UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number: 000-28602
Pro Tech Communications, Inc.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-3281593
--------------------------------------- ----------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4492 Okeechobee Rd
Fort Pierce, Florida 34947
----------------------------------------- ----------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (772) 464-5100.
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months(or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on June 28, 2002, was approximately $160,000 (based upon the last
sale price of $0.03 per share on June 28, 2002, on the National Association of
Securities Dealers Automated Quotation System).
1
PART I
ITEM 1. BUSINESS
A. General
Pro Tech Communications, Inc., throughout this document referred to as "Pro
Tech," "we," "our," or "us," was incorporated in 1994 under the laws of the
State of Florida and has its principal executive offices at 4492 Okeechobee Rd,
Fort Pierce, Florida. From its formation on August 30, 1991 to October 31, 1994,
the business was conducted by Pro Tech Systems, a limited partnership organized
under the laws of the State of California. Keith Larkin, the Chairman of the
Board of Pro Tech, was general partner of Pro Tech Systems and there were 12
limited partners in the limited partnership. From August 1991 until June 1993,
the limited partnership was involved in engineering and designing lightweight
telecommunications headsets as well as preliminary marketing efforts for the
products. From June 1993 until October 1994, Pro Tech Systems was engaged in
limited manufacturing and marketing activities for its products. On November 1,
1994, all of the assets of Pro Tech Systems were transferred to Pro Tech as
consideration for the issuance of 2,000,000 shares of our common stock, par
value $.001 per share. These shares were subsequently distributed on a pro rata
basis to each of the partners of the partnership. Effective December 13, 1994,
Pro Tech Systems was formally dissolved. On September 13, 2000, Pro Tech sold
23,702,750 shares of its common stock, representing approximately 83% of
outstanding common stock, to NCT Hearing Products, Inc., herein referred to as
"NCT Hearing," a wholly-owned subsidiary of NCT Group, Inc., herein referred to
as "NCT," in exchange for exclusive rights to certain NCT technologies for use
in lightweight cellular, multimedia and telephony headsets.
Pro Tech operates mainly in the lightweight headset industry. During the fiscal
year ended December 31, 2001, we expanded into the telecommunication integration
business and the call center operations business (see section L. Business
Divisions for further discussion of these operations).
Pro Tech presently designs, develops, manufactures and markets lightweight
telecommunications headsets. Our headsets employ new concepts in advanced
lightweight design. Our marketing strategy involves the sale of our products
directly to the commercial headset market as a replacement for competitors'
products. We presently sell to the commercial headset market comprised of fast
food companies and other large quantity users of headset systems. We have
recently completed development of several other headsets for the telephone user
market including telephone operating companies, government agencies, business
offices, and professional telephone centers. Our products include:
o The ProCom Headset
o The Apollo Headset
o The Apollo Freedom Series Headset
o The Gemini Amplifier (telephone)
o The USB Adapter
o The DSP Intelligent Microphone
o The Manager's Headset
o The A-10 Amplifier (telephone)
o The A-27 Amplifier
o The Active Series Headset
o The Trinity Headset
There are two components to a complete telephone headset. The first is the
headset component that the user wears, consisting of a speaker and a microphone.
The second is the electronic amplifier which is relatively more complex, time
consuming and costly to produce as it requires many variations to interface with
the wide variety of telephone systems in the market and generates higher labor
and material costs. The electronic amplifier also generally offers lower profit
margins than the headset component. As a result, we have outsourced the
production of several amplifiers engineered to our specifications. We will
continue to concentrate our efforts on the production of that portion of the
telephone headset that the user wears.
2
Pro Tech will also continue to concentrate efforts on the production and
distribution of new headsets designed to connect to and interface with various
electronic amplifiers and telephone systems currently in use. We have adopted a
co-engineering product development strategy through the use of joint engineering
agreements with companies with complimentary engineering patents. We project
that this strategy will greatly decrease the product development cycle while
offering far superior products to our customers. We have continued to make
investments in technology and have incurred development costs with respect to
engineering prototypes, pre-production models and field testing of several new
products. Management believes that our investment in technology will result in
the improvement of the functionality, speed and cost of components and products.
