro Tech reorganized this division and resumed limited
operations during the third quarter 2002. All of these divisions 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 room in
Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference room. Our SEC filings are also available to the public
from the SEC's Website at "http://www.sec.gov."
8
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 fiscal year ended October 31, 2000; the interim two-month
period ended December 31, 2000; and the fiscal years ended December 31, 2001 and
2002. The market quotations reflect inter-dealer prices, without retail mark-up,
markdown, or commission and may not represent actual transactions.
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
Year ended December 31, 2002 High Low
- ------------------------------------- -------- --------
First Quarter $0.070 $0.040
Second Quarter $0.050 $0.020
Third Quarter $0.035 $0.020
Fourth Quarter $0.021 $0.010
On March 12, 2003, the last reported sale of Pro Tech's common stock as reported
by the NASD OTC Bulletin Board was $0.015. As of March 12, 2003, there were 56
record holders of the common stock, representing approximately 600 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 Notes to Financial Statements: Note 8 - Series B Redeemable Convertible
Preferred Stock and Note 9 - Capital Stock for a description of our sales of
unregistered securities within the last three fiscal years.
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,
------------------------------------------- ------------ ------------------------------
1998 1999 2000 2000 2001 2002
------------- ------------ ------------- ------------ -------------- --------------
STATEMENTS OF OPERATIONS DATA:
Net sales $ 1,142,482 $1,090,551 $ 1,562,484 $ 307,902 $ 2,175,306 $ 1,648,949
Cost of goods sold 470,450 414,931 623,555 129,378 920,127 774,316
------------- ------------ ------------- ------------ -------------- --------------
Gross profit 672,032 675,620 938,929 178,524 1,255,179 874,633
Selling, general and administrative 882,385 893,384 1,275,290 545,586 3,655,711 2,703,425
Impairment charge on intangible assets - - - - - 11,500,000
Provision for doubtful accounts 38,835 3,771 7,990 1,574 9,958 29,800
------------- ------------ ------------- ------------ -------------- --------------
Loss from operations (249,188) (221,535) (344,351) (368,636) (2,410,490) (13,358,592)
Other income (expense):
Interest income (expense), net 24,719 9,181 (31,715) (8,713) (20,262) (51,290)
Miscellaneous income 89 697 1,726 1,029 4,305 5,004
Loss on disposal of fixed assets - (9,408) - - (2,945) -
------------- ------------ ------------- ------------ -------------- --------------
Loss before income taxes (224,380) (221,065) (374,340) (376,320) (2,429,392) (13,404,878)
Income tax expense (benefit) (964) - - - - -
------------- ------------ ------------- ------------ -------------- --------------
Net loss (223,416) (221,065) (374,340) (376,320) (2,429,392) (13,904,878)
Less:
Preferred stock beneficial conversion - - 3,569,000 - 79,190 45,810
Preferred stock embedded dividend - - 375,000 - 62,661 -
Dividend accretion on preferred stock - - 5,425 10,027 24,085 22,000
------------- ------------ ------------- ------------ -------------- --------------
Net loss attributable to common
stockholders -
as previously reported (223,416) (221,065) (4,323,765) (386,347) (2,595,328) (13,472,688)
Adjustment of beneficial conversion (3) - - 2,444,000 - - -
------------- ------------ ------------- ------------ -------------- --------------
Net loss attributable to common
stockholders - as adjusted $ (223,416) $ (221,065) (1,879,765) $ (386,347) $(2,595,328) $(13,472,688)
============= ============ ============= ============ ============== ==============
Basic and diluted net loss per share
attributable to common
stockholders - as previously
reported (0.05) (0.05) (0.57) (0.01) (0.08) (0.41)
Adjustment of beneficial conversion (3) - - 0.32 - - -
------------- ------------ ------------- ------------ -------------- --------------
Basic and diluted net loss per share
attributable to commons
stockholders - as adjusted $ (0.05) $ (0.05) $ (0.25) $ (0.01) $ (0.08) $ (0.41)
============= ============ ============= ============ ============== ==============
Weighted average number
of common shares outstanding (1) 4,254,000 4,254,000 7,537,855 28,248,438 32,281,034 33,200,311
============= ============ ============= ============ ============== ==============
October 31, December 31,
------------------------------------------- --------------------------------------------
1998 1999 2000 2000 2001 2002
------------- ------------ ------------- ------------ -------------- --------------
BALANCE SHEET DATA:
Total assets 1,158,898 945,377 18,652,665 18,264,130 17,184,920 4,163,492
Total current liabilities 209,845 209,300 662,956 651,313 1,541,386 866,537
Long-term debt - 8,089 3,687 3,115 44,632 1,102,931
Accumulated deficit (192,219) (413,284) (787,624) (1,163,944) (3,593,336) (16,998,214)
Stockholders' equity(2) 949,053 727,988 17,986,022 17,609,702 14,965,464 1,540,586
Working capital/(deficit) 724,769 494,148 1,419,819 1,205,686 (320,525) (19,543)
(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.
(3) See Note 18 - Adjustment included in October 2000 financial statements in
our Notes to Financial Statements.
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.
Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. As such, some
accounting policies have a significant impact on amounts reported in the
financial statements. A summary of those significant accounting policies can be
found in Notes to Financial Statements: Note 1 - Organization and Summary of
Significant Accounting Policies. In
12
particular, judgment is used in areas such as determining the allowance for
doubtful accounts, adjustments to inventory valuations, asset impairments and
the accrual for warranty expense.
RESULTS OF OPERATIONS
The Year Ended December 31, 2002 As Compared To The Year Ended December 31,
2001:
Net loss for the year ended December 31, 2002 increased approximately
$10,975,000, or 452%, compared to the year ended December 31, 2001. This
increase was due mainly to the recognition of a $11,500,000 intangible assets
impairment charge. Also included is the net effect of a reduction of
approximately $952,000 in selling, general and administrative expenses, offset
by a decrease of approximately $381,000 in gross profit margin.
Net sales generated during the year ended December 31, 2002 decreased
approximately $526,000, or 24%, compared to the year ended December 31, 2001.
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, 2002, we sold a total of 60,540 headsets and headset
related products, as compared to 70,803 during the same period 2001, a 14%
decrease.
Revenues from the fast food market decreased approximately $473,000 in 2002 as
compared to the same period in 2001. Net unit sales of fast food headsets
decreased 23% due mainly to reduced purchases by three of our major
distributors. This decrease was primarily the result of slowed demand from their
customer base. In addition, a portion of this decrease was related to a
component failure issue that we experienced with one of our suppliers during the
second quarter 2001. Although this component issue has been resolved, we
continued to honor our customer agreements by replacing defective headsets,
therefore resulting in fewer new sales to these customers. These replacement
agreements were completed as of September 30, 2002.
Revenues from the radio market decreased approximately $118,000 in 2002 compared
to the same period in 2001. After evaluating the revenues and costs of this
market, we determined that it was not profitable for us and decided to exit this
market during the first quarter of 2002.
Revenues from the telephone market increased approximately $85,000 in 2002
compared to the same period in 2001. We have determined that the telephone
market is the growth market for our products and will focus our resources toward
expanding our presence in that market. We have faced delays in introduction of
new products for this market due to a lack of working capital. We and NCT
Hearing are actively pursuing new investments to utilize the technologies and
other assets available to us to expand and improve our product line for this
market.
Cost of goods sold for the year ended December 31, 2002 decreased approximately
$146,000, or 16%, compared to the same period in 2001. This decrease was due
mainly to the decrease in sales volume for 2002, offset by additional costs
incurred to replace headsets in connection with the component issue mentioned
above.
Gross margin percent decreased from 57.7% for the year ended December 31, 2001
to 53.0% for the year ended December 31, 2002. This decline was a result of an
increase in production costs due to the increase in domestic production to
facilitate smaller production runs, along with the additional cost effect of
replacing headsets in connection with the component issue mentioned above.
Selling, general and administrative expenses for the year ended December 31,
2002 decreased approximately $952,000, or 26%, compared to the year ended
December 31, 2001. In the first quarter 2002, Pro Tech implemented cost savings
to reduce selling, general and administrative expenses. These cost savings
included a reduction of work force in all areas of the products operations,
tighter controls over expenditures and the continued reorganization of the call
center operation. The decrease in expenses was
13
due mainly to a decrease of approximately $636,000 in payroll and related
expenses, combined with a decrease of approximately $253,000 in marketing,
advertising and public relations.
