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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, 2003
/ / 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, 2003, was approximately $53,000 (based upon the last sale
price of $0.01 per share on June 30, 2003, on the National Association of
Securities Dealers Automated Quotation System).
The number of shares outstanding of the registrant's common stock was 33,200,311
as of March 12, 2004.
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 former 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. 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 in February of 2000. We will continue to offer this
headset in our fast food product line for the year 2004.
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 2000.
The Active Series Headset.
The Active Series Headset was introduced in 2000. This headset is designed for
the mobile headset user. Cellular phone users and automobile hands-free kits are
the primary market focus of this product.
The Trinity.
The Trinity was designed for users in noisy environments. Pro Tech completed the
development of this product early in the 2000 calendar year. Unlike other
currently available headsets, the Trinity employs a light (1/2-ounce)
"acoustical ear cup" which completely surrounds the user's ear. The perimeter of
this cup rests lightly in a broad area of contact around the ear, rather than
against or in the ear itself, which we believe will allow the user to wear the
Trinity in comfort for extended periods. Moreover, by enclosing the
4
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 bulky
commercial sound suppressant headsets. 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
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.
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 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, 2003, Pro Tech had an internal sales and
marketing force of 4 employees, and our executive officers and directors.
5
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, 2003, the value of our inventory was $493,555.
Pro Tech believes that its Fort Pierce, Florida facility 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 three largest customers accounted
for approximately 35% of revenues during the fiscal year ended December 31, 2003
and 22% of gross accounts receivable at December 31, 2003. We do not require
collateral or other security to support customer receivables.
As of December 31, 2003,
And for the year then ended
--------------------------------------
Accounts
CUSTOMER Receivable Revenue
------------------------ ---------------- ---------------
Muzak $ 7,413 $ 194,052
3M Corporation 3,105 113,683
McDonalds 16,410 101,611
All Other 93,278 769,189
---------------- ---------------
Total $ 120,206 $ 1,178,535
================ ===============
Pro Tech regularly assesses the realizability of our accounts receivable and
performs a detailed analysis of aged accounts receivable. When quantifying the
realizability of accounts receivable, we take into consideration the value of
past due receivables and the collectibility of such receivables, based on credit
worthiness.
Financial instruments, which potentially subject us to concentration of credit
risk, consist principally of cash and cash equivalents and trade receivables.
Our cash equivalents consist of commercial paper and other investments that are
readily convertible into cash and have original maturities of three months or
less. We maintain our cash and cash equivalents primarily in one bank.
Pro Tech does not have a significant foreign exchange transaction risk because
non-U.S. revenue and purchases are denominated and settled in U.S. dollars.
6
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. Mr. Larkin, Pro Tech's former Chairman, founded Plantronics. We
estimate Plantronics' share of the market to be approximately 48% worldwide.
Plantronics reported net sales from all of its products (including electronic
amplifiers and other headset accessories and services) of approximately $338
million for the fiscal year 2003. 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. Mr. Larkin founded
ACS Wireless. We believe GN Netcom, Inc. has a market share of approximately 20%
worldwide. These companies are well established and have substantially more
technical, financial, marketing, manufacturing and product development resources
than Pro Tech.
Pro Tech believes that in selecting telephone headsets, users primarily consider
price, 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 airline
flight information. We believe that this competition will be more than offset by
increased demand for headsets as voice telecommunication applications expand.
H. Government Contracts
Pro Tech currently is a contract provider of headsets to the Boeing Corporation,
a prime contractor to NASA, for headsets to be used in the international space
station. Government contracts provide for cancellation at the government's sole
discretion, in which event the contractor or subcontractor may recover its
actual costs up to the date of cancellation, plus a specified profit percentage.
Governmental expenditures for defense are subject to the political process and
to rapidly changing world events, either or both of which may result in
significant reductions in such expenditures in the proximate future. Government
contracts or contracts with prime government contractors are not viewed as a
significant part of Pro Tech's business.
I. Environmental Regulation Compliance
Compliance with Federal, state and local provisions regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, does not have any material effect upon the capital expenditures,
earnings or competitive position of Pro Tech.
J. Proprietary Protection
Pro Tech owns one technology patent, which was granted 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, that any patent issued will be
of sufficient scope or strength, 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.
7
Pro Tech also has a license to utilize two types of 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. The licensed
technologies are:
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, 2003, Pro Tech had 10 full-time and 4 part-time employees,
including 5 employees in administration and shipping, 4 in sales and marketing
and 5 in assembly and production. None of our employees are represented by a
collective bargaining unit. We believe our employee relationships are 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. For further information, please call the SEC at 1-800-SEC-0330.
Our SEC filings are also available to the public from the SEC's Website at
"http://www.sec.gov."
ITEM 2. PROPERTIES
Pro Tech's executive, sales and manufacturing facilities occupy approximately
13,000 square feet of space located at 4492 Okeechobee Rd, Fort Pierce, Florida
34947, pursuant to a lease agreement dated March 1, 2001 which expires in
February 2006 and provides for monthly rental of approximately $5,000 increasing
to approximately $8,000 over the five-year term.
ITEM 3. LEGAL PROCEEDINGS
Pro Tech is not party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
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 high and low prices of the common stock as
reported by the NASD's OTC Bulletin Board for each of the fiscal quarters during
the fiscal years ended December 31, 2002 and 2003. The market quotations reflect
inter-dealer prices, without retail mark-up, markdown, or commission and may not
represent actual transactions.
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
Year ended December 31, 2003 High Low
-------------------------------------- ---------- -----------
First Quarter $0.015 $0.005
Second Quarter $0.018 $0.007
Third Quarter $0.015 $0.008
Fourth Quarter $0.018 $0.009
On March 12, 2004, the last reported sale of Pro Tech's common stock as reported
by the NASD OTC Bulletin Board was $0.03. As of March 12, 2004, 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 7 - Preferred Stock Subject to Mandatory
Conversion into a Variable Number of Shares and Note 9 - Capital Stock for a
description of our sales of unregistered securities within the last three fiscal
years.
9
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,
--------------------------- ------------ ---------------------------------------
1999 2000 2000 2001 2002 2003
------------ ------------- ------------ ------------ ------------ -----------
STATEMENTS OF OPERATIONS DATA:
Net sales $ 1,090,551 $ 1,562,484 $ 307,902 $ 2,175,306 $ 1,648,949 $1,178,535
Cost of goods sold 414,931 623,555 129,378 920,127 774,316 364,413
------------ ------------- ------------ ------------ ------------ -----------
Gross profit 675,620 938,929 178,524 1,255,179 874,633 814,122
Selling, general and administrative 893,384 1,275,290 545,586 3,655,711 2,703,425 1,694,363
Impairment charge on intangible assets - - - - 11,500,000 -
Provision for doubtful accounts 3,771 7,990 1,574 9,958 29,800 6,591
------------ ------------- ------------ ------------ ------------ -----------
Loss from operations (221,535) (344,351) (368,636) (2,410,490) (13,358,592) (886,832)
Other income (expense):
Interest income (expense), net 9,181 (31,715) (8,713) (20,262) (51,290) (90,966)
Miscellaneous income 697 1,726 1,029 4,305 5,004 3,352
Loss on disposal of fixed assets (9,408) - - (2,945) - -
------------ ------------- ------------ ------------ ------------ -----------
Loss before income taxes (221,065) (374,340) (376,320) (2,429,392) (13,404,878) (974,446)
Income tax expense (benefit) - - - - - -
Net loss (221,065) (374,340) (376,320) (2,429,392) (13,404,878) (974,446)
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 10,911
------------ ------------- ------------ ------------ ------------ -----------
Net loss attributable to common
stockholders - as previously reported (221,065) (4,323,765) (386,347) (2,595,328) (13,472,688) (985,357)
Adjustment of beneficial conversion (3) - 2,444,000 - - - -
------------ ------------- ------------ ------------ ------------ -----------
Net loss attributable to common
stockholders - as adjusted $(221,065) $(1,879,765) $ (386,347) $(2,595,328) $(13,472,688) $ (985,357)
============ ============= ============ ============ ============= ===========
Basic and diluted net loss per share attributable
to common stockholders - as previously reported (0.05) (0.57) (0.01) (0.08) (0.41) (0.03)
Adjustment of beneficial conversion (3) - 0.32 - - - -
------------ ------------- ------------ ------------ ------------- ----------
Basic and diluted net loss per share attributable
to common stockholders - as adjusted $ (0.05) $ (0.25) $ (0.01) $ (0.08) $ (0.41) $ (0.03)
============ ============= ============ ============ ============= ==========
Weighted average number
of common shares outstanding (1) 4,254,000 7,537,855 28,248,438 32,281,034 33,200,311 33,200,311
============ ============= ============ ============ ============= ==========
December 31,
---------------------------------------------------------------------------------
1999 2000 2000 2001 2002 2003
------------ ------------- ------------ ------------ ------------- ----------
BALANCE SHEET DATA:
Total assets 945,377 18,652,665 18,264,130 17,184,920 4,163,492 3,673,036
Total current liabilities 209,300 662,956 651,313 1,541,386 866,537 1,334,879
Long-term debt 8,089 3,687 3,115 44,632 1,102,931 1,849,949
Accumulated deficit (413,284) (787,624) (1,163,944) (3,593,336) (16,998,214) (17,972,660)
Stockholders' equity (2) 727,988 17,986,022 17,609,702 14,965,464 1,540,586 488,208
Working capital/(deficit) 494,148 1,419,819 1,205,686 (320,525) (19,543) (647,747)
Footnotes:
- ----------
(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) Adjustment to reflect the allocation of proceeds to multiple equity
instruments (Series A preferred stock and warrants) and to adjust the
beneficial conversion feature.