B. Industry Background
Designed specifically for air traffic controllers and other aerospace
applications, the first lightweight headsets were intended as a replacement for
the heavy, bulky headsets then in use. Today, while lightweight telephone
headsets continue to be used for such purposes, telephone headsets are
predominantly used as a substitute to telephone handsets. These headsets are
used by a wide variety of customers, including telephone operating companies and
telephone call centers (such as airline reservations, catalog sales and credit
collection operations) and, to a lesser extent, by business persons and other
professionals whose occupations require extensive, though not constant, use of
the telephone. In comparison to speakerphones, telephone headsets provide
greater communication clarity and security. We believe that these advantages
will lead to increased demand for telephone headsets.
Telephone headsets also have other commercial applications, primarily two-way
radio communication systems, such as those used by fast food attendants to
communicate with patrons and other personnel. Personal computer applications for
telephone headsets include audio input and output via voice command, voice
dictation and integrated voice telephone functions.
C. Existing Products
The ProCom.
Pro Tech's initial entry into the lightweight fast food headset market was the
ProCom. Weighing less than 2 ounces, the ProCom is worn over the head by means
of a springsteel wire headband and a cushioned earphone. Attached to the
earphone, which may be worn over either ear, is an adjustable boom, which
connects to the ProCom's microphone. The ProCom headset connects to the wireless
belt-pack system with the use of various plug types offered by the wireless
belt-pack providers and sold to many fast food franchises around the world.
The Apollo.
The Apollo headset is Pro Tech's most advanced, lightweight headset design sold
for use with telephone users in the call center and small office market. It
incorporates the use of advanced microphone and speaker components and is
designed for durability and comfort over long periods. The Apollo headset was
introduced on August 1, 2001 and since then has been sold directly through Pro
Tech's sales force and the Internet. It has also been sold indirectly through
our established distributor base in the United States, Canada and Europe.
The Apollo Freedom Series Headset.
A headset with the exact form factor of the Apollo headset, the Apollo Freedom
Series is made to plug directly into phone systems that already have
amplification built into their existing handset. Through the use of advanced
circuitry, many new phone systems have built-in the added feature of
amplification of sound inside each handset phone, therefore not requiring
another amplifier in order to use a headset with the phone system. The Apollo
Freedom Series headset adapts to all of these newer design phone systems using
sophisticated microphone technology and a direct connect phone cord.
3
The Gemini Amplifier.
Introduced on August 1, 2001, the Gemini amplifier is our latest amplifier. It
is a full feature unit designed to be used in nearly all phone and/or PC phone
configurations in the call center and small office market. The user has full
control of receive and transmit sound levels in addition to being able to work
directly with the latest multi-media configurations employing analog or digital
technologies. This amplifier's circuitry has been awarded a patent by the United
States Patent and Trademark Office. The Gemini amplifier was awarded "Best of
Show" in the category Best Desktop/Agent Productivity Tools at the 12th Annual
Call Center & CRM Solutions Conference & Exposition held in February 2002.
The USB Adapter.
The USB adapter is an adapter that allows the use of an amplifier and headset in
PC phone installations. Several new applications such as Internet Protocol (IP)
telephony, voice recognition and auto attendant allow for the use of telephone
headsets which in most cases improve the performance of the application. The USB
adapter allows the use of our headsets and amplifiers in these new market
niches.
The DSP Intelligent Microphone.
The DSP Intelligent microphone is designed to serve those market niches where
the use of a headset is not wanted although the user still requires the need for
headset functionality such as speech recognition and speech enabling
input/output PC gaming applications. This product allows for the receiving of
sound to be very focused in addition to eliminating all background noise. Pro
Tech is currently directing a portion of our sales and marketing efforts towards
these emerging PC markets.
The Manager's Headset.
The manager's headset is a lightweight over-the-ear fast food headset, which
provides improved comfort to the fast food store manager monitoring drive-thru
activity. It was introduced and favorably received by the marketplace in
February of 2000. We will continue to offer this headset in our fast food
product line for the year 2003.
The A-10 Amplifier.
The A-10 amplifier is the first in a series of multi-line amplifiers being
offered with each of our headsets. It is designed for the small office/home
office market and has been engineered to work with over 90% of all existing
phone systems in the world.
The A-27 Amplifier.
The A-27 amplifier is the first in a series of amplifiers specifically designed
for automatic control distributors or phone systems which use the standard
PJ-237 2-prong plug as their interface. This amplifier will employ noise
suppression technology designed by Pro Tech. We received patent approval for
this technology during fiscal year 2001. The A-27 was introduced into the call
center market in the 2nd quarter of fiscal year 2000.