Impairment charge on intangible assets was $11,500,000 for the year ended
December 31, 2002. We are required to test the recoverability of our long-lived
assets (which include our intangible assets) whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. As of
December 31, 2002, we have not been able to exploit the technologies underlying
our intangible assets due to the lack of available working capital during the
fiscal year 2002. Although we and NCT continue to try to obtain sufficient
working capital to produce the new products we have identified and developed
that use the technology included in our intangible assets, we determined that,
given our current situation, recoverability testing was appropriate at December
31, 2002. We determined that the carrying amount of such assets were greater
than their fair value. Using the estimated discounted future cash flows
attributable to the new products utilizing the technology, or the fair value of
the assets, we determined the carrying amount of the assets was impaired by
approximately $11,500,000.
Interest expense for the year ended December 31, 2002 increased approximately
$30,000, or 119%, from the comparable year ended December 31, 2001. This
increase was due to interest charges of approximately $21,000 from NCT Hearing.
These charges were incurred on the outstanding note payable to NCT Hearing. The
outstanding note payable represents amounts owed to NCT Hearing for services
provided to Pro Tech by NCT Hearing and its affiliated companies, as well as
cash advances. As of December 31, 2002, the balance of the outstanding note
payable, including interest, was $1,064,703.
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 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 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 were selected to be a part of
the McDonald's International Owner Operator's trade show in 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.
14
Gross margin percent decreased 3.2% 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 $1,873,000, 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.
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.
15
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, 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the current fiscal year ended December 31, 2002, we funded working
capital requirements with continued use of our short-term factoring arrangement
and advances from NCT (our ultimate parent company) and its affiliates. In
addition, NCT paid expenses on behalf of Pro Tech, which had been allocated to
them. We have taken steps to reduce our working capital requirements. These
steps include the reorganization of the call center operations, the reduction of
work force levels in all areas of product operations, and the institution of
tighter controls over all expenditures. Subsequent to December 31, 2002, Pro
Tech received over $190,000 in cash advances from NCT to fund our working
capital needs during 2003. Management believes Pro Tech will have sufficient
funds to meet anticipated working capital requirements through December 31,
2003. 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. We will seek to raise
additional financing as a result of our relationship with NCT and NCT Hearing.
On March 27, 2002, we were able to roll the outstanding loan from Westek
Electronics, a stockholder, for $162,750 into a new note for $176,584, which
included accrued interest payable from the old note. The new note became payable
on June 27, 2002. We were able to roll this note plus accrued interest into a
$180,493 note with interest at 8.5% and payment terms of $3,500 due on the last
day of each month starting on August 31, 2002 through May 31, 2003 with the
remaining balance due on June 27, 2003.
At December 31, 2002, cash and cash equivalents were $13,624.
The current ratio (current assets to current liabilities) was .98 to 1.00 at
December 31, 2002, as compared to .79 to 1.00 at December 31, 2001. Pro Tech had
a working capital deficit of $19,543 at December 31, 2002 as opposed to a
deficit of $320,525 at December 31, 2001. This $300,982 decrease in working
capital deficit was due mainly to the exchange of $556,142 of current
liabilities, representing amounts owed to NCT and its subsidiaries as of
December 31, 2001, into noncurrent liabilities in conjunction with the signing
of a secured promissory note due on April 1, 2004. See Notes to Financial
Statements: Note 5 - Other Liabilities and Note 7 - Noncurrent Notes Payable Due
to Affiliates for further details. In addition, we decreased our outstanding
accounts payable by approximately $120,000. Offsetting these decreases in
current liabilities was a decrease in inventories of approximately $353,000.
16
Cash flows used in operating activities was $10,276 during the year ended
December 31, 2002. This use of funds was driven primarily by the 2002 generated
net loss (excluding the $11,5000,000 impairment charge) of $1,904,878 and the
decrease of approximately $120,000 in accounts payable. These uses of funds were
offset by depreciation and amortization expense of $1,093,778, an approximate
$509,000 increase in notes payable for services received; a decrease in accounts
receivable of approximately $56,000 and a decrease in inventories of
approximately $353,000 (including a current provision of $10,000).
The net cash used by financing activities was $22,414 during the year ended
December 31, 2002, due to payments made on notes payable and capital lease
obligations.
Pro Tech has no lines of credit with banks or other lending institutions.
Capital Expenditures
There were no material commitments for capital expenditures as of December 31,
2002, and no material commitments are anticipated in the near future.
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.
17
ITEM 8. FINANCIAL STATEMENTS
The Reports of the Independent Auditors, Eisner LLP and Morgan, Jacoby, Thurn,
Boyle & Associates, P.A., and the financial statements and accompanying notes
are attached.
Page
-----
Independent Auditors' Report (Eisner LLP) F-1
Independent Auditors' Report (Morgan, Jacoby, Thurn, Boyle & Associates, P.A.) F-2
Balance Sheets as of December 31, 2001 and 2002 F-3
Statements of Operations for the year ended October 31, 2000; the two months
ended December 31, 2000; and the years ended December 31, 2001 and 2002 F-4
Statements of Stockholders' Equity for the year ended October 31, 2000; the two
months ended December 31, 2000; and the years ended December 31, 2001 and 2002 F-5
Statements of Cash Flows for the year ended October 31, 2000; the two months
ended December 31, 2000; and the years ended December 31, 2001 and 2002 F-6
Notes to Financial Statements F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On June 4, 2002, the Company notified its principal independent accountant,
Morgan, Jacoby, Thurn, Boyle & Associates, P.A. ("MJTB") that the auditing
services of MJTB would no longer be required. MJTB's dismissal was approved by
the Pro Tech's Board of Directors.
During Pro Tech's year ended December 31, 2001; the two months ended December
31, 2000; and the years ended October 31, 2000 and 1999, and for the subsequent
interim period, there were no disagreements with MJTB on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement(s), if not resolved to the satisfaction
of MJTB, would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report. The report of MJTB, dated March
1, 2002, on Pro Tech's financial statements as of and for the year ended
December 31, 2001; the two months ended December 31, 2000; and the years ended
October 31, 2000 and 1999, included in Pro Tech's 2001 Annual Report on Form
10-K, did not contain an adverse opinion and was not qualified or modified as to
audit scope or accounting principles.
On June 4, 2002, Pro Tech engaged the accounting firm of Eisner LLP ("Eisner")
as principal independent accountant to audit the financial statements of Pro
Tech for the fiscal year ending December 31, 2002. The engagement was authorized
by Pro Tech's Board of Directors. During the year ended December 31, 2001; the
two months ended December 31, 2000; and the year ended October 31, 2000, and the
subsequent interim period, neither Pro Tech nor any person on Pro Tech's behalf
consulted Eisner regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on Pro Tech's financial statements, except for
consultations regarding consolidation into NCT Group, Inc.'s (Pro Tech's
ultimate parent company) financial statements audited by Eisner.
18
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,
2003.
Name Age Positions and Offices
---------------------- ----- -----------------------------------------------
Keith Larkin 79 Chairman of the Board
Richard Hennessey 43 President, Chief Operating Officer and Director
Michael J. Parrella 55 Director
Irene Lebovics 50 Director
Cy E. Hammond 48 Director
Mark Melnick 44 Secretary
Debra Kirven 38 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 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
19
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, 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. He
joined NCT as Controller in January 1990 and was appointed a Vice President in
February 1994. On September 4, 1997, Mr. Hammond was elected to serve as Acting
Chief Financial Officer, Treasurer and Assistant Secretary of NCT Audio
Products, Inc. On January 5, 2000, he was elected to serve as Acting Chief
Financial Officer, Treasurer and Assistant Secretary for Advancel Logic
Corporation. On August 20, 2002, Mr. Hammond was elected to serve as President
and Treasurer of DMC New York, Inc. He also serves as Treasurer for the
following NCT subsidiaries: Artera Group, Inc., Chaplin Patents Holding Company,
Inc., Distributed Media Corporation, DMC HealthMedia Inc., Midcore Software,
Inc., NCT Far East, Inc., NCT Hearing Products, Inc., NCT Muffler, Inc., and NCT
Video Displays, Inc. 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 various NCT subsidiaries, as follows: Artera Group, Inc.,
ConnectClearly.com, Inc., DMC Cinema, Inc., DMC New York, Inc., NCT Video
Displays, Inc., Artera Group International Limited, and Noise Cancellation
Technologies (Europe), 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
20
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, 2002 to December 31, 2002.