10
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 divisions 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 POLICES
- ---------------------------
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
11
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, 2003 As Compared To The Year Ended December 31,
2002:
Net loss for the year ended December 31, 2003 decreased approximately
$12,430,000, or 93%, compared to the year ended December 31, 2002. This decrease
was due mainly to the recognition of an $11,500,000 intangible assets impairment
charge in 2002. Also included is the total effect in 2003 of a reduction of
approximately $254,000 in selling, general and administrative expenses and a
reduction of approximately $756,000 in depreciation and amortization expense.
Total revenue generated during the year ended December 31, 2003 decreased
approximately $470,000, or 29%, compared to the year ended December 31, 2002.
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, 2003, we sold approximately 35,800 headsets and
headset related products, as compared to approximately 60,500 during the same
period 2002, a 41% decrease.
Revenue from the fast food market decreased approximately $313,000, or 28%, in
2003 as compared to the same period in 2002. Net unit sales of fast food
headsets decreased 51% due mainly to reduced purchases by three of our major
distributors. This decrease was primarily the result of slowed demand from their
customer base. Demand has decreased and we expect it to remain slow as a result
of two factors: (1) the announced closures of several hundred McDonalds
franchises worldwide; and (2) increased market competition from Far East
competitors.
Revenue from the radio market decreased approximately $100,000, or 97%, in 2003
compared to the same period in 2002. After evaluating the revenue and costs of
this market, we determined that it was not profitable for us and decided to exit
this market during 2002.
Revenue from the telephone market remained approximately the same in 2003
compared to the same period in 2002. 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 capital with which 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, 2003 decreased approximately
$410,000, or 53%, compared to the same period in 2002. This decrease was due
mainly to the decrease in sales volume for 2003. In addition, replacement of
headsets in connection with a component failure that we experienced during the
second quarter of 2001 was completed as of September 30, 2002. The number of
units replaced through warranty during the year ended December 31, 2003
decreased by approximately 7,300 compared to the same period in 2002,
representing approximately $54,000 in costs. Although these component failures
had been corrected, Pro Tech continued to honor the warranty associated with
these headsets and repaired or replaced the headsets for customers as needed.
Also contributing to the decrease in cost of goods sold was a $15,000 credit
from a vendor in settlement of disputed charges from prior years.
Gross margin percent increased from 53.0% for the year ended December 31, 2002
to 69.1% for the year ended December 31, 2003. This increase was a result of:
(1) a favorable change in the mix of customers; (2) a decrease in the expenses
incurred to honor warranty replacements; and (3) a $15,000 credit from a vendor,
mentioned above. The change in the mix of customers resulted from the decrease
in sales to our three major distributors. These distributors purchased in large
quantities and, therefore, were given discounted prices resulting in lower
profit margins. We are now selling more to retail customers who do not buy in
large quantities. These customers do not receive discounts, resulting in higher
profit margins.
12
The decrease in expenses related to warranty is a result of fewer headsets being
replaced in connection with the component failure mentioned above.
Selling, general and administrative expenses for the year ended December 31,
2003 decreased approximately $254,000, or 20%, compared to the year ended
December 31, 2002. Starting in 2002 and continuing throughout 2003, 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 and tighter controls over expenditures. The decrease in
expenses was due mainly to a decrease of approximately $292,000 in payroll and
related expenses comprised mainly of a $133,000 decrease in health benefit
expenses and a $121,000 decrease in payroll and payroll taxes reflecting
reductions in force.
We did not have an impairment charge on intangible assets for the year ended
2003 as compared to a charge of $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. We tested the
recoverability of the intangible assets as of December 31, 2003 and determined
that the carrying amount of such assets were less than their fair value. No
impairment charge was necessary for the year ended December 31, 2003.
Interest expense - related party for the year ended December 31, 2003 increased
approximately $35,000, or 168%, compared to the same period in 2002. These
charges were incurred on the outstanding notes payable to NCT Hearing. The
outstanding notes 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, 2003, the balance of the outstanding notes
payable, including interest, was $1,824,540, as compared to $1,064,703 as of
December 31, 2002.
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 an $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
13
actively pursuing new capital investment with which 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 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 were not 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 continued to try to obtain sufficient working
capital to produce the new products we identified and developed that use the
technology included in our intangible assets, we determined that, given our then
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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the current fiscal year ended December 31, 2003, 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 Hearing 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 reduction of work force levels in all
areas of product operations and the institution of tighter controls over all
expenditures. Pro Tech received approximately $278,000 in cash advances during
the first quarter 2004 from NCT Hearing to fund our working capital needs during
2004. Management believes Pro Tech will have sufficient funds to meet
anticipated working capital requirements through December 31, 2004. 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 are seeking and will continue to seek to
raise additional financing.
On June 27, 2003, we were able to roll the $159,938 outstanding note payable to
Westek Electronics, a stockholder, into a new $159,938 note payable with
interest at 8.5% and payment terms of $3,500 due on
14
the last day of each month starting on June 30, 2003 through May 31, 2004 with
the remaining balance due on June 27, 2004.
At December 31, 2003, cash and cash equivalents were $21,193.
The current ratio (current assets to current liabilities) was 0.51 to 1.00 at
December 31, 2003, as compared to 0.98 to 1.00 at December 31, 2002. Pro Tech
had a working capital deficit of $647,747 at December 31, 2003 as opposed to a
deficit of $19,543 at December 31, 2002. This $628,204 increase in working
capital deficit was due mainly to the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
required us to reclassify our Series A and Series B convertible preferred stock
from the equity section to the current liability section on our balance sheet.
The total balance outstanding of our Series A and Series B preferred stock was
$742,459 as of December 31, 2003. Offsetting this increase in current
liabilities was a decrease in our outstanding accounts payable of approximately
$196,000.
Cash flows used in operating activities were $249,444 during the year ended
December 31, 2003. This use of funds was driven primarily by the 2003 generated
net loss of $974,446 and the decrease of approximately $196,000 in accounts
payable. These uses of funds were offset by depreciation and amortization
expense of $338,071, an approximate $454,000 increase in notes payable for
services received, a decrease in accounts receivable of approximately $68,000
and a decrease in inventories of approximately $104,000.
The net cash provided by financing activities was $264,319 during the year ended
December 31, 2003, due mainly to approximately $306,000 in cash received from
NCT Hearing and its affiliates, offset by 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,
2003, and no material commitments are anticipated in the near future.
Contractual Obligations
The impact that our contractual obligations as of December 31, 2003 are expected
to have on our liquidity and cash flow in future periods is as follows:
Payments due by period
----------------------------------------------------------------------
More
Contractual Obligations Less than than 5
Total 1 year 1-3 years 3-5 years years
-------------- ------------ -------------- ---------- ----------
Long-Term Debt $ 1,831,001 $ 2,385 $ 1,828,616 $ - $ -
Capital Leases 36,582 13,109 23,473
Operating Leases 208,671 95,924 112,747 - -
Purchase Obligations - - - - -
Other Long-Term Liabilites - - - - -
-------------- ------------ -------------- ---------- ----------
Total $ 2,076,254 $ 111,418 $ 1,964,836 $ - $ -
============== ============ ============== ========== ==========
Off-Balance Sheet Arrangements
As of December 31, 2003, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
15
ITEM 7A. QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Pro Tech's primary market risk exposures are fluctuations in interest rates and
foreign exchange rates. We are exposed to short-term interest rate risk on
certain debts and trade accounts receivable sales. We do not use derivative
financial instruments to hedge cash flows for such obligations. In the normal
course of business, we employ established policies and procedures to manage
these risks.
Based upon a hypothetical 10% proportionate increase in interest rates from the
average level of interest rates during the last twelve months, and taking into
consideration expected investment positions, commissions paid to selling agents,
growth of new business and the expected borrowing level of variable-rate debt,
the expected effect on net income related to our financial instruments would be
immaterial.