The Active Series Headset.
The Active Series Headset was introduced in the 2nd quarter of fiscal year 2000.
This headset is designed for the mobile headset user. Cellular phone users and
automobile hands-free kits are the primary market focus of this product.
4
The Trinity.
The Trinity was designed for users in noisy environments. Pro Tech completed the
development of this product early in the 2000 calendar year. Unlike other
currently available headsets, the Trinity employs a light (1/2-ounce)
"acoustical ear cup" which completely surrounds the user's ear. The perimeter of
this cup rests lightly in a broad area of contact around the ear, rather than
against or in the ear itself, which we believe will allow the user to wear the
Trinity in comfort for extended periods. Moreover, by enclosing the ear, the
acoustical ear cup reduces background noise, thereby significantly improving the
clarity and strength of reception from the earphone. The Trinity has been
designed as a comfortable and lightweight alternative to the bulky commercial
sound suppressant headsets, which are presently the only lightweight noise
suppression headsets available to users operating in noisy office environments.
The Trinity headset can be worn in a single ear cup version or dual ear cup
version. Like the ProCom, the Trinity is produced with a choice of adapters
capable of interfacing with the electronic amplifiers and telephone systems of
most major manufacturers.
D. Marketing and Sales
Pro Tech presently intends to market products primarily through our officers and
staff, utilizing industry contacts and calling upon potential purchasers. We
also supplement the marketing efforts of our employees by using electronic
commerce from our web site along with independent sales representatives and
strategic marketing agreements.
The following summarizes Pro Tech's key alliances:
- --------------------------- -------------------- -------------------------------
Date Relationship
Key Marketing Alliances Established Applications
- --------------------------- -------------------- -------------------------------
The McDonald's Corporation April 1995 Aftermarket Fast Food Headsets
Hello Direct April 2000 Marketing Agreement
3M Corporation April 2000 Marketing Agreement
Muzak Corporation July 2000 Marketing Agreement
- --------------------------- -------------------- -------------------------------
Pro Tech markets and will continue to market our headsets directly to the
commercial headset market as a replacement for our competitors' headsets.
Examples of such purchasers include fast food companies and franchisees and
other large quantity users of commercial headset systems. We entered into a
non-binding business relationship agreement with the McDonald's Corporation that
allows us to sell our products on a non-exclusive basis to McDonald's franchises
and company-owned restaurants. Initial test sales to McDonald's and its
franchisees by Pro Tech and Pro Tech Systems included sales to more than 3,500
McDonald's restaurants. Penetration increased to more than 11,000 restaurants
during the fiscal year ending December 31, 2002.
As Pro Tech expands, we will continue to direct marketing and sales efforts
toward: (1) telephone operating companies; (2) telephone system manufacturers;
(3) personal computer manufacturers; and (4) government agencies. To exploit a
developing market for telephone headsets, we have targeted manufacturers of new
telephone systems and other telecommunication equipment that utilize headsets.
We will also supplement the above strategies with joint ventures and marketing
agreements with companies with complementary technologies. Although we presently
intend to sell our products to several large telephone users, there can be no
assurance that we will be successful in such efforts. Other potential large
volume purchasers of headsets are manufacturers of personal computers,
especially when headsets become a standard telephone accessory. In addition, we
plan to market our products to government agencies. Pro Tech's headsets have
been approved for sale to Boeing, a prime contractor of NASA, for use by
astronauts in space travel. To date, we have had minimal sales to Boeing for
prototype headsets. While profits from government contracts are anticipated to
be minimal, such sales enhance the credibility and reputation of the selected
headset and its manufacturer, especially within the telephone industry.
Finally, Pro Tech's direct marketing and sales efforts will be supplemented by
the distribution of products through established channels of distribution. These
include: (1) specialized headset distributors that derive
5
a majority of their revenues from the sale of headsets to both end users and, to
a lesser extent, resellers; and (2) large electronic wholesalers that offer
hundreds of products, including headsets. It is anticipated that a majority of
sales of our headsets to commercial users such as credit card companies and
airlines will be through such distributors.
In addition to marketing our technology through existing marketing alliances as
described above, as of December 31, 2002, Pro Tech had an internal sales and
marketing force of 3 employees, 2 independent sales representative and our
executive officers and directors.