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 year ended October 31, 2000; the two months ended December 31,
2000 and the fiscal years ended December 31, 2001 and 2002.
Securities
Other Underlying All
Name and Annual Options/Warrants Other
Principal Position Year Salary Bonus Compensation SARs(#) Compensation
- --------------------------- --------- -------------- --------- --------------- ------------------- -----------------
Keith Larkin
Chairman of the Board 10/31/00 $ 22,500 - - - -
12/31/00 $ 7,500 - - - -
12/31/01 $ 56,750 - - 540,000 -
12/31/02 $ 7,500 - - 250,000 -
Richard Hennessey
President 10/31/00 $ 77,000 - - - -
12/31/00 $ 16,000 - - 250,000 -
12/31/01 $ 142,896 (a) - - - -
12/31/02 $ 151,667 (a) - - - -
(a) The 2001 amount includes $21,250 of salary accrued but not paid during
2001. This amount was paid during 2002. The 2002 amount does not include
the $21,250 accrued for in 2001, but does include $62,500 of salary accrued
but not paid during 2002.
Compensation Arrangements with Certain Officers and Directors
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.
21
In addition, Messrs. Larkin and Hennessey have been granted stock options under
the 1998 Stock Option Plan as described below.
Compensation of Directors
On February 1, 2002, Pro Tech and Mr. Larkin entered into an agreement regarding
compensation to Mr. Larkin for his services as Chairman of the Board of
Directors of Pro Tech. This agreement provides for the following:
1. Options to purchase 250,000 shares of Pro Tech common stock (described
below)
2. Coverage under the health benefit plans then in effect for employees
of Pro Tech
3. A nominal salary of $4,550 per annum included in the above noted
compensation table.
No other directors of Pro Tech have received any fees for serving as a director.
22
2002 Aggregated Option and Warrant Exercises and
December 31, 2002 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, 2002 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
Underlying Value of Unexercised
Number of Unexercised Options In-the-Money Options
Shares and Warrants at And Warrants at
Acquired December 31, 2002 December 31, 2002
On Value ---------------------------------------- ----------------------------
Name Exercise (#) Realized Exercisable (#) Unexercisable (#) Exercisable Unexercisable
- ----------------- ---------------- ----------- ------------------- ------------------- ----------- ------------
Keith Larkin - - 790,000 - $ - $ -
Richard Hennessey - - 437,500 62,500 $ - $ -
During the fiscal year ended October 31, 2000; the two months ended December 31,
2000; and the fiscal years ended December 31, 2001 and 2002, neither Mr. Larkin
nor Mr. Hennessey exercised any stock options. The fair market value of Pro
Tech's common stock as of December 31, 2002 was less than the exercise price for
both Mr. Larkin's and Mr. Hennessey's stock options. Accordingly, as of December
31, 2002, 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 provided 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 1996 Plan terminated on April 15, 2002. As
of December 31, 2002, there were no options outstanding under this Plan.
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. The authorized shares for this plan was increased to
30,000,000 on April 12, 2002 at Pro Tech's annual meeting of stockholders.
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:
23
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.
On February 1, 2002, the Board of Directors granted options to Mr. Larkin to
purchase up to 250,000 shares of common stock at an exercise price of $0.06 per
share, the fair market value on the date of grant. The options vested on the
date of grant. The options expire on February 1, 2009.
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 12, 2003 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, 2002; 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.
Amount and
Nature of Approximate
Beneficial Percentage
Name of Beneficial Owner Ownership (1) Of Class (1)
-------------------------------------- --------------------- ---------------
Keith Larkin 1,550,000 (2) 4.5%
Richard Hennessey 437,500 (3) 1.3%
Michael J. Parrella - (4) -
Irene Lebovics - (4) -
Cy E. Hammond - (4) -
NCT Hearing Products, Inc. 27,102,174 (5) 81.6%
Alpha Capital Aktiengesellschaft 67,458,985 (6) 67.0%
Zakeni Limited 9,105,535 (7) 21.5%
All Executive Officers and Directors
as a Group (7 persons) 1,987,500 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
Electronics, 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.
24
(3) Includes shares of common stock from stock option agreements, as follows:
(1) 250,000 shares of common stock underlying stock option agreements, all
of which are presently exercisable (of such options, 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
187,500 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. Mr. Parrella 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) 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 12, 2003.
Such conversion shares were determined using 80% of an assumed $0.01 price
per share five-day average closing bid price of the 15-day trading period
immediately preceding the assumed conversion. Pursuant to a contractual
restriction between Pro Tech and Alpha Capital, Alpha Capital is prohibited
from holding in excess of 4.99% of our common stock at any given time,
subject to certain exceptions.
(7) 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 12, 2003. Such conversion
shares were determined using 80% of an assumed $0.01 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.
ITEM 14. CONTROLS AND PROCEDURES.
Pro Tech's President and the Chief Financial Officer, conducted an evaluation of
the effectiveness of Pro Tech's disclosure controls and procedures (as defined
in Exchange Act Rule 13a-14 and 15(d)-14) within 90 days of the filing of this
report. Based on that evaluation, the President and the Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this annual report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the President and the Chief Financial
Officer completed their evaluation.
25
PART IV
ITEM 15. 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 (Eisner LLP)
Independent Auditors' Report (Morgan, Jacoby, Thurn, Boyle & Associates,
P.A.)
Balance Sheets as of December 31, 2001 and 2002
Statements of Operations for the year ended October 31, 2000; for the two
months ended December 31, 2000; and for the years ended December 31, 2001
and 2002
Statements of Stockholders' Equity for the year ended October 31, 2000; for
the two months ended December 31, 2000; and for the years ended December
31, 2001 and 2002
Statements of Cash Flows for the year ended October 31, 2000; for the two
months ended December 31, 2000; and for the years ended December 31, 2001
and 2002
Notes to Financial Statements
(2) Financial Statements Schedules- Schedules are omitted as not
applicable or not required
(3) Exhibits including those Incorporated by Reference.
10 (a) *Stock Option Agreement, dated February 1, 2002, between the
Company and Keith Larkin, incorporated herein by reference to
exhibit 10(a) of Pro Tech's Form 10-Q filed on May 13, 2002.
16 Change in certifying accountants, dated June 4, 2002,
incorporated herein by reference to Pro Tech's current report on
Form 8-K filed on June 7, 2002.
99 (a) Certification of Form 10-K for the fiscal year ended December
31, 2002 pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
On June 7, 2002, the company filed a report on Form 8-K, dated June 4, 2002
announcing a change in independent accountants.
26
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 31, 2003.
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 31, 2003
----------------------------------------
Richard Hennessey
/s/ KEITH LARKIN Chairman of the Board March 31, 2003
----------------------------------------
Keith Larkin
/s/ MICHAEL J. PARRELLA Director March 31, 2003
----------------------------------------
Michael J. Parrella
/s/ CY E. HAMMOND Director March 31, 2003
----------------------------------------
Cy E. Hammond
/s/ IRENE LEBOVICS Director March 31, 2003
----------------------------------------
Irene Lebovics
27
CERTIFICATION OF PRESIDENT (Principal Executive Officer)
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard Hennessey, certify that:
1. I have reviewed this annual report on Form 10-K of Pro Tech Communications,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and c) presented in this
annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ RICHARD HENNESSEY
-----------------------------------------
Richard Hennessey
President (Principal Executive Officer)
28
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Debra Kirven, certify that:
1. I have reviewed this annual report on Form 10-K of Pro Tech Communications,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ DEBRA KIRVEN
------------------------
Debra Kirven
Chief Financial Officer
29
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Pro Tech Communications, Inc.