ITEM 8. FINANCIAL STATEMENTS
The Reports of the Independent Auditors, 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, 2002 and 2003 F-3
Statements of Operations for the years ended December 31, 2001; 2002; and 2003 F-4
Statements of Stockholders' Equity for the years ended December 31, 2001; 2002; F-5
and 2003
Statements of Cash Flows for the years ended December 31, 2001; 2002; and 2003 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, 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, 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,
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.
16
ITEM 9A CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Pro Tech's President and the Chief Financial Officer, based on their evaluation
of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this Annual
Report on Form 10-K, have concluded that Pro Tech's disclosure controls and
procedures are effective for ensuring that all material information required to
be disclosed by Pro Tech in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.
(b) Changes in internal controls.
There were no changes in our internal control over financial reporting that
occurred during Pro Tech's last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, Pro Tech's internal control over
financial reporting.
17
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 12,
2004.
Name Age Positions and Offices
------------------------- ------ ----------------------------------------
Keith Larkin 80 Director
Richard Hennessey 44 President, Chief Operating Officer and
Director
Michael J. Parrella 56 Director
Irene Lebovics 51 Chairman of the Board
Cy E. Hammond 49 Director
Mark Melnick 45 Secretary
Debra Kirven 39 Chief Financial Officer and Treasurer
Keith Larkin is the founder and currently serves as a director of Pro Tech. 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 fiscal year 2003 of approximately $338 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 and until November 20, 2003 when he resigned as
Chairman of the Board, but retained his position as director.
Richard Hennessey joined Pro Tech as Director of Marketing in August 1995 and
was appointed Vice President, Marketing on June 10, 1996. On August 4, 1998, Mr.
Hennessey was appointed Secretary and became a director of Pro Tech. On February
2, 1999, Mr. Hennessey was appointed President and Chief Operating Officer of
Pro Tech. On January 1, 2002, Mr. Hennessey resigned from the position of
Secretary but retained the positions of President and Chief Operating Officer.
From 1982 through 1984, Mr. Hennessey was a salesman with the computer sales
division of Lanier Business Products located in Boston, Massachusetts. From 1984
through April 1994, Mr. Hennessey held various new venture sales and sales
management positions with Digital Equipment Corporation.
Michael J. Parrella currently serves as a director of Pro Tech. Mr. Parrella is
Chief Executive Officer and Chairman of the Board of Directors of NCT Group, the
ultimate parent company of Pro Tech, and serves as Chairman of the Board of NCT
Hearing Products, Inc., the direct parent company of Pro Tech. Mr. Parrella was
elected Chairman of the Board of Directors of NCT Group on April 21, 2000, on
which date he relinquished the position of President. From August 1995 to April
21, 2000, Mr. Parrella served as NCT Group's President and Chief Executive
Officer. From November 1994 to July 1995, Mr. Parrella served as Executive Vice
President of NCT Group. Prior to that, from February 1988 until November 1994,
he served as President and Chief Operating Officer of NCT Group. He initially
became a director of NCT Group in 1986. Mr. Parrella also serves as Chief
Executive Officer and Acting President of NCT Audio
18
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 Chairman of the Board 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 and Treasurer 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) Ltd.
Mark Melnick currently serves as Secretary of Pro Tech, the position which he
has held since January 1, 2002. Mr. Melnick is Vice President, General Counsel
and Secretary of NCT Group, Inc., positions he has held since September 2001. He
also serves as Secretary of Distributed Media Corporation, DMC Cinema, Inc., DMC
HealthMedia, Inc., NCT Audio Products, Inc., NCT Hearing Products, Inc., NCT
Medical Systems, Inc., ConnectClearly.com, Inc., Midcore Software, Inc., Artera
Group, Inc., Advancel Logic Corporation, NCT Muffler, Inc., Chaplin Patents
Holding Company, Inc., NCT Far East, Inc. and NCT Video Displays, Inc. From 1989
to 2000, Mr. Melnick was Counsel, Senior Counsel and then Assistant General
Counsel of CBS Cable and its predecessor-in-interest Group W Satellite
Communications (a division of Westinghouse Broadcasting Co.), in the cable
television field. From 1984 to 1988, he was an associate at the law firm of
Stults & Marshall (now known as Balber Pickard Battistoni Maldonado & Van Der
Tuin, PC) in New York, NY. From 1982 to 1984, he was an associate at the law
firm of Seyfarth, Shaw, Fairweather & Geraldson (now known as Seyfarth Shaw LLP)
in New York, NY.
19
Debra Kirven currently serves as Chief Financial Officer and Treasurer of Pro
Tech, positions she has held since February 1, 2002. Ms. Kirven is Assistant
Controller of NCT Group Inc., a position 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 in New Haven, CT.
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 SEC 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, 2003 to December 31, 2003.
Audit Committee Composition - The entire Board of Directors stands as the Audit
Committee for Pro Tech. None of the members of the Audit Committee are deemed to
be independent. Pro Tech is not required to have independent Audit Committee
members as we are not a listed company.
Audit Committee Financial Expert - The Board of Directors has determined that in
its judgment, Mr. Hammond qualifies as an audit committee financial expert under
the Sarbanes-Oxley Act of 2002 and the rules of the SEC.
Code of Ethics - In February 2004, Pro Tech adopted a Code of Ethics (as defined
in Item 406 of Regulation S-K) that applies to our Chief Executive Officer (or
those performing similar functions), as well as any and all Senior Financial
Officers (including our Chief Financial Officer). The Code of Ethics is filed as
Exhibit 14 to this Annual Report on Form 10-K for the fiscal year ended December
31, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid to or
accrued by all persons who served as Chief Executive Officer during the last
calendar year and by each other executive officer receiving in excess of
$100,000 (the "Named Executive Officers") for services rendered to Pro Tech
during the fiscal years ended December 31, 2001; 2002; and 2003.
Securities
Other Underlying All
Name and Annual Options/Warrants Other
Principal Position Year Salary Bonus Compensation SARs(#) Compensation
- -------------------------- ------- ------------ ---------- -------------- ----------------- ---------------
Keith Larkin
CEO through 02/01/02 2001 $ 56,750 - - 540,000 -
Chairman of the Board 2002 $ 7,500 - - 250,000 -
through 11/20/03 2003 $ 4,200 - - - -
Richard Hennessey
President 2001 $ 142,896 (a) - - - -
(Principal Executive 2002 $ 151,667 (a) - - - -
Officer) 2003 $ 149,000 (a) - - - -
Footnote:
- ---------
(a) The 2001 amount includes $21,250 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 accrued but not paid during
2002. The 2003 amount does not include the $62,500 accrued for in 2002, but
does include $87,500 accrued but not paid during 2003. At December 31,
2003, Pro Tech owes Mr. Hennessey a total of $87,500 relating to 2003
compensation.
20
Compensation Arrangements with Certain Officers
- -----------------------------------------------
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 a
director.
Pro Tech does not have a written employment agreement with Richard Hennessey.
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 $4,200 per annum included in the above noted compensation
table.
On November 20, 2003, in connection with Mr. Larkin's resignation as Chairman of
the Board of Directors, this agreement was amended so that all of its provisions
remain in effect as long as Mr. Larkin is a director of Pro Tech.
No other directors of Pro Tech have received any fees for serving as a director.
2003 Aggregated Option and Warrant Exercises and
December 31, 2003 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, 2003 and the unexercised options and warrants held and the value thereof at
that date, by each of Mr. Larkin and Mr. Hennessey.
Number of Shares
Number of Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired and Warrants at And Warrants at
On Value December 31, 2003 December 31, 2003
---------------------------------- ------------------------------
Name Exercise (#) Realized Exercisable (#) Unexercisable (#) Exercisable Unexercisable
- ------------------ ------------ ------------- --------------- ----------------- --------------- -------------
Keith Larkin - - 790,000 - $ - $ -
Richard Hennessey - - 450,000 - $ - $ -
During the fiscal years ended December 31, 2001; 2002; and 2003, neither Mr.
Larkin nor Mr. Hennessey exercised any stock options. The fair market value of
Pro Tech's common stock as of December 31, 2003 was less than the exercise price
for both Mr. Larkin and Mr. Hennessey's stock options. Accordingly, as of
December 31, 2003, Mr. Larkin and Mr. Hennessey's unexercised stock options had
no value as indicated above.
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.
21
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, 150,000 options 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, 200,000 options 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
vested and were exercisable as follows: 100,000 immediately; 50,000 on April 13,
2000; and 50,000 on April 13, 2001. The options expire April 13, 2004.
On November 28, 2000, the Board of Directors authorized the issuance to Pro Tech
employees of options to purchase an aggregate of 500,000 shares of common stock
at an exercise price of $0.4375 per share, the fair market value on the date of
grant. Included in these grants was a grant to Mr. Hennessey to acquire 250,000
shares of common stock. The shares underlying Mr. Hennessey's stock option vest
as follows: 25% (or 62,500 shares) on the date of grant and 25% on each of the
first, second and third anniversaries of the date of grant. The options expire
on November 28, 2007.