E. Manufacturing
Pro Tech is currently outsourcing nearly all components from several Far East
suppliers who build each component according to Pro Tech's specifications. Pro
Tech will continue to adhere to past cost reduction policies and will be
expanding its outsourced Far East manufacturing operations to support the
current and future projected sales volumes. Pro Tech plans a full migration of
this production capacity from U.S. operations to offshore operations as the
demand for its products increases. An interruption in the supply of a component
for which Pro Tech is unable to readily procure a substitute source of supply
could temporarily result in Pro Tech's inability to deliver products on a timely
basis, which in turn could adversely affect its operations. To date, Pro Tech
has not experienced any shortages; however, in order to meet forecasted customer
requirements, Pro Tech has under contract multiple suppliers for several key
components in order to reduce the risk in a disruption of the supply chain. At
December 31, 2002, the value of our inventory was $592,536.
Pro Tech believes that its Fort Pierce, Florida office presently possesses
sufficient capacity for its current needs. In the event that sales volumes were
to exceed the capabilities of the Fort Pierce location or Pro Tech's supply
chain from the Far East were to be disrupted, Pro Tech would immediately enter
into subcontracting arrangements for products with other third parties. A delay
in establishing such arrangements, if necessary, could adversely affect Pro
Tech's ability to deliver products on a timely basis to its customers, which in
turn could adversely affect Pro Tech's operations. Pro Tech, however, believes
that subcontracting the manufacture of Pro Tech's products could be accomplished
on short notice given the simple design of Pro Tech's products.
F. Concentrations of Credit Risk
Pro Tech sells products and services to distributors and end users in various
industries worldwide. As outlined below, our four largest customers accounted
for approximately 46% of revenues during the fiscal year ended December 31, 2002
and 27% of gross accounts receivable at December 31, 2002. We do not require
collateral or other security to support customer receivables.
As of December 31, 2002,
And for the year then ended
--------------------------------------
Accounts
CUSTOMER Receivable Revenue
----------------------------- ---------------- ------------------
Muzak $ 6,871 $ 483,550
McDonalds 12,754 137,004
Ageis 13,284 70,928
3M Corporation 17,817 69,338
All Other 137,544 888,129
---------------- ------------------
Total $ 188,270 $ 1,648,949
================ ==================
Pro Tech regularly assesses the realizability of our accounts receivable and
performs a detailed analysis of aged accounts receivable. When quantifying the
realizability of accounts receivable, we take into consideration the value of
past due receivables and the collectibility of such receivables, based on credit
worthiness.
6
Financial instruments, which potentially subject us to concentration of credit
risk, consist principally of cash and cash equivalents and trade receivables.
Our cash equivalents consist of commercial paper and other investments that are
readily convertible into cash and have original maturities of three months or
less. We maintain our cash and cash equivalents primarily in one bank.
Pro Tech does not have a significant foreign exchange transaction risk because
non-U.S. revenue and purchases are denominated and settled in U.S. dollars.
G. Competition
The lightweight telephone headset industry is highly competitive and
characterized by a few dominant manufacturers. We are aware of several companies
who manufacture telephone headsets. Primary among our competitors is
Plantronics, Inc., the world's largest manufacturer of lightweight telephone
headsets. Plantronics was founded by Mr. Larkin, Pro Tech's Chairman. We
estimate Plantronics' share of the market to be approximately 46% worldwide.
Plantronics reported net sales from all of its products (including electronic
amplifiers and other headset accessories and services) of approximately $311
million for the fiscal year 2002. Our other major competitor is GN Netcom, Inc.
In 1997, GN NetCom, Inc. purchased UNEX Corporation and ACS Wireless and in
calendar year 2000 announced the purchase of Hello Direct. ACS Wireless was
founded by Mr. Larkin. We believe GN Netcom, Inc. has a market share of
approximately 20% worldwide. These companies are well established and have
substantially more management, technical, financial, marketing, manufacturing
and product development resources than Pro Tech.
Pro Tech believes that in selecting telephone headsets, users primarily consider
price, product quality, reliability, product design and features, and warranty
terms. We believe that our headsets are superior in design and construction, and
substantially lower in price, than the models currently available from our
competitors. However, we cannot assure that our products will be perceived by
users and distributors as providing a competitive advantage over competing
headsets. In addition, we cannot assure that competing technologies will not
become available which are superior, less costly or marketed by better known
companies. Also, certain customers may prefer to do business with companies that
have greater access to resources.