We have audited the accompanying balance sheet of Pro Tech Communications, Inc.
as of December 31, 2002 and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides 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 December 31, 2002 and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
Eisner LLP
New York, New York
January 31, 2003
With respect to Note 1(a)
March 31, 2003
F-1
Independent Auditors' Report
The Board of Directors
Pro Tech Communications, Inc.:
We have audited the accompanying balance sheet of Pro Tech Communications, Inc.
as of December 31, 2001 and the related statements of operations, stockholders'
equity and cash flows for the year 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 December 31, 2001, and the results of its operations and its cash flows
for the year 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-2
PRO TECH COMMUNICATIONS, INC.
BALANCE SHEETS
December 31,
---------------------------------------
2001 2002
------------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 46,881 $ 13,624
Accounts receivable, less allowance for doubtful accounts
of $24,784; and $27,309, respectively 219,434 160,961
Inventories, net of reserves (Note 2) 945,744 592,536
Due from officer/stockholder and employees 2,876 63,113
Other current assets 5,926 16,760
------------------ ----------------
Total current assets 1,220,861 846,994
Property and equipment, net (Note 3) 756,365 601,183
Intangible assets (at adjusted cost for 2002),
net of accumulated amortization of
$1,164,821 and $2,096,677, respectively (Note 1) 15,142,671 2,710,815
Due from officer/stockholder 59,670 -
Other assets 5,353 4,500
------------------ ----------------
$ 17,184,920 $ 4,163,492
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 546,917 $ 426,976
Accrued expenses (Note 4) 199,526 222,980
Current portion of capital lease obligations (Note 12) 10,083 9,662
Due to factor (Note 11) 64,030 34,165
Other liabilities due to affiliates (Notes 5 and 7) 556,142 -
Notes payable (Note 6) 1,938 2,150
Notes payable to stockholder (Note 6) 162,750 170,604
------------------ ----------------
Total current liabilities 1,541,386 866,537
Noncurrent notes payable (Note 6) 8,611 6,461
Noncurrent notes payable due to affiliates (Note 7) - 1,064,703
Capital lease obligations (Note 12) 36,021 31,767
------------------ ----------------
Total liabilities 1,586,018 1,969,468
------------------ ----------------
Commitments (Note 12)
Series B redeemable convertible preferred stock, $.01 par value, $1,000
stated value, authorized, issued and outstanding 500 shares (Note 8) 633,438 653,438
------------------ ----------------
Stockholders' equity (Notes 9 and 10):
Preferred stock, $.01 par value, authorized 998,000 shares, none
issued and outstanding - -
Series A convertible preferred stock, $.01 par value, $1,000 stated
value, authorized 1,500 shares, issued and outstanding 50 shares 52,521 54,521
Common stock, $.001 par value, authorized 40,000,000 and 300,000,000
shares, respectively; issued and outstanding 33,200,311 shares 33,200 33,200
Additional paid-in-capital 18,473,079 18,451,079
Accumulated deficit (3,593,336) (16,998,214)
------------------ ----------------
Total stockholders' equity 14,965,464 1,540,586
------------------ ----------------
$ 17,184,920 $ 4,163,492
================== ================
The accompanying notes are an integral part of the financial statements.
F-3
PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
For the Year
For the Year Two Months Ended
Ended Ended December 31,
October 31, December 31, --------------------------------
2000 2000 2001 2002
--------------- -------------- -------------- --------------
Net sales $ 1,562,484 $ 307,902 $ 2,175,306 $ 1,648,949
Cost of goods sold 623,555 129,378 920,127 774,316
--------------- -------------- -------------- --------------
Gross profit 938,929 178,524 1,255,179 874,633
Selling, general and administrative expenses 1,275,290 545,586 3,655,711 2,703,425
Impairment charge on intangible assets - - - 11,500,000
Provision for doubtful accounts 7,990 1,574 9,958 29,800
--------------- -------------- -------------- --------------
Loss before other income (expense) (344,351) (368,636) (2,410,490) (13,358,592)
Other income (expense) :
Interest income 4,877 721 4,530 3,109
Interest expense (36,592) (9,434) (24,792) (54,399)
Miscellaneous income 1,726 1,029 4,305 5,004
Loss on disposal of fixed assets - - (2,945) -
--------------- -------------- -------------- --------------
Net loss $ (374,340) $ (376,320) $ (2,429,392) $(13,404,878)
Adjustments attributable to preferred stock (Notes 8 and 9):
Preferred stock beneficial conversion feature $ 3,569,000 $ - $ 79,190 $ 45,810
Preferred stock embedded dividend requirement 375,000 - 62,661 -
Preferred stock dividend (accretion) 5,425 10,027 24,085 22,000
--------------- -------------- -------------- --------------
Net loss attributable to common stockholders - as reported $ (4,323,765) $ (386,347) $ (2,595,328) $(13,472,688)
Adjustment of beneficial conversion (Note 18) 2,444,000 - - -
--------------- -------------- -------------- --------------
Net loss attributable to common stockholders - as adjusted $ (1,879,765) $ (386,347) $ (2,595,328) $(13,472,688)
=============== ============== ============== ==============
Basic and diluted loss per share attributable to common
stockholders - as previously reported $ (0.57) $ (0.01) $ (0.08) $ (0.41)
Adjustment of beneficial conversion (Note 18) 0.32 - - -
--------------- -------------- -------------- --------------
Basic and diluted loss per share attributable to common
stockholders - as adjusted $ (0.25) $ (0.01) $ (0.08) $ (0.41)
=============== ============== ============== ==============
Weighted average common shares outstanding -
basic and diluted 7,537,855 28,248,438 32,281,034 33,200,311
=============== ============== ============== ==============
The accompanying notes are an integral part of the financial statements.
F-4
PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (Note 9)
Series A
Preferred Common
Stock Stock
---------------------- ---------------------
Shares Amount Shares Amount
Balance at October 31, 1999 - $ - 4,254,000 $ 4,254
Issue common stock under
stock option plans (Note 10) - - 12,000 12
Issue common stock in exchange for certain
intangible assets including 279,688
shares issued as issuance costs
net or related,
issuance costs of $179,678 - - 23,982,438 23,982
Sale of preferred stock 1,500 1,500,000 - -
Dividend on preferred stock - 5,425 - -
Net loss - - - -
--------------------- ---------------------
Balance at October 31, 2000 1,500 1,505,425 28,248,438 28,248
Dividend on preferred stock - 10,027 - -
Net loss - - - -
--------------------- ---------------------
Balance at December 31, 2000 1,500 1,515,452 28,248,438 28,248
Exchange/conversion of preferred stock (1,450) (1,478,578) 4,951,873 4,952
Issuance costs on sale of Series B
Preferred Stock (Note 8) - - - -
Redemption adjustment on Series B
Preferred Stock (Note 8) - - - -
Dividend on preferred stock - 15,647 - -
Net loss - - - -
--------------------- ---------------------
Balance at December 31, 2001 50 52,521 33,200,311 33,200
Dividend on preferred stock - 2,000 - -
Net loss - - - -
--------------------- ---------------------
Balance at December 31, 2002 50 $ 54,521 33,200,311 $ 33,200
===================== =====================
The accompanying notes are an integral part of the financial statements.
PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (Note 9)
Additional
Paid in Accumulated
Capital Deficit Total
-------------- -------------- ------------
Balance at October 31, 1999 $ 1,137,018 $ (413,284) $ 727,988
Issue common stock under
stock option plans (Note 10) 4,548 - 4,560
Issue common stock in exchange for certain
intangible assets including 279,688
shares issued as issuance costs
net or related,
issuance costs of $179,678 16,103,832 - 16,127,814
Sale of preferred stock - - 1,500,000
Dividend on preferred stock (5,425) - -
Net loss - (374,340) (374,340)
--------------- -------------- ------------
Balance at October 31, 2000 17,239,973 (787,624) 17,986,022
Dividend on preferred stock (10,027) - -
Net loss - (376,320) (376,320)
--------------- -------------- ------------
Balance at December 31, 2000 17,229,946 (1,163,944) 17,609,702
Exchange/conversion of preferred stock 1,473,626 - -
Issuance costs on sale of Series B
Preferred Stock (Note 8) (81,408) - (81,408)
Redemption adjustment on Series B
Preferred Stock (Note 8) (125,000) - (125,000)
Dividend on preferred stock (24,085) - (8,438)
Net loss - (2,429,392) (2,429,392)
--------------- -------------- ------------
Balance at December 31, 2001 18,473,079 (3,593,336) 14,965,464
Dividend on preferred stock (22,000) - (20,000)
Net loss - (13,404,878) (13,404,878)
--------------- -------------- ------------
Balance at December 31, 2002 $ 18,451,079 $(16,998,214) $ 1,540,586
=============== ============== ============
The accompanying notes are an integral part of the financial statements.