On June 1, 2001, the Board of Directors granted options to three employees of
Pro Tech for the purchase of an aggregate of 940,000 shares of common stock,
including an option to Mr. Larkin to acquire 540,000 shares. Mr. Larkin's
options have an exercise price of $0.17 per share, the fair market value on the
date of grant, and vested 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, 2004 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 in the fiscal year ending
December 31, 2003; 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 500,000 (3) 1.3%
Michael J. Parrella - (4) -
Irene Lebovics - (4) -
Cy E. Hammond - (4) -
Debra Kirven 25,000 (5) 0.1%
NCT Hearing Products, Inc. 27,102,174 (6) 81.6%
Alpha Capital Aktiengesellschaft 27,525,288 (7) 45.3%
Zakeni Limited 2,368,708 (8) 6.7%
All Executive Officers and Directors
as a Group (7 persons) 2,000,000 5.7%
22
(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.
(3) Includes shares of common stock from stock option agreements, as follows:
(1) 200,000 shares of common stock underlying stock option agreements, all of
which are presently exercisable and expire on August 13, 2004; (2) 250,000
shares of common stock underlying a stock option agreement, all of which are
presently exercisable and expire on November 28, 2007; and (3) 200,000 shares of
common stock underlying a March 9, 2004 stock option agreement, of which 50,000
are presently exercisable (the 200,000 options will expire on March 9, 2011).
(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) Represents 100,000 shares of common stock from a March 9, 2004 option
agreement, of which 25,000 are presently exercisable (the 100,000 options will
expire on March 9, 2011).
(6) 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.
(7) Alpha Capital Aktiengesellschaft's business address is Pradafant 7, 9490
Furstentums, Vaduz, Lichtenstein. Konrad Ackermann, Director, has voting and
dispositive control of Pro Tech's shares on behalf of Alpha Capital. In addition
to shares owned, includes shares of common stock that Alpha Capital has the
right to acquire pursuant to the exercise of a currently exercisable warrant for
1,000,000 shares. Also includes shares of common stock that Alpha Capital has
the right to acquire pursuant to its right to convert its 500 shares of our
Series B Convertible Preferred Stock for our common stock plus accretion thereon
at 4% per annum through March 12, 2004. Such conversion shares were determined
using 80% of an assumed $0.026 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.
(8) 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, 2004. Such conversion shares were determined using
80% of an assumed $0.026 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.
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees paid or accrued by Pro Tech
for the audit and other services provided by Eisner LLP for the years ended
December 31, 2002 and 2003:
For the Year Ended December 31,
---------------- -- -----------------
2002 2003
---------------- -----------------
Audit Fees $ 57,300 $ 52,500
Audit Related Fees - -
Tax Fees 3,250 3,250
All Other Fees - -
---------------- -----------------
Total $ 60,550 $ 55,750
================ =================
Audit Fees - Represents fees for professional services rendered in connection
with the audit and review of Forms 10-K and all other SEC regulatory filings.
Audit Related Fees - Represents fees for assurance and related services that are
reasonably related to the performance of the audit or review of Forms 10-K and
all other SEC regulatory filings. Pro Tech did not incur any audit related fees
during the years ended December 31, 2002 and 2003.
Tax Fees - Represents fees for professional services rendered in conjunction
with Federal and State tax return preparation and other tax matters.
All Other Fees - Represents fees for professional services other than those
reported above. Pro Tech did not incur any other fees during the years ended
December 31, 2002 and 2003.
Audit Committee Pre-Approval Policy
Pro Tech's Audit Committee adopted an Audit Committee Pre-Approval Policy for
pre-approving all permissible audit and non-audit services performed by Eisner
once the final rules of the Sarbanes-Oxley Act of 2002 pertaining to this issue
became effective on May 6, 2003. For the 2003 audit, the Audit Committee
specifically pre-approved the services performed by Eisner.
24
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, 2002 and 2003
Statements of Operations for the years ended December 31, 2001; 2002;
and 2003
Statements of Stockholders' Equity for the years ended December 31,
2001; 2002; and 2003
Statements of Cash Flows for the years ended December 31, 2001; 2002;
and 2003
Notes to Financial Statements
(2) Financial Statements Schedules- Schedules are omitted as not
applicable or not required
(3) Exhibits including those Incorporated by Reference.
3(a) Articles of Amendment to Articles of Incorporation of Pro Tech
Communications, Inc., as adopted by Pro Tech, which became
effective upon acceptance by the Secretary of State of Florida
on August 5, 2002.
3(b) By-laws of Pro Tech Communications, Inc., as amended to date.
10(a) Exchange Rights and Release Agreement dated April 10, 2003 among
NCT Group, Inc., Pro Tech Communications, Inc., Alpha Capital
Aktiengesellschaft, Austost Anstalt Schaan, Balmore, S.A. and
Libra Finance, S.A., incorporated herein by reference to Exhibit
10 (a) of Pro Tech's Form 10-Q filed on May 14, 2003.
14 Code of Ethics for the CEO and Senior Financial Officers.
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.
31(a) Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 for the quarterly period ended
June 30, 2003.
31(b) Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 for the quarterly period ended
June 30, 2003.
31(c) Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 for the quarterly period ended
September 30, 2003, incorporated herein by reference to Exhibit
31(a) of Pro Tech's Form 10-Q filed on November 18, 2003.
31(d) Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 for the quarterly period ended
September 30, 2003, incorporated herein by reference to Exhibit
31(a) of Pro Tech's Form 10-Q filed on November 18, 2003.
31(e) Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 for the year ended December
31, 2003.
31(f) Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 for the year ended December
31, 2003.
25
32(a) Certification of Form 10-Q for the quarterly period ended March
31, 2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, incorporated
herein by reference to Exhibit 99 of Pro Tech's Form 10-Q filed
on May 14, 2003.
32(b) Certification of Form 10-Q for the quarterly period ended June
30, 2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, incorporated
herein by reference to Exhibit 99 of Pro Tech's Form 10-Q filed
on August 8, 2003.
32(c) Certification of Form 10-Q for the quarterly period ended
September 30, 2003 pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, incorporated herein by reference to Exhibit 32(c) of Pro
Tech's Form 10-Q filed on November 18, 2003.
32(d) Certification of Form 10-K for the year ended December 31, 2003
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On April 4, 2003, Pro Tech filed a report on Form 8-K announcing its
results of operations for the year ended December 31, 2002.
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 30, 2004.
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/ Irene Lebovics Chairman of the Board March 30, 2004
- --------------------------
Irene Lebovics
/s/ Cy E. Hammond Director March 30, 2004
- --------------------------
Cy E. Hammond
/s/ Richard Hennessey Director and President March 30, 2004
- --------------------------
Richard Hennessey
/s/ Keith Larkin Director March 30, 2004
- --------------------------
Keith Larkin
/s/ Michael J. Parrella Director March 30, 2004
- --------------------------
Michael J. Parrella
27
Independent Auditors' Report
Board of Directors and Stockholders
Pro Tech Communications, Inc.
We have audited the accompanying balance sheets of Pro Tech Communications, Inc.
as of December 31, 2003 and 2002 and the related statements of operations,
changes in stockholders' equity and cash flows for each of the years 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 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 enumerated above present fairly, in all
material respects, the financial position of Pro Tech Communications, Inc. as of
December 31, 2003 and 2002 and the results of its operations and its cash flows
for each of the years then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 7 to the financial statements, the Company adopted a new
accounting standard regarding financial instruments with characteristics of both
liabilities and equity and changed its method of accounting for its preferred
stock in 2003, in accordance with Statement of Financial Accounting Standard No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity."
/s/ Eisner LLP
- -----------------------
Eisner LLP
New York, New York
January 30, 2004
With respect to Note 1(a) and last paragraph of Note 10
March 29, 2004
F-1
Independent Auditors' Report
The Board of Directors
Pro Tech Communications, Inc.:
We have audited the balance sheet of Pro Tech Communications, Inc. as of
December 31, 2001 and the related accompanying statements of operations,
stockholders' equity and cash flows for the year then ended. 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 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, 2001, 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.