In addition to direct competition from other companies offering lightweight
telephone headsets, Pro Tech may face indirect competition from technological
advances such as interactive voice response systems which require no human
operators for certain applications such as account balance inquiries or airplane
flight information. We believe that this competition will be more than offset by
increased demand for headsets as voice telecommunication applications expand.
H. Government Contracts
Pro Tech currently is a contract provider of headsets to the Boeing Corporation,
a prime contractor to NASA, for headsets to be used in the international space
station. Government contracts provide for cancellation at the government's sole
discretion, in which event the contractor or subcontractor may recover its
actual costs up to the date of cancellation, plus a specified profit percentage.
Governmental expenditures for defense are subject to the political process and
to rapidly changing world events, either or both of which may result in
significant reductions in such expenditures in the proximate future. Government
contracts or contracts with prime government contractors are not viewed as a
significant part of Pro Tech's business.
I. Environmental Regulation Compliance
Compliance with Federal, state and local provisions regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, does not have any material effect upon the capital expenditures,
earnings or competitive position of Pro Tech.
7
J. Proprietary Protection
Pro Tech owns one technology patent which was granted in 2001. We intend to seek
patent protection on our inventions at the appropriate time in the future. The
process of seeking patent protection can be lengthy and expensive, and there can
be no assurance that patents will be issued from any applications or that any
patent issued will be of sufficient scope or strength or provide meaningful
protection or any commercial advantage. Pro Tech may be subjected to, or may
initiate, litigation or patent office interference proceedings, which may
require significant financial and management resources. The failure to obtain
necessary rights or the advent of litigation arising out of any such claims
could have a material adverse effect on our operations.
Pro Tech also has a license to utilize certain patent-protected technologies
(described below) in the area of noise reduction which are owned by NCT, its
ultimate parent company. NCT is highly experienced in noise reduction technology
and has developed headphone, headset and earmuff products incorporating noise
reduction for a wide variety of applications.
Active Noise Reduction ("ANR") processes a correcting signal that is equal to
but opposite from an offending noise. The two sound fields cancel each other to
give a greatly reduced noise level.
ClearSpeech(TM) noise reduction algorithm electronically strips background noise
from speech, even when the noise is in the same frequency band as the speech and
where there is no independent measure of the interfering noise. This is achieved
by noting the unique characteristics of speech as compared to general noise and
adaptively adjusting a multitude of complex filters to let through only those
signal components that represent the wanted speech signal.
Certain of Pro Tech's employees involved in engineering are required to enter
into confidentially agreements as a condition of employment. We do not currently
own any registered trademarks, although we intend to file trademark registration
applications in the future with respect to distinguishing marks.
K. Employees
As of December 31, 2002, Pro Tech had 11 full-time employees, including 5
persons in administration and shipping, 3 persons in sales and marketing and 3
persons in assembly and production. None of our employees are represented by a
collective bargaining unit, and we believe that our relationship with our
employees is good.
L. Business Divisions
Pro Tech operates in three business divisions: headset products,
telecommunication integration, and call center operations. The headset division
encompasses the design, development, manufacturing and marketing of lightweight
headsets for commercial use. The telecommunication integration division was
launched in 2001 to sell and install simple to sophisticated analog, digital and
IP phone systems. The call center operation was launched in 2001 to take
advantage of an expertise in a specialized niche of the medical market. In
December 2001, management suspended call center operations due to poor
performing contracts. Pro Tech reorganized this division and resumed limited
operations during the third quarter 2002. All of these divisions operate
predominantly within the North American geographic area.
M. Available Information
We file annual, quarterly and special reports, proxy statements and other
information with the Securities Exchange Commission, known as the SEC. You may
read and copy any document we file at the SEC's public reference room in
Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference room. Our SEC filings are also available to the public
from the SEC's Website at "http://www.sec.gov."
8
ITEM 2. PROPERTIES
Pro Tech's executive, sales and manufacturing facilities occupy approximately
13,000 square feet of space located at 4492 Okeechobee Rd, Fort Pierce, Florida
34947, pursuant to a lease agreement dated March 1, 2001 which expires in
February 2006 and provides for monthly rental of approximately $5,000 increasing
to approximately $8,000 over the five-year term.