F-5
PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS For the Year For the For the Year Ended
Ended Two Months Ended December 31,
October 31, December 31, -----------------------------
2000 2000 2001 2002
-------------- ------------- -------------- -------------
Cash flows from operating activities:
Net loss $ (374,340) $ (376,320) $ (2,429,392) $(13,404,878)
Adjustments to reconcile net loss to net
cash used in operating activities:
Note payable issued for services received - - - 508,561
Depreciation and amortization 128,658 164,153 1,052,737 1,093,778
Impairment charge on intangible assets - - - 11,500,000
Provision for doubtful accounts 7,990 1,574 9,958 2,524
Provision for obsolete inventory - - - 10,000
Loss on disposal of fixed assets - - 2,945 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (223,439) (2,007) 192,413 55,949
(Increase) decrease in inventories, net (272,977) (91,728) (295,156) 343,208
Decrease (increase) in other assets 2,161 24,062 2,316 (10,683)
Increase(decrease) in accounts payable 116,703 (48,057) 378,167 (119,941)
Increase in accrued expenses 1,777 8,235 101,876 41,071
Increase (decrease) in other liabilities 101,057 115,516 403,599 (29,865)
-------------- ------------ ------------- -------------
Net cash used in operating activities $ (512,410) $ (204,572) $ (580,537) $ (10,276)
-------------- ------------ ------------- -------------
Cash flows from investing activities:
Capital expenditures (130,152) (1,129) (543,702) -
Proceeds on sale of fixed asset - - 350 -
Net change in Due from officer/stockholder and employees 852 (417) (4,940) (567)
-------------- ------------ ------------- -------------
Net cash used in investing activities $ (129,300) $ (1,546) $ (548,292) $ (567)
-------------- ------------ ------------- -------------
Cash flows from financing activities:
Proceeds from:
Notes payable 536,145 - - -
Sale of preferred stock (net) (Notes 8 and 9) 1,020,347 - 500,000 -
Sale of common stock (net) 4,560 - - -
Payment made on:
Notes payable - (86,170) (797) (11,701)
Issuance/conversion costs on preferred stock - - (81,408) -
Capital lease obligations (9,362) (1,739) (18,466) (10,713)
-------------- ------------ -------------- -------------
Net cash provided by (used in) financing activities $1,551,690 $ (87,909) $ 399,329 $ (22,414)
-------------- ------------ -------------- -------------
Net increase (decrease) in cash and cash equivalents $ 909,980 $ (294,027) $ (729,500) $ (33,257)
Cash and cash equivalents - beginning of period 160,428 1,070,408 776,381 46,881
-------------- ------------ -------------- -------------
Cash and cash equivalents - end of period $1,070,408 $ 776,381 $ 46,881 $ 13,624
============== ============ ============== =============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 36,592 $ 2,072 $ 10,883 $ 26,293
============== ============ =============== =============
Supplemental disclosures of non-cash investing and financing activities:
During the year ended October 31, 2000; the year ended December 31, 2001; and
the year ended December 31, 2002, Pro Tech acquired assets under capital
leases for $2,909; $55,865; and $6,038, 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;
the year ended December 31, 2001; and the year ended December 31, 2002, Pro
Tech adjusted the carrying value of preferred stock and additional
paid-in-capital for a 4% dividend totaling $5,425; $10,027; $24,085; and
$22,000, respectively.
The accompanying notes are an integral part of the financial statements.
F-6
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. Our chief purpose is designing, developing, producing and
marketing lightweight telephone headsets emphasizing performance and
durability at a cost below that of our competitors. 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.
As a result of the issuance of common stock in September 2000 (see
Note 9 - 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, 2002, NCT Hearing owned approximately 81.6% of the
outstanding common stock of Pro Tech.
On December 28, 2000, we changed our year-end from October 31 to
December 31 to conform to NCT. Accordingly, we reported on the
two-month transition period in our Form 10-K as of December 31, 2000.
Pro Tech has experienced recurring net losses from operations since
its inception, aggregating $16,998,214 through December 31, 2002.
These losses, which include the cost for development of products for
commercial use and an impairment charge of $11,500,000 (see Note
1(o)), have been funded primarily from product sales, the sale of
common stock and preferred stock convertible into common stock, and
advances directly and indirectly from NCT (our ultimate parent
company).
In addition, Pro Tech had negative working capital of $19,543 at
December 31, 2002. Pro Tech has taken steps to reduce its working
capital requirements. These steps include the reorganization of its
call center operations, the reduction of workforce levels in all areas
of the products operations, and the institution of tighter controls
over all expenditures.
Subsequent to December 31, 2002, Pro Tech received over $190,000 in
cash advances from NCT to fund our working capital needs during 2003.
In addition, as a result of the steps that Pro Tech has taken,
management believes Pro Tech will have sufficient funds to meet
anticipated working capital requirements through December 31, 2003.
(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.
F-7
(d) Revenue and Cost Recognition
Pro Tech recognizes revenue as products are shipped and title has
passed. 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. Freight charges are charged to
expense when incurred. Not all customers are billed for shipping
costs; however, the amount of shipping costs collected from customers
is netted against our incurred freight charges. The net amount of
freight charges is included in selling, general and administrative
expenses in the statements of operations.
(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 (including assets held under capital leases). Leasehold
improvements are amortized over the term of the lease. Asset lives are
3-10 years for machinery and equipment and 5 years for leasehold
improvements. Repair and maintenance costs are charged to expense when
incurred.
(f) Intangible Assets
Intangible assets consist of licensed rights to certain technologies
acquired from NCT Hearing through the issuance of common stock (see
Note 9 - Capital Stock). Amortization is computed using the
straight-line method over the initial estimated useful lives of the
assets of 17.5 years. Intangible assets are periodically reviewed for
impairments where the fair value is less than the carrying value. For
the year ended December 31, 2002, we had an impairment charge of
$11,500,000 (see Note 1(o)). Amortization expense was $77,655;
$155,309; $931,857; and $931,857 for the year ended October 31, 2000;
the two months ended December 31, 2000; and the years ended December
31, 2001and 2002, respectively. Estimated amortization expense for
each of the next five years is $180,721.
(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. See Note 13 - Income Taxes.
(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 $54,424; $5,088; $42,242; and
$17,638 for the year ended October 31, 2000; the two months ended
December 31, 2000; and the years ended December 31, 2001 and 2002,
respectively.
(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 $41,554; $11,517; $71,097;
F-8
and $10,377 for the year ended October 31, 2000; the two months ended
December 31, 2000; and the years ended December 31, 2001 and 2002,
respectively.
(j) Fair Value of Financial Instruments
The estimated fair value of Pro Tech's notes receivable and current
liabilities approximates the carrying amount due to the short-term
nature of such financial instruments. The fair value of certain loans
to or from stockholders are not readily determinable due to the
related party nature of those instruments.
(k) Use of Estimates
The preparation of Pro Tech's financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported and/or disclosed amounts of assets, liabilities,
revenues and expenses and contingent assets and liabilities.
Management periodically assesses and evaluates those estimates and
assumptions. Actual results could differ from those estimates.
(l) Reclassifications
We have reclassified some amounts in prior period financial statements
to conform to the current period's presentation.
(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." 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. The potential common
shares are as follows:
For the year For the two For the year ended
ended months ended December 31,
October 31, December 31, -----------------------------------------
2000 2000 2001 2002
---------------- ----------------- ------------------ -----------------
Warrants 4,500,000 4,500,000 5,500,000 5,500,000
Options 978,000 1,103,000 1,187,500 1,235,000
Convertible preferred stock 3,010,850 5,522,784 11,686,646 72,869,875
---------------- ----------------- ------------------ -----------------
8,488,850 11,125,784 18,374,146 79,604,875
================ ================= ================== =================
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," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment to FASB
Statement No. 123," and continues to apply Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for our
stock-based compensation plans.