/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,
----------------------------------
2002 2003
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,624 $ 21,193
Accounts receivable, less allowance for doubtful accounts
of $27,309; and $31,437, respectively 160,961 88,769
Inventories, net of reserves (Note 2) 592,536 493,555
Due from officer/stockholder and employees (Note 14) 63,113 66,044
Other current assets 16,760 17,571
---------------- --------------
Total current assets 846,994 687,132
Property and equipment, net (Note 3) 601,183 449,672
Intangible assets, net of accumulated amortization of
$2,096,677 and $2,277,398, respectively (Note 1) 2,710,815 2,530,094
Other assets 4,500 6,138
---------------- --------------
$ 4,163,492 $ 3,673,036
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 426,976 $ 231,282
Accrued expenses (Note 4) 222,980 195,201
Current portion of capital lease obligations (Note 11) 9,662 10,434
Due to factor (Note 5) 34,165 11,117
Note payable (Note 6) 2,150 2,385
Note payable to stockholder (Note 6) 170,604 142,001
Preferred stock subject to mandatory conversion into
a variable number of shares (Note 7) - 742,459
---------------- --------------
Total current liabilities 866,537 1,334,879
Noncurrent note payable (Note 6) 6,461 4,076
Noncurrent notes payable due to affiliates (Note 8) 1,064,703 1,824,540
Capital lease obligations (Note 11) 31,767 21,333
---------------- --------------
Total liabilities 1,969,468 3,184,828
---------------- --------------
Commitments (Note 11)
Series B redeemable convertible preferred stock (Note 7) 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, $0.01 par value, $1,000 stated
value, authorized 1,500 shares, issued and outstanding 50 shares (Note 7) 54,521 -
Common stock, $.001 par value, authorized 300,000,000 shares,
issued and outstanding 33,200,311 shares 33,200 33,200
Additional paid-in-capital 18,451,079 18,427,668
Accumulated deficit (16,998,214) (17,972,660)
---------------- --------------
Total stockholders' equity 1,540,586 488,208
---------------- --------------
$ 4,163,492 $ 3,673,036
================ ==============
The accompanying notes are an integral part of the financial statements.
F-3
PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
For the Year Ended December 31,
------------------------------------------------
2001 2002 2003
------------- ------------- -------------
Net sales $ 2,175,306 $ 1,648,949 $ 1,178,535
Cost of goods sold 920,127 774,316 364,413
------------- ------------- -------------
Gross profit 1,255,179 874,633 814,122
Selling, general and administrative expenses 2,276,614 1,296,088 1,042,085
Depreciation and amortization 1,052,737 1,093,778 338,071
NCT Hearing and affiliates charges (Note 14) 326,360 313,559 314,207
Impairment charge on intangible assets - 11,500,000 -
Provision for doubtful accounts 9,958 29,800 6,591
------------- ------------- -------------
Loss before other income (expense) (2,410,490) (13,358,592) (886,832)
Other income (expense):
Interest income 4,530 3,109 2,931
Interest expense (24,349) (33,297) (26,353)
Interest expense - NCT Hearing (Note 14) (443) (21,102) (56,455)
Interest expense - convertible preferred stock (Note 7) - - (11,089)
Miscellaneous income, net 4,305 5,004 3,352
Loss on disposal of fixed assets (2,945) - -
------------- ------------- -------------
Net loss $ (2,429,392) $(13,404,878) $ (974,446)
Adjustments attributable to preferred stock (Notes 7 and 9):
Preferred stock beneficial conversion feature $ 79,190 $ 45,810 $ -
Preferred stock embedded dividend requirement 62,661 - -
Preferred stock dividend (accretion) 24,085 22,000 10,911
------------- ------------- -------------
Net loss attributable to common stockholders $ (2,595,328) $(13,472,688) $ (985,357)
============= ============= =============
Basic and diluted net loss per share attributable
to common stockholders $ (0.08) $ (0.41) $ (0.03)
============= ============= =============
Weighted average common shares outstanding -
basic and diluted 32,281,034 33,200,311 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 Additional
Preferred Common Paid in Accumulated
Stock Stock Capital Deficit Total
--------------------- -------------------- ------------- -------------- -------------
Shares Amount Shares Amount
Balance at December 31, 2000 1,500 $ 1,515,452 28,248,438 $ 28,248 $17,229,946 $ (1,163,944) $ 17,609,702
Exchange/conversion of preferred stock (1,450) (1,478,578) 4,951,873 4,952 1,473,626 - -
Issuance costs on sale of Series B
Preferred Stock (Note 7) - - - - (81,408) - (81,408)
Redemption adjustment on Series B
Preferred Stock (Note 7) - - - - (125,000) - (125,000)
Dividend on preferred stock - 15,647 - - (24,085) - (8,438)
Net loss - - - - - (2,429,392) (2,429,392)
--------------------- -------------------- ------------- -------------- -------------
Balance at December 31, 2001 50 52,521 33,200,311 33,200 18,473,079 (3,593,336) 14,965,464
Dividend on preferred stock - 2,000 - - (22,000) - (20,000)
Net loss - - - - - (13,404,878) (13,404,878)
--------------------- -------------------- ------------- -------------- -------------
Balance at December 31, 2002 50 $ 54,521 33,200,311 $ 33,200 $ 18,451,079 $(16,998,214) $ 1,540,586
Dividend on preferred stock 991 - - (10,911) - (9,920)
Series B Preferred Stock waiver of
registration rights (Note 7) - - - - 125,000 - 125,000
Accounting change for adoption of
SFAS No. 150 (Note 7):Series A (50) (55,512) - - (12,500) - (68,012)
Series B - - - - (125,000) - (125,000)
Net loss - - - - - (974,446) (974,446)
--------------------- -------------------- ------------- -------------- -------------
Balance at December 31, 2003 - $ - 33,200,311 $ 33,200 $ 18,427,668 $(17,972,660) $ 488,208
===================== ==================== ============= ============== =============
The accompanying notes are an integral part of the financial statements.
F-5
PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
----------------------------------------------------
2001 2002 2003
-------------- -------------- -------------
Cash flows from operating activities:
Net loss $ (2,429,392) $ (13,404,878) $ (974,446)
Adjustments to reconcile net loss to net
cash used in operating activities:
Note payable issued for services received - 508,561 454,104
Depreciation and amortization 1,052,737 1,093,778 338,071
Impairment charge on intangible assets - 11,500,000 -
Provision for doubtful accounts 9,958 2,524 4,128
Provision for obsolete inventory - 10,000 (5,000)
Interest expense related to preferred stock dividend - - 11,089
Loss on disposal of fixed assets 2,945 - -
Changes in operating assets and liabilities:
Decrease in accounts receivable 192,413 55,949 68,064
(Increase) decrease in inventories, net (295,156) 343,208 103,981
Decrease (increase) in other assets 2,316 (10,683) (3,914)
Increase (decrease) in accounts payable 378,167 (119,941) (195,694)
Increase (decrease) in accrued expenses 101,876 41,071 (26,779)
Increase (decrease) in other liabilities 403,599 (29,865) (23,048)
-------------- -------------- -------------
Net cash used in operating activities $ (580,537) $ (10,276) $ (249,444)
-------------- -------------- -------------
Cash flows from investing activities:
Capital expenditures (543,702) - (4,375)
Proceeds on sale of fixed asset 350 - -
Net change in due from officer/stockholder and employees (4,940) (567) (2,931)
-------------- -------------- -------------
Net cash used in investing activities $ (548,292) $ (567) $ (7,306)
-------------- -------------- -------------
Cash flows from financing activities:
Proceeds from:
Notes payable - NCT Hearing (Note 14) - - 305,733
Sale of preferred stock (net) (Note 7) 500,000 - -
Payment made on:
Notes payable (797) (11,701) (31,752)
Issuance/conversion costs on preferred stock (81,408) - -
Capital lease obligations (18,466) (10,713) (9,662)
-------------- -------------- -------------
Net cash provided by (used in) financing activities $ 399,329 $ (22,414) $ 264,319
-------------- -------------- -------------
Net (decrease) increase in cash and cash equivalents $ (729,500) $ (33,257) $ 7,569
Cash and cash equivalents - beginning of year 776,381 46,881 13,624
-------------- -------------- -------------
Cash and cash equivalents - end of year $ 46,881 $ 13,624 $ 21,193
============== ============== =============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 10,883 $ 26,293 $ 25,353
============== ============== =============
Supplemental disclosures of non-cash investing and financing activities:
During the years ended December 31, 2001 and 2002, Pro Tech acquired assets
under capital leases for $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 years ended December 31, 2001; 2002; and 2003, Pro Tech increased the
carrying value of preferred stock and additional paid-in capital for a
4% dividend totaling $24,085; $22,000; and $10,911, respectively.
During the year ended December 31, 2003, Pro Tech increased the carrying value
of preferred stock and additional paid-in capital by $125,000 due to the
reversal of a redemption penalty on the Series B preferred stock.
During the year ended December 31, 2003, Pro Tech increased the carrying value
of preferred stock and additional paid-in capital by $137,500 due to the
adoption of SFAS No. 150.
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 developing 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, 2003, NCT Hearing owned approximately 81.6% of the
outstanding common stock of Pro Tech.
Pro Tech has experienced recurring net losses from operations since
its inception, aggregating $17,972,660 through December 31, 2003.
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) and its affiliates.
In addition, Pro Tech had negative working capital of $647,747 at
December 31, 2003. Pro Tech has taken steps to reduce its working
capital requirements. These steps include the reduction of workforce
levels in all areas of the products operations and the institution of
tighter controls over all expenditures.
From January 1, 2004 through March 29, 2004, Pro Tech received
approximately $278,000 in cash advances from NCT Hearing to fund our
working capital needs during 2004. 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, 2004.
(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 estimated useful lives of the assets of
15 years. Intangible assets are periodically reviewed for impairment
where the fair value is less than the carrying value. We did not have
an impairment on our intangible asset for the year ended December 31,
2003; however, we had an impairment charge of $11,500,000 for the year
ended December 31, 2002 (see Note 1 (o)). Amortization expense was
$931,857; $931,857; and $180,721 for the years ended December 31,
2001; 2002; and 2003, 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 12 - 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 $42,242; $17,638; and $13,453 for
the years ended December 31, 2001; 2002; and 2003, 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 $71,097; $10,377; and $28,334 for the years
ended December 31, 2001; 2002; and 2003, respectively.
F-8
(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. In
particular, judgment is used in areas such as determining the
allowance for doubtful accounts, adjustments to inventory valuations,
asset impairments and the accrual for warranty expense. 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 ("SFAS") 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:
December 31,
--------------------------------------------------
2001 2002 2003
---------------- -------------- --------------
Warrants 5,500,000 5,500,000 1,000,000
Options 1,187,500 1,235,000 1,285,000
Convertible preferred stock 11,686,646 72,869,875 58,169,135
---------------- -------------- --------------
18,374,146 79,604,875 60,454,135
================ ============== ==============
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 SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure
an amendment to FASB Statement No. 123," and continues to apply
Accounting Principles Board ("APB") Opinion No. 25 and related
interpretations in accounting for our stock-based compensation plans.
No options were issued during the year ended December 31, 2003. No
compensation expense was recorded during the years ended December 31,
2001 and 2002 for the options issued to directors, officers and
employees, in accordance with APB No. 25. Had compensation expense
been
F-9
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 year ended
December 31,
-----------------------------------------------
2001 2002 2003
-------------- -------------- -------------
Net loss attributable to
common stockholders,
as reported $ (2,595,328) $ (13,472,688) $ (985,357)
Stock-based employee costs
based on fair value method,
net of related taxes (188,793) (14,596) (5,022)
-------------- -------------- -------------
Net loss attributable to
common stockholders,
pro forma $ (2,784,121) $ (13,487,284) $ (990,379)
============== ============== =============
Loss per common share:
As reported $ (0.08) $ (0.41) $ (0.03)
============== ============== =============
Pro forma $ (0.09) $ (0.41) $ (0.03)
============== ============== =============
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 year ended
December 31,
---------------------------------
2001 2002
-------------- ----------------
Volatility 100% 100%
Expected life of options 5 to 7 years 7 years
Risk free interest rate 4.25% 3.65%
Dividend yield 0% 0%
There were no options granted during the fiscal year ended December
31, 2003. The weighted average fair value of options granted during
the years ended December 31, 2001 and 2002 was $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 years ended December
31, 2001 and 2003. 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 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 estimated fair
value of the intangible assets. We determined the estimated 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
F-10
convertible preferred stock. The resulting impairment charge of
$11,500,000 is included in the 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. Pro
Tech 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. 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. 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 May 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how a company classifies and measures
certain financial instruments with characteristics of both liabilities
and equity. The provisions of SFAS No. 150 were effective for
financial instruments entered into or modified after May 31, 2003 and
to all other instruments that existed as of the beginning of the first
interim financial reporting period beginning after June 15, 2003. Pro
Tech adopted SFAS No. 150 as of the third quarter 2003. We were
required to reclassify our Series A and Series B convertible preferred
stock from the equity section to the current liability section on our
balance sheet. Adoption of SFAS No. 150 also required us to present
payments to holders of such instruments and related accruals
separately from payments to and interest due to other creditors in our
statements of cash flows and operations. See Note 7 - Preferred Stock
Subject to Mandatory Conversion into a Variable Number of Shares.
(2) Inventory
Inventory consisted of the following:
December 31,
------------------------------------
2002 2003
----------------- -----------------
Finished goods $ 379,089 $ 295,346
Raw materials 196,330 179,179
Work in progress 27,117 24,030
----------------- -----------------
Gross inventory 602,536 498,555
Less: reserve for obsolete inventory 10,000 5,000
----------------- -----------------
Total Inventory $ 592,536 $ 493,555
================= =================
F-11
(3) Property and Equipment, Net
The following is a summary of property and equipment:
December 31,
------------------------------------
2002 2003
----------------- -----------------
Production molds $ 454,076 $ 455,440
Office equipment 146,556 149,568
Production equipment 39,514 39,514
Leased equipment 83,188 83,188
Leasehold improvements 315,050 315,050
Vehicles 12,414 12,414
Marketing displays 16,160 16,160
----------------- -----------------
Total cost 1,066,958 1,071,334
Less accumulated depreciation
and amortization 465,775 621,662
----------------- -----------------
Total Property and equipment, net $ 601,183 $ 449,672
================= =================
Total depreciation and amortization expense, with respect to property and
equipment, was $120,194; $161,219; and $155,887 for the years ended December 31,
2001; 2002; and 2003, respectively. Depreciation expense on assets under capital
leases for the years ended December 31, 2001; 2002; and 2003 was $24,464;
$20,401; and $18,517, respectively.
(4) Accrued Expenses
Accrued expenses consisted of the following:
December 31,
------------------------------------
2002 2003
----------------- -----------------
Accrued payroll and vacation $ 115,070 $ 132,182
Accrued warranty expense 69,486 41,687
Other accrued expenses 38,424 21,332
----------------- -----------------
Total Accrued expenses $ 222,980 $ 195,201
================= =================
(5) Due to Factor
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 4.00% at December 31,
2003. In addition, at December 31, 2003 we had $1,762 in holdback 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, 2003, 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.
F-12
At December 31, 2003, accounts receivable factored under this agreement and
still outstanding were $12,879, of which, $11,117 had been received under the
factoring agreement under the recourse provisions. Total fees incurred under
this arrangement amounted to $13,008; $6,346; and $4,433 during the years ended
December 31, 2001; 2002; and 2003, respectively. Interest expense incurred under
this arrangement amounted to $5,901; $3,393; and $2,285 during the years ended
December 31, 2001; 2002; and 2003, respectively.
(6) Notes Payable and Note Payable to Stockholder
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% (6.3% at
December 31, 2003), through May 13, 2006. The loan is secured by a vehicle with
a net book value of $1,524 at December 31, 2003. As of December 31, 2003, the
balance outstanding was $6,461 and future maturities are: 2004, $2,385; 2005,
$2,646; and 2006 $1,430.
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 March 27, 2002, 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 June
27, 2002, Pro Tech renegotiated this note plus accrued interest into an $180,493
note with interest at 8.5%, due on June 27, 2003. On June 27, 2003, Pro Tech
renegotiated the outstanding amount of this note into a $159,937 note with
interest at 8.5% and payment terms of $3,500 (including interest) due on the
last day of each month starting on June 30, 2003 through May 31, 2004 with the
remaining balance due on June 27, 2004. As of December 31, 2003, the balance of
this note was $142,001.
(7) Preferred Stock Subject to Mandatory Conversion into a Variable Number
of Shares
Series A Convertible Preferred Stock
- ------------------------------------
As of December 31, 2003, Pro Tech had 1,500 shares authorized and 50 shares
issued and outstanding of its Series A Convertible Preferred Stock (Preferred
Stock-A). Each share has a par value of $0.01, and a stated value of $1,000. 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. 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, at
the holder's option, 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%.
Pro Tech, at its option, may redeem up to $50,000 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.
The Preferred Stock-A was covered under the adoption of SFAS No. 150 as of the
beginning of the third quarter 2003. SFAS No. 150 required us to move the
Preferred Stock-A from the equity section to the current liability section on
our balance sheet. In connection with the move from the equity section to the
current liability section, Pro Tech was required to increase the value of the
Preferred Stock-A to reflect the monetary value of the shares required to be
issued upon conversion. The Preferred Stock-A was increased $12,500 with a
corresponding entry to additional paid-in-capital.
F-13
SFAS No. 150 also required us to record any payments or accruals of payments to
holders of such instruments as interest costs. Therefore, as of July 1, 2003,
the dividends accrued to holders of the Preferred Stock-A are recorded as
interest expense in the statement of operations; whereas, previously they were
recorded as a reduction to additional paid-in-capital. Interest expense recorded
for the Preferred Stock-A for the period July 1 through December 31, 2003 was
$1,009. The reduction to additional paid-in-capital for the Preferred Stock-A,
calculated for purposes of determining net loss attributable to common
stockholders, was $15,647 and $2,000 for the years ended December 31, 2001 and
2002, respectively; and $991 for the period January 1 through June 30, 2003.