F-9
No compensation expense was recorded during the year ended October 31,
2000; during the two months ended December 31, 2000; and during the
years ended December 31, 2001 and 2002 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 No. 123, the net loss and loss
per share attributable to common stockholders would have been adjusted
to the pro forma amounts indicated below:
For the For the two For the year ended
year ended months ended December 31,
October 31, December 31, ----------------------------------
2000 2000 2001 2002
---------------- ---------------- ------------- ----------------
Net loss attributable to
common stockholders,
as reported $ (1,879,765) (a) $ (386,347) $(2,595,328) $ (13,472,688)
Stock-based employee costs
based on fair value method,
net of related taxes (17,867) (57,295) (188,793) (14,596)
---------------- ---------------- ------------- ----------------
Net loss attributable to
common stockholders,
pro forma $ (1,897,632) $ (443,642) $(2,784,121) $ (13,487,284)
================ ================ ============= ================
Loss per common share:
As reported $ (0.25) (a) $ (0.01) $ (0.08) $ (0.41)
================ ================ ============= ================
Pro forma $ (0.25) (a) $ (0.02) $ (0.09) $ (0.41)
================ ================ ============= ================
(a) See Note 18 - Adjustment included in October 2000 financial statements.
The fair value of each option grant on the date of grant was estimated
using the Black-Scholes option-pricing model reflecting the following:
For the two For the year ended
months ended December 31,
December 31, ------------------------------
2000 2001 2002
------------------- --------------- ----------
Volatility 100% 100% 100%
Expected life of options 4 to 7 years 5 to 7 years 7 years
Risk free interest rate 5.54% 4.25% 3.65%
Dividend yield 0% 0% 0%
There were no options granted during the fiscal year ended October 31,
2000. The weighted average fair value of options granted during the
two months ended December 31, 2000 and the years ended December 31,
2001 and 2002 was $0.34, $0.14 and $0.05, respectively.
(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 undiscounted 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 year ended October 31,
2000, for the two months ended December 31, 2000, and for the year
ended December 31, 2001. As of December 31, 2002, due to the lack of
available working capital, we reviewed the impairment testing under
the guidelines of SFAS No. 144. We estimated the future cash flows of
those products identified as
F-10
using the patent rights included under our intangible assets. These
future cash flows were then compared to the carrying value of our
intangible assets on the books as of December 31, 2002. Based on this
comparison, we determined an impairment was present. We calculated the
impairment loss by comparing the carrying value of the intangible
assets to the fair value of the intangible assets. We determined the
fair value of the intangible assets based on the discounted cash flows
attributable to the new products utilizing the technology. The
discount rate used was based on cost of capital associated with our
Series B convertible preferred stock. The resulting impairment charge
of $11,500,000 is included in our statement of operations for the year
ended December 31, 2002.
(p) Concentrations of Credit Risk
Cash and cash equivalents and trade receivables potentially subject
Pro Tech to concentration of credit risk. We maintain cash and cash
equivalents in accounts with one financial institution in amounts
which, at times, may be in excess of the FDIC insurance limit. As of
December 31, 2002, 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 alternative means and, in effect, increase our
inventory to cover the anticipated returns under warranty.
(q) Recent Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 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 No. 142, we are
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 No. 142 became effective for fiscal years
beginning after December 15, 2001 and required 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 were to be subsumed into goodwill upon adoption. In
addition, the useful lives of recognized intangible assets acquired in
transactions completed before July 1, 2001 were to be reassessed and
the remaining amortization periods adjusted accordingly. Adoption of
SFAS No. 141 did not have a significant impact on our financial
statements. Adoption of SFAS No. 142 required us to evaluate the
future cash flows of those products identified as using the patent
rights included under our intangible assets. Using the guidelines in
SFAS No. 142 for intangible assets with finite lives, the estimated
future cash flows were determined in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The
estimated future cash flows were then compared to the carrying value
of our intangible assets. As of January 1, 2002, we did not have an
impairment on the intangible
F-11
assets. Due to the lack of available working capital during the year,
we repeated the impairment testing as of December 31, 2002. See Note 1
(o) for a discussion of the impairment charge taken. In accordance
with SFAS No. 142, we will continue to monitor activities associated
with our intangible assets for possible future impairments.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds Statement No. 4, which
required all gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. Upon adoption of SFAS No. 145, companies
will be required to apply the criteria in APB Opinion 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" in determining the
classification of gains and losses resulting from the extinguishments
of debt. SFAS No. 145 is effective for fiscal years beginning after
May 15, 2002. We believe adoption of SFAS No. 145 will have no
material effect on our financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December
31, 2002. We believe SFAS No. 146 will have no material effect on our
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure an amendment of
FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS No. 148 is
effective for fiscal years ending after December 15, 2002. We have
applied the additional disclosure requirements of SFAS No. 148 as they
relate to options granted to employees (see Note 10 - Stock Option
Plans).
(2) Inventory
Inventory consisted of the following:
December 31,
----------------------------------
2001 2002
-------------- ---------------
Finished goods $ 609,852 $ 379,089
Raw materials 273,202 196,330
Work in progress 62,690 27,117
-------------- ---------------
Gross inventory 945,744 602,536
Less: reserve for obsolete inventory - 10,000
-------------- ---------------
Total Inventory $ 945,744 $ 592,536
============== ===============
F-12
(3) Property and Equipment, Net
The following is a summary of property and equipment:
December 31,
-----------------------------------
2001 2002
-------------- ----------------
Production molds $ 454,076 $ 454,076
Office equipment 146,556 146,556
Production equipment 39,514 39,514
Leased equipment 79,235 83,188
Leasehold improvements 315,050 315,050
Vehicles 12,414 12,414
Marketing displays 16,160 16,160
-------------- ----------------
Total cost 1,063,005 1,066,958
Less accumulated depreciation
and amortization 306,640 465,775
-------------- ----------------
Total Property and equipment, net $ 756,365 $ 601,183
============== ================
Total depreciation and amortization expense, with respect to property and
equipment, was $51,546, $8,844 $120,194 and $161,219 for the year ended October
31, 2000; for the two months ended December 31, 2000; and for the years ended
December 31, 2001 and 2002, respectively.
(4) Accrued Expenses
Accrued expenses consisted of the following:
December 31,
--------------------------------------
2001 2002
------------------ ---------------
Accrued warranty expense $ 96,391 $ 69,486
Accrued payroll and vacation 69,554 115,070
Other accrued expenses 33,581 38,424
------------------ ---------------
Total Accrued expenses $ 199,526 $ 222,980
================== ===============
(5) Other Liabilities
Other liabilities consisted of the following:
December 31,
---------------------------------
2001 2002
---------------- ------------
Due to NCT (see note 7) $ 195,298 $ -
Due to NCT Hearing (see note 7) 325,733 -
Due to NCT Europe (see note 7) 35,111 -
---------------- ------------
Total Other liabilities $ 556,142 $ -
================ ============
(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 entered into a new note which included
the original principal amount plus accrued interest to date. This $162,750 note
matured on March 27, 2002 and bore interest at 8.5% per annum, payable at
maturity. On the maturity date, Pro Tech entered into a new note that included
the original principal plus accrued interest to date. This $176,584 note matured
on June 27, 2002 and bore interest at 8.5% per annum, payable at maturity. On
the maturity date, Pro Tech renegotiated this note plus accrued interest into a
$180,493 note with interest at 8.5%. Payment terms on the new note are $3,500
(including interest) due on the last day of each
F-13
month starting on August 31, 2002 through May 31, 2003 with the remaining
balance due on June 27, 2003. As of December 31, 2002, the balance of this note
was $170,604.
On May 13, 2001, Pro Tech received a bank loan of $11,346. The loan provides for
equal monthly payments of $245, including interest at prime plus 2.3% (6.55% at
December 31, 2002), through May 13, 2006. The loan is secured by a vehicle with
a net book value of $5,662 at December 31, 2002. As of December 31, 2002, the
balance outstanding was $8,611 and future maturities are: 2003, $2,150; 2004,
$2,385; 2005, $2,646; and 2006 $1,430.
(7) Noncurrent Notes Payable Due to Affiliates
On September 30, 2002, a promissory note due to NCT Hearing, bearing interest at
prime (4.25% at December 31, 2002) and due on April 1, 2004, was issued in
exchange for $906,232, the amount due to NCT and its subsidiaries at September
30, 2002. The balance of this note payable plus accrued interest as of December
31, 2002 was $916,437.
On December 31, 2002, a promissory note due to NCT Hearing, bearing interest at
prime (4.25% at December 31, 2002) and due on April 1, 2004, was issued in
exchange for $148,266, the amount due to NCT and its subsidiaries for services
provided to Pro Tech during the fourth quarter of 2002. See Note 15 - Related
Party Transactions.
(8) 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 cumulative 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 in a manner similar to a dividend 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 statement 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 and
$20,000 for the years ended December 31, 2001 and 2002, respectively.
We have classified the Preferred Stock-B as temporary equity rather than
stockholders' equity because, at December 31, 2001 and 2002, respectively, 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. Such redemption would not be within the sole
control of Pro Tech.
F-14
The Preferred Stock-B is carried on our balance sheet as of December 31, 2001
and 2002 at $633,438 and $653,438, respectively, the redemption value, which is
comprised of 125% of the stated value of $500,000; plus the accrued accretion of
$8,438 and $28,438, respectively.
(9) Capital Stock
On August 11, 2000, Pro Tech's stockholders approved an amendment to the
Articles of Incorporation to increase the number of authorized shares of common
stock from 10 million to 40 million and to authorize the creation of 1 million
shares of non-voting, non-designated preferred stock.
On April 12, 2002, Pro Tech's stockholders approved an amendment to the Articles
of Incorporation to increase the number of authorized shares of common stock
from 40 million to 300 million. The increase in authorized shares was effective
as of August 5, 2002, upon acceptance by the Secretary of State of Florida of
Articles of Amendment to the Amended and Restated Articles of Incorporation of
Pro Tech.
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 cumulative 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 statement 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;
$15,647; and $2,000 for the year ended October 31, 2000; the two months ended
December 31, 2000; and the years ended December 31, 2001 and 2002, 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. No shares of Preferred
Stock-A were converted during the year ended December 31, 2002.
F-15
Common Stock
On September 12, 2000, Pro Tech obtained a license for rights to certain
technologies from NCT Hearing 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, December 31, 2001 and December 31, 2002,
$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 107.3
million at December 31, 2002. This reserve includes amounts for the conversion
of preferred stock and for the exercise of options and warrants. On July 12,
2002, Pro Tech, NCT and the holder of eight convertible notes payable issued by
NCT entered into an agreement. Under this agreement, the holder of the notes
payable waived her right to exchange such notes into Pro Tech common shares. In
consideration of these waivers, the holder was given a warrant for 20 million
shares of NCT common stock. Prior to this agreement, the convertible notes
payable were exchangeable in Pro Tech common stock at prices ranging from $0.03
to $0.14 per share, or a total of approximately 215 million shares.
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. See Note 18 - Adjustment included in October
2000 financial statements. 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.
F-16
The following table summarizes warrants to purchase common stock during the year
ended October 31, 2000, during the two months ended December 31, 2000 and during
the years ended December 31, 2001 and 2002:
October 31, 2000 December 31, 2000
--------------------------------------- ------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------------- --------------------- ------------------ --------------------
Warrants outstanding,
beginning of period - $ - 4,500,000 $ 0.500
Warrants granted 4,500,000 0.500 - -
Warrants terminated - - - -
------------- --------------------- ------------------ --------------------
Warrants outstanding,
end of period 4,500,000 $ 0.500 4,500,000 $ 0.500
============= ===================== ================== ====================
December 31, 2001 December 31, 2002
---------------------------------------- ------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------------- ---------------------- ------------------ --------------------
Warrants outstanding,
beginning of period 4,500,000 $ 0.500 5,500,000 $ 0.433
Warrants granted 1,000,000 0.130 - -
Warrants terminated - - - -
------------- ---------------------- ------------------ --------------------
Warrants outstanding,
end of period 5,500,000 $ 0.433 5,500,000 $ 0.433
============= ====================== ================== ====================
As of December 31, 2002, the outstanding warrants have exercise prices ranging
from $0.13 to $0.50 and a weighted average remaining contractual life of
approximately 1 year.
(10) 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 Board of Directors determined in 2000 that no further grants would
be made under the 1996 Plan. The 1996 Plan terminated on April 15, 2002.
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 million shares of common stock on August 11, 2000.
The authorized shares for this plan were increased to 30 million on April 12,
2002 at Pro Tech's annual meeting of stockholders.
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.
F-17
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, 50,000 expired
during the year ended December 31, 2002 and 50,000 remain outstanding and
exercisable at December 31, 2002.
On April 13, 1999, the remaining 1998 Plan options to purchase 200,000 shares
were granted to an officer at an exercise price of $0.375 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 and
expire on June 1, 2008. The exercise price of these options was equal to the
fair market value of the common stock on the grant date. On February 1, 2002,
Pro Tech modified the 540,000 options to exclude the clause under which the
options would expire upon termination of employment. Although the change in the
termination clause was a modification of the original grant, there was no
accounting consequence because the market price on the date of such modification
was lower than the exercise price of the grant.
On June 1, 2001, Pro Tech issued options to two 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 expired in April 2002. The exercise price of
these options was equal to the fair market value of the common stock on the
grant date.
On February 1, 2002, Pro Tech issued options to the Chairman of the Board of
Directors 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. The exercise price of these options was
equal to the fair market value of the common stock on the grant date.
The following table summarizes stock option activity for the year ended October
31, 2000; for the two months ended December 31, 2000; and for the years ended
December 31, 2001 and 2002:
F-18
October 31, 2000 December 31, 2000
-------------------------------------------- ------------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------------- ------------------------ ---------------------- ---------------------
Options outstanding,
beginning of the period 1,040,000 $ 0.441 1,028,000 $ 0.442
Options granted - - 500,000 0.438
Options exercised (12,000) (0.380) - -
Options expired - - - -
---------------- ------------------- ---------------------- ---------------------
Options outstanding,
end of period 1,028,000 $ 0.442 1,528,000 $ 0.440
================ =================== ====================== =====================
Options exercisable,
end of period 978,000 $ 0.445 1,103,000 $ 0.444
================ =================== ====================== =====================
December 31, 2001 December 31, 2002
-------------------------------------------- -------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
-------------------- -------------------- -------------------- -------------------
Options outstanding,
beginning of the period 1,528,000 $ 0.440 1,740,000 $ 0.283
Options granted 940,000 0.170 250,000 0.060
Options exercised - - - -
Options expired (728,000) (0.468) (617,500) (0.259)
-------------------- -------------------- -------------------- -------------------
Options outstanding,
end of period 1,740,000 $ 0.283 1,372,500 $ 0.253
==================== ==================== ==================== ===================
Options exercisable,
end of period 1,187,500 $ 0.265 1,235,000 $ 0.232
==================== ==================== ==================== ===================
As of December 31, 2002, Pro Tech's outstanding stock options have exercise
prices ranging from $0.06 to $0.4375 and a weighted average remaining
contractual life of approximately 4.7 years. As of December 31, 2002, 28,627,500
options were available for future grants under the 1998 Stock Option Plan.
(11) 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.
F-19
On March 26, 2001, Pro Tech entered into a factoring agreement. Under this
agreement 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 4.25% at December 31,
2002. In addition, at December 31, 2002 we had $6,417 in reserve at the factor
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,
the factor may charge an additional commitment fee, as described in the
agreement. As of December 31, 2002, no such fees were required. Such factored
receivables are subject to acceptance by the factor. The factor 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.
At December 31, 2002, accounts receivable factored under this agreement and
still outstanding were $40,582, of which, $34,165 had been received under the
factoring agreement under the recourse provisions. Total fees incurred under
this arrangement amounted to $13,008 and $6,346 during the years ended December
31, 2001 and 2002, respectively. Interest expense incurred under this
arrangement amounted to $5,901 and $3,393 during the years ended December 31,
2001 and 2002, respectively.
(12) 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, 2002 are:
Year ended December 31
- ---------------------- Capital Leases Operating Leases
-------------- ----------------
2003 $ 13,298 $ 99,942
2004 13,109 95,924
2005 13,109 96,563
2006 9,992 16,184
2007 and thereafter 373 -
-------------- ----------------
Total minimum lease payments 49,881 $ 308,613
================
Less amount representing interest 8,452
--------------
Present value of net minimum capital
lease payments 41,429
Less current installments 9,662
--------------
Obligations under capital leases,
exlcuding current installments $ 31,767
==============
Rent expense under lease agreements totaled $41,696, $6,421, $127,099 and
$129,765 for the year ended October 31, 2000; for the two months ended December
31, 2000; and for the years ended December 31, 2001 and 2002, respectively.