The Preferred Stock-A is carried on our balance sheet as of December 31, 2003 at
$69,021, which is comprised of the monetary value of the shares of $62,500 plus
the accrued dividends of $6,521. Pro Tech would have had to issue approximately
5 million shares of our common stock if settlement of the stated value of the
Preferred Stock-A had settlement occurred at December 31, 2003. Pro Tech has the
option to settle the accrued dividends in cash or common stock. As of December
31, 2003, settlement in common stock for the accrued dividends on the Preferred
Stock-A would have required issuance of approximately 630,000 shares. There is
no limit on the number of shares that Pro Tech could be required to issue upon
conversion of the Preferred Stock-A. No shares of Preferred Stock-A were
converted or exchanged during the years ended December 31, 2002 and 2003.
Series B Convertible Preferred Stock
- ------------------------------------
As of December 31, 2003, Pro Tech had 500 shares authorized, issued and
outstanding of its Series B Convertible Preferred Stock (Preferred Stock-B).
Each share has a par value of $0.01 and a stated value of $1,000. 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. The shares of
Preferred Stock-B 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, preceding the date of such conversion, less a discount of
20%; or a fixed price of $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 exchange, less a discount of 20%. Any outstanding shares will
be mandatorily converted on March 31, 2006.
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 was recognized 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) and is included in the calculation of net loss attributable to
common stockholders on the statement of operations for the years ended December
31, 2001 and 2002.
As of December 31, 2002, Preferred Stock-B was carried on our balance sheet at
$653,438, which represented 125% of the stated value of the shares, plus the
accrued dividends of $28,438 and was classified as temporary equity rather than
stockholders' equity. The Series B was presented this way because, as of
December 31, 2002, under the terms of the agreements entered into in connection
with the issuance of Preferred Stock-B, the holders of those shares may have had
a right to require Pro Tech to redeem the shares at 125% of the stated value.
Because any such redemption would not be within the sole control of Pro Tech,
and accordingly, treated the shares as temporary equity. On April 10, 2003, Pro
Tech entered into an agreement with the holder of Preferred Stock-B whereby the
holder agreed to waive certain requirements of the Registration Rights Agreement
relating to Preferred Stock-B. This waiver released Pro Tech from the
requirement to register shares of Pro Tech's common stock for the conversion of
Preferred Stock-B. This cancelled the triggering event, which may have placed
the redemption of Preferred Stock-B at the holder's option. With the signing of
this agreement, such redemption was within Pro Tech's control. At June 30, 2003,
Preferred Stock-B was classified within the stockholders' equity section of the
balance sheet and carried at its stated value plus accrued dividends.
F-14
The Preferred Stock-B was covered under the adoption of SFAS No. 150 as of the
beginning of the third quarter 2003. SFAS No. 150 required us to move the
Preferred Stock-B from the equity section to the current liability section on
our balance sheet. In connection with the move from the equity section to the
current liability section, Pro Tech was required to increase the value of the
Preferred Stock-B to reflect the monetary value of the shares required to be
issued upon conversion. The Preferred Stock-B was increased $125,000 with a
corresponding entry to additional paid-in-capital.
SFAS No. 150 also required us to record any payments or accruals of payments to
holders of such instruments as interest costs. Therefore, as of July 1, 2003,
the dividends accrued to holders of the Preferred Stock-B are recorded as
interest expense in the statement of operations; whereas, previously they were
recorded as a reduction to additional paid-in-capital. Interest expense recorded
for the Preferred Stock-B for the year ended December 31, 2003 was $10,080. The
reduction to additional paid-in-capital for the Preferred Stock-B, calculated
for purposes of determining net loss attributable to common stockholders, was
$8,438; $20,000; and $9,920 for the years ended December 31, 2001; 2002; and
2003, respectively.
The Preferred Stock-B is carried on our balance sheet as of December 31, 2003 at
$673,438, which is comprised of the monetary value of the shares of $625,000
plus the accrued dividends of $48,438. Pro Tech would have had to issue
approximately 48 million shares of our common stock if settlement of the stated
value of the Preferred Stock-B had settlement occurred at December 31, 2003. Pro
Tech has the option to settle the accrued dividends in cash or common stock. As
of December 31, 2003, settlement in common stock for the accrued dividends on
the Preferred Stock-B would have required issuance of approximately 5 million
shares. There is no limit on the number of shares that Pro Tech could be
required to issue upon conversion of the Preferred Stock-B. No shares of
Preferred Stock-B were converted or exchanged during the years ended December
31, 2002 and 2003.
(8) Noncurrent Notes Payable Due to Affiliates
As of December 31, 2002, Pro Tech had two outstanding promissory notes payable
to NCT Hearing. Both notes were due on April 1, 2004, bearing interest at prime
(4.25% as of December 31, 2002). The first note was issued for $906,232 on
September 30, 2002, in exchange for the amount due to NCT and its subsidiaries
at September 30, 2002, and had an outstanding balance of $916,437 as of December
31, 2002. The second note was issue for $148,266 on December 31, 2002, in
exchange for the amount due to NCT and its subsidiaries for services provided
and other charges to Pro Tech during the fourth quarter of 2002.
On March 31, 2003, Pro Tech issued a promissory note payable to NCT Hearing for
$291,312, bearing interest at prime, due on April 4, 2004, in exchange for cash
advanced, services provided and other charges to Pro Tech by NCT and its
subsidiaries during the first quarter of 2003.
On June 30, 2003, Pro Tech issued a promissory note payable to NCT Hearing,
bearing interest at prime (4.00% at December 31, 2003) and due on April 1, 2005
in the amount of $1,512,679. This note was issued as consideration for the
rollover of $1,345,811 in principal of all outstanding notes payable by Pro Tech
to NCT Hearing (plus accrued interest of $35,900) as of June 30, 2003, plus
$130,968 for services provided and cash advanced to Pro Tech by NCT and its
subsidiaries during the second quarter 2003. The following notes payable were
outstanding and rolled into the new note payable dated June 30, 2003:
Outstanding Accrued
Original issue date of note: Principal Interest Total
------------- ------------- ------------
September 30, 2002 $ 906,232 $ 29,664 $ 935,896
December 31, 2002 148,267 3,146 151,413
March 31, 2003 291,312 3,090 294,402
------------- ------------- ------------
Total rolled into new note payable $ 1,345,811 $ 35,900 $ 1,381,711
============== ============= ============
As of December 31, 2003, the June 30, 2003 note payable outstanding balance was
$1,543,439.
F-15
On December 31, 2003, Pro Tech issued a $281,101 promissory note payable to NCT
Hearing, bearing interest at prime (4.00% at December 31, 2003) and due on April
1, 2005, in exchange for services provided, cash advanced and other charges to
Pro Tech during the third and fourth quarters of 2003. See Note 14 - Related
Party Transactions.
(9) Capital 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.
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.
As of December 31, 2002 and 2003, $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.
The number of shares of common stock required to be reserved for was 82.4
million at December 31, 2003. 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 for 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 were exercisable at
$0.50 per share and expired on October 28, 2003.
In connection with the Preferred Series-B, we issued a warrant to purchase
1,000,000 shares of our common stock. The warrant is exercisable at $0.13 per
share and expires on July 30, 2004. We have the right to require the warrant
holder to exercise upon a call by Pro Tech under the following conditions: (1)
one-third of the warrant is callable if the closing bid price of the common
stock for each of the previous fifteen days equals or exceeds $0.177 per share
and the average daily trading volume during such period is at least 150,000
shares; (2) two-thirds of the warrant is callable if the closing bid price of
the common stock for each of the previous fifteen days equals or exceeds $0.244
per share and the average daily trading volume during such period is at least
150,000 shares; and (3) the entire warrant is callable if the closing bid price
of the common stock for each of the previous fifteen days equals or exceeds
$0.295 per share and the average daily trading volume during such period is at
least 150,000 shares.
We estimated the fair value of this warrant to be approximately $63,000, using
the following assumptions in applying the Black-Scholes valuation method:
dividend yield of 0%; risk-free interest rates of 4.25%, volatility of 100%, and
an expected life of three years. The $63,000 is included in the calculation of
net loss attributable to common stockholders on the statements of operations for
the year ended December 31, 2001.
The following table summarizes warrants to purchase common stock during the
years ended December 31, 2001; 2002; and 2003:
F-16
December 31, 2001 December 31, 2002 December 31, 2003
---------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------ -------------- ------------- -------------- -------------- --------------
Warrants outstanding,
beginning of year 4,500,000 $ 0.500 5,500,000 $ 0.433 5,500,000 $ 0.433
Warrants granted 1,000,000 0.130 - - - -
Warrants canceled or expired - - - - (4,500,000) 0.500
------------ ------------- --------------
Warrants outstanding,
end of year 5,500,000 $ 0.433 5,500,000 $ 0.433 1,000,000 $ 0.130
============ ============= ==============
As of December 31, 2003, the outstanding warrants have an exercise price of
$0.13 and a remaining contractual life of less than one year.