(13) Income Taxes
There was no provision for income taxes for the year ended October 31, 2000, for
the two months ended December 31, 2000, or for the years ended December 31, 2001
and 2002 due to operating losses incurred.
Pro Tech had a deferred tax asset of approximately $755,700 and $6,523,000
available to offset future federal income tax, subject to limitations for
alternative minimum tax, at December 31, 2001 and 2002, respectively. Pro Tech's
deferred tax assets have been fully reserved by a valuation allowance since the
realization of its benefit is uncertain. The difference between the statutory
federal income tax rate of 34%
F-20
and Pro Tech's effective tax rate is due to an increase in the valuation
allowance of $127,276 for the year ended October 31, 2000; $127,949 for the two
months ended December 31, 2000; and $825,993 for the year ended December 31,
2001. Included in the change in valuation of $5,767,300 for the year ended
December 31, 2002 is $680,000, the net effect of a change in Pro Tech's
effective rate to 34% from the rate used in the previous years of 15%.
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 10 - 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 such compensation was not recognized as an expense for financial
reporting purposes in accordance with APB 25. 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 SFAS 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 year ended October 31, 2000; the two
months ended December 31, 2000; and the years ended December 31, 2001 and 2002.
Pro Tech has net operating loss carryforwards for federal and state income tax
purposes amounting to $6,233,000 and $6,308,000, respectively, which expire
through the year 2022. 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
9 - 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:
December 31,
---------------------------
2001 2002
----------- ------------
Accounts receivable principally due to
allowance for doubtful accounts $ 4,900 $ 10,000
Accrued warranty expense 19,000 26,000
Net operating loss carryforwards 787,600 2,345,000
Amortization and impairment on intangible assets - 4,162,000
Contribution carryforwards 500 1,000
----------- ------------
812,000 6,544,000
Less valuation allowance 755,700 6,523,000
----------- ------------
Total deferred tax assets 56,300 21,000
----------- ------------
Property and equipment principally due to
differences in depreciaton 300 21,000
Amortization and impairment on intangible assets 56,000 -
----------- ------------
Total deferred tax liabilities 56,300 21,000
----------- ------------
Net deferred taxes $ - $ -
=========== ============
F-21
(14) Business Division Information
During 2001, management identified two new business divisions that we have added
to our business focus. These two new identifiable business divisions are: (1)
Telecommunications Systems Integration; and (2) Call Center Operations. At
December 31, 2001 and 2002 neither of these divisions is a separately reportable
segment in accordance with SFAS No. 131. Prior to establishment of these two new
business divisions, we were predominately in the design, development,
manufacture and marketing of lightweight telecommunications headsets, currently
known as Product Business. We evaluate division performance based on net sales
and operating income. Management does not track division data or evaluate
division performance on additional financial information. As such, there are no
separately identifiable division 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 divisions. Likewise,
depreciation expense and capital additions are also not tracked by business
division.
No geographic information for revenues from external customers or for long-lived
assets is disclosed as our primary market and capital investments were
concentrated in the United States.
Business division data is as follows:
Division
------------------------------------------------------------------------------------
Telecom
Product Systems Call Center Total
Business Integration Operations Divisions
-------------------- ----------------- ---------------- -------------------
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)
For the year ended December 31, 2002:
Sales to external customers $ 1,500,883 131,378 16,688 $ 1,648,949
Loss from operations $ (13,321,985) (657) (35,950) $ (13,358,592)
Pro Tech is divided into the following three business divisions:
Product Business: We presently design, develop, manufacture and market
lightweight telecommunications headsets. Our headsets employ new concepts in
advanced lightweight design, and our marketing strategies involve the sale of
our product directly to the commercial headset market as a replacement for our
competitors' products. We presently sell our first design for the commercial
headset market comprised of fast food companies and other large quantity users
of headset systems. We are also in the process of completing development of
several other headsets for the telephone user market, to include telephone
operating companies, government agencies, business offices, and professional
telephone centers.
Telecommunications Systems Integration Business: On March 1, 2001, we launched
the Telecommunications Systems Integration Business to sell and install simple
to sophisticated analog, digital and Internet Protocol phone systems providing
telecommunications system integration support to the small office and the large
corporate call center clients.
F-22
Call Center Operations Business: During 2001, we launched the Call Center
Operations Business. utilized customer relationship management technologies and
strategies in order to achieve business division objectives. As of December 21,
2001, we suspended operations in the Call Center Operations Business due to poor
performing contracts. We resumed limited operations during the third quarter of
2002.
(15) 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 was 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 principal and
interest amounted to $59,670 and $63,009 as of December 31, 2001 and 2002,
respectively.
As of December 31, 2001 and 2002, Pro Tech owed $556,142 and $1,064,703,
respectively, to NCT and its subsidiaries, for various research, administrative
and accounting services provided to Pro Tech. See Note 7 - Noncurrent Notes
Payable Due to Affiliates. During 2002, NCT charged Pro Tech approximately
$203,000 for health benefits paid by NCT, approximately $120,000 for labor
provided by NCT employees and approximately $193,000 for Pro Tech's share of
parent company expenses allocated to each subsidiary.
As of January 1, 2001, Pro Tech began participating in the NCT Group, Inc.
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 and 2002, the total amount owed to NCT for benefit claims
was approximately $185,000 and $388,000, respectively, and 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 or 2002.
(16) Major Customers
During the year ended October 31, 2000, two customers accounted for
approximately 34% of net sales. During the two months ended December 31, 2000,
one customer accounted for approximately 35% of net sales. Two customers
accounted for approximately 35% of net sales generated during the year ended
December 31, 2001. Two customers accounted for approximately 38% of net sales
generated during the year ended December 31, 2002.
(17) 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-23
For the two For the
months ended year ended
December 31, December 31,
1999 2000
----------------- ---------------
Net Sales $ 116,716 $ 1,729,875
================= ===============
Gross profit $ 77,838 $ 1,053,455
================= ===============
Loss from operations $ (67,581) $ (738,484)
================= ===============
Net loss $ (68,906) $ (779,342)
================= ===============
Net loss attributable to
common shareholders $ (68,906) $(2,294,794)
================= ===============
Net loss per share $ (0.02) $ (0.20)
================= ===============
Weighted average number
of shares outstanding 4,266,000 11,405,853
================= ===============
(18) Adjustment included in October 2000 financial statements
The October 2000 financial statements include an adjustment to reflect the
allocation of proceeds to multiple equity instruments (Series A preferred stock
and warrants) and to adjust the beneficial conversion feature. The net effect of
the adjustment is to decrease the beneficial conversion feature and the net loss
attributable to common shareholders by $2,444,000 to $1,879,765, or $0.32 per
share to $0.25 per share.
(19) Selected Quarterly Financial Data (Unaudited)
The following tables contain selected quarterly financial data for each quarter
of 2001 and 2002. Pro Tech believes that the following information reflects all
normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter are
not necessarily indicative of results for any future periods.
(Unaudited)
Year Ended December 31, 2001
-------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
------------- -------------- -------------- ----------------- ----------------
Net sales $ 618,021 634,949 462,034 460,302 $ 2,175,306
Gross profit $ 397,484 429,126 272,285 156,284 $ 1,255,179
Loss attributable to common stockholders $ (345,186) (522,176) (839,197) (888,769) $ (2,595,328)
Loss per share - basic and diluted $ (0.01) (0.02) (0.03) (0.02) $ (0.08)
Year Ended December 31, 2002
-------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
------------- -------------- -------------- ----------------- ----------------
Net sales $ 443,796 439,212 407,357 358,584 $ 1,648,949
Gross profit $ 267,424 241,772 198,082 167,355 $ 874,633
Loss attributable to common stockholders $ (586,821) (520,292) (402,020) (11,963,555) $ (13,472,688)
Loss per share - basic and diluted $ (0.02) (0.02) (0.01) (0.36) $ (0.41)
F-24