(10) Stock Option Plans
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 options to purchase shares were granted
to officers and employees, respectively, at an exercise price of $0.375 per
share. The exercise price was the fair market value of a share of common stock
at the date of the grant. Of these, options to purchase 150,000 shares of common
stock were granted to Richard Hennessey and vested as follows: 50,000
immediately; 50,000 on August 4, 1999; and 50,000 on August 4, 2000. The
remaining options vested immediately. All options are exercisable over a
three-year period from the date of vesting. Of the 300,000 options granted on
August 4, 1998, 12,000 were exercised during March and April 2000, total
proceeds received by Pro Tech amounted to $4,560, 188,000 options expired during
the year ended December 31, 2001, 50,000 expired during the year ended December
31, 2002 and 50,000 expired during the year end December 31, 2003. None of these
options remain outstanding at December 31, 2003.
On April 13, 1999, 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 vested and became 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. All 200,000 options are outstanding and exercisable as of December 31,
2003.
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 vested
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. Of these options, 295,000 remain outstanding and exercisable
as of December 31, 2003.
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. All 540,000 options remain
outstanding and exercisable as of December 31, 2003.
F-17
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. The exercise
price of these options was equal to the fair market value of the common stock on
the grant date. In January 2002 employment of these two employees was terminated
and, according to the option agreement, such granted options expired in April
2002.
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. All
250,000 of these options remain outstanding and exercisable as of December 31,
2003.
The following summarizes stock option activity for the years ended December 31,
2001; 2002; and 2003:
December 31, 2001 December 31, 2002 December 31, 2003
--------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------- -------------- ---------- -------------- ---------- --------------
Options outstanding,
beginning of the year 1,528,000 $ 0.440 1,740,000 $ 0.283 1,372,500 $ 0.253
Options granted 940,000 0.170 250,000 0.060 - -
Options exercised - - - - - -
Options expired (728,000) 0.468 (617,500) 0.259 (87,500) 0.402
----------- ----------- -----------
Options outstanding,
end of year 1,740,000 $ 0.283 1,372,500 $ 0.253 1,285,000 $ 0.242
=========== =========== ===========
Options exercisable,
end of year 1,187,500 $ 0.265 1,235,000 $ 0.232 1,285,000 $ 0.242
=========== =========== ===========
As of December 31, 2003, 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 3.8 years. As of December 31, 2003, 28,715,500
options were available for future grants under the 1998 Stock Option Plan.
On March 9, 2004, Pro Tech issued options to officers and employees under the
1998 Stock Option Plan to purchase 635,000 shares of common stock exercisable at
$0.03 per share, the fair market value of the underlying common stock on the
date of grant.
(11) Commitments
Future minimum lease payments under noncancelable operating leases for buildings
and equipment and the present value of future minimum capital lease payments as
of December 31, 2003 are as follows:
F-18
Year ending December 31 Capital Leases Operating Leases
- ----------------------- ----------------- ------------------
2004 $ 13,109 $ 95,924
2005 13,109 96,563
2006 9,992 16,184
2007 373 -
2008 and thereafter - -
----------------- ------------------
Total minimum lease payments 36,583 $ 208,671
==================
Less amount representing interest 4,816
-----------------
Present value of net minimum capital lease payments 31,767
Less current installments 10,434
-----------------
Obligations under capital leases, excluding current installments $ 21,333
=================
Rent expense under lease agreements totaled $127,099, $129,765 and $132,176 for
the years ended December 31, 2001; 2002; and 2003, respectively.
(12) Income Taxes
There was no provision for income taxes for the years ended December 31, 2001;
2002; and 2003 due to operating losses incurred.
Pro Tech had a net deferred tax asset of approximately $6,523,000 and $6,887,000
available to offset future federal income tax at December 31, 2002 and 2003,
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% and Pro Tech's
effective tax rate is due to an increase in the valuation allowance of $364,000.
At December 31, 2003, Pro Tech has net operating loss carryforwards for federal
and state income tax purposes amounting to $8,086,000 and $8,162,000,
respectively, which expire through the year 2023. 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:
F-19
December 31,
------------------------------
2002 2003
-------------- -------------
Accounts receivable principally due to
allowance for doubtful accounts $ 10,000 $ 12,000
Accrued warranty expense 26,000 16,000
Net operating loss carryforwards 2,345,000 3,073,000
Amortization and impairment on intangible assets 4,162,000 3,795,000
Other 1,000 3,000
-------------- -------------
6,544,000 6,899,000
Less valuation allowance 6,523,000 6,887,000
-------------- -------------
Total deferred tax assets 21,000 12,000
-------------- -------------
Property and equipment principally due to
differences in depreciaton 21,000 12,000
-------------- -------------
Total deferred tax liabilities 21,000 12,000
-------------- -------------
Net deferred taxes $ - $ -
============== =============
(13) Business Division Information
During 2001, management identified two new business divisions that were added to
our business focus. These two new identifiable business divisions were: (1)
Telecommunications Systems Integration; and (2) Call Center Operations. At
December 31, 2001; 2002; and 2003 neither of these divisions is a separately
reportable segment in accordance with SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." 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:
F-20
Division
---------------------------------------------------------------------
Product Telecom Systems Call Center Total
Business Integration Operations Divisions
---------------- ---------------- --------------- ----------------
For the year ended December 31, 2001:
Sales to external customers $ 2,001,348 99,376 74,582 $ 2,175,306
Loss before other income (expense) $ (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 before other income (expense) $(13,321,985) (657) (35,950) $(13,358,592)
For the year ended December 31, 2003:
Sales to external customers $ 1,067,430 110,133 972 $ 1,178,535
Loss before other income (expense) $ (856,729) (17,120) (12,983) $ (886,832)
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: The Telecommunications Systems
Integration Business sells and installs 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.
Call Center Operations Business: During 2001, we launched the Call Center
Operations Business. We utilized customer relationship management technologies
and strategies in order to achieve business division objectives. As of December
21, 2001, we suspended operations in the Call Center Operations Business due to
poor performing contracts. We resumed limited operations during the third
quarter of 2002. We continued to develop this business in 2003.
(14) Related Party Transactions
During fiscal year 1996, Pro Tech loaned $28,882 to its Chairman. Outstanding
principal and interest, at 5% per annum, were 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, were due October 19, 2003. Pro Tech did not receive
payment for this note and has begun collection efforts. Outstanding principal
and interest amounted to $63,009 and $66,044 as of December 31, 2002 and 2003,
respectively.
NCT and its affiliates provided certain administrative services including but
not limited to accounting, legal, human resources, employee benefits and
insurance. The costs of these services were allocated to Pro Tech based on
specific identification and, to the extent that such identification was not
practical, on the basis of employees or other methods which management believes
to be a reasonable reflection of the utilization of services provided or the
benefit received by Pro Tech.
F-21
As of December 31, 2002 and 2003, Pro Tech owed $1,064,703 and $1,824,540,
respectively, to NCT and its subsidiaries, for cash advances and various
research, administrative and accounting services provided to Pro Tech. See Note
8 - Noncurrent Notes Payable Due to Affiliates. During 2002, NCT charged Pro
Tech approximately $203,000 for health benefits paid by NCT and its affiliates,
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. During 2003, NCT charged Pro Tech approximately $83,000 for health
benefits paid by NCT and its affiliates, approximately $147,000 for labor
provided by NCT employees and approximately $167,000 for Pro Tech's share of
parent company expenses allocated to each subsidiary. In addition, during 2003
NCT and its subsidiaries provided approximately $306,000 in cash advances to Pro
Tech.
As of January 1, 2001, Pro Tech began participating in the NCT Group, Inc.
Employee Benefits 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 $725,000, while combined individual and family benefit
exposure in each Benefit Plan fiscal year is limited to $450,000. 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, 2002 and 2003, the total amount owed to NCT for benefit claims was
approximately $388,000 and $471,000, 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
years ended December 31, 2001, 2002 and 2003.
(15) Major Customers
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. These two customers
represented approximately 10% of the gross accounts receivable at December 31,
2002. Three customers accounted for approximately 35% of net sales generated
during the year ended December 31, 2003. These three customers represented
approximately 9% of the gross accounts receivable at December 31, 2003.
F-22
(16) Selected Quarterly Financial Data (Unaudited)
The following tables contain selected quarterly financial data for each quarter
of 2002 and 2003. 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, 2002
----------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
------------ ------------ ----------- -------------- -----------------
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)
Year Ended December 31, 2003
----------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
------------ ------------ ----------- -------------- -----------------
Net sales $ 353,537 $ 258,142 $ 324,639 $ 242,217 $ 1,178,535
Gross profit 229,006 192,774 221,656 170,686 814,122
Loss attributable to common stockholders (257,916) (239,887) (188,350) (299,204) (985,357)
Loss per share - basic and diluted (0.01) (0.01) - (0.01) (0.03)
F-23