ITEM 3. LEGAL PROCEEDINGS
Pro Tech is not party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Pro Tech's common stock began trading on the NASD OTC Bulletin Board on March
22, 1996. Our stock is currently being traded under the symbol "PCTU." The
following table sets forth the average high and low bid prices of the common
stock as reported by the NASD's OTC Bulletin Board for each of the fiscal
quarters during the fiscal year ended October 31, 2000; the interim two-month
period ended December 31, 2000; and the fiscal years ended December 31, 2001 and
2002. The market quotations reflect inter-dealer prices, without retail mark-up,
markdown, or commission and may not represent actual transactions.
Year ended December 31, 2001 High Low
- ------------------------------------- -------- --------
First Quarter $0.750 $0.281
Second Quarter $0.500 $0.090
Third Quarter $0.180 $0.100
Fourth Quarter $0.130 $0.050
Year ended December 31, 2002 High Low
- ------------------------------------- -------- --------
First Quarter $0.070 $0.040
Second Quarter $0.050 $0.020
Third Quarter $0.035 $0.020
Fourth Quarter $0.021 $0.010
On March 12, 2003, the last reported sale of Pro Tech's common stock as reported
by the NASD OTC Bulletin Board was $0.015. As of March 12, 2003, there were 56
record holders of the common stock, representing approximately 600 beneficial
owners.
Pro Tech has neither declared nor paid any dividends on shares of common stock
since our incorporation in October 1994 and we do not anticipate declaring a
cash dividend in the reasonably foreseeable future. Any decisions as to the
future payment of dividends will depend on our earnings and our financial
position and such other factors as the Board of Directors deems relevant. We
anticipate that we will retain earnings, if any, in order to finance expansion
of our operations.
See Notes to Financial Statements: Note 8 - Series B Redeemable Convertible
Preferred Stock and Note 9 - Capital Stock for a description of our sales of
unregistered securities within the last three fiscal years.
10
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below is derived from the
historical financial statements of Pro Tech. The data set forth below is
qualified in its entirety by and should be read in conjunction with Item 8.
Financial Statements and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations that are included elsewhere in
this document.
For the Year For the Two For the Year
Ended Months Ended Ended
October 31, December 31, December 31,
------------------------------------------- ------------ ------------------------------
1998 1999 2000 2000 2001 2002
------------- ------------ ------------- ------------ -------------- --------------
STATEMENTS OF OPERATIONS DATA:
Net sales $ 1,142,482 $1,090,551 $ 1,562,484 $ 307,902 $ 2,175,306 $ 1,648,949
Cost of goods sold 470,450 414,931 623,555 129,378 920,127 774,316
------------- ------------ ------------- ------------ -------------- --------------
Gross profit 672,032 675,620 938,929 178,524 1,255,179 874,633
Selling, general and administrative 882,385 893,384 1,275,290 545,586 3,655,711 2,703,425
Impairment charge on intangible assets - - - - - 11,500,000
Provision for doubtful accounts 38,835 3,771 7,990 1,574 9,958 29,800
------------- ------------ ------------- ------------ -------------- --------------
Loss from operations (249,188) (221,535) (344,351) (368,636) (2,410,490) (13,358,592)
Other income (expense):
Interest income (expense), net 24,719 9,181 (31,715) (8,713) (20,262) (51,290)
Miscellaneous income 89 697 1,726 1,029 4,305 5,004
Loss on disposal of fixed assets - (9,408) - - (2,945) -
------------- ------------ ------------- ------------ -------------- --------------
Loss before income taxes (224,380) (221,065) (374,340) (376,320) (2,429,392) (13,404,878)
Income tax expense (benefit) (964) - - - - -
------------- ------------ ------------- ------------ -------------- --------------
Net loss (223,416) (221,065) (374,340) (376,320) (2,429,392) (13,904,878)
Less:
Preferred stock beneficial conversion - - 3,569,000 - 79,190 45,810
Preferred stock embedded dividend - - 375,000 - 62,661 -
Dividend accretion on preferred stock - - 5,425 10,027 24,085 22,000
------------- ------------ ------------- ------------ -------------- --------------
Net loss attributable to common
stockholders -
as previously reported (223,416) (221,065) (4,323,765) (386,347) (2,595,328) (13,472,688)
Adjustment of beneficial conversion (3) - - 2,444,000 - - -
------------- ------------ ------------- ------------ -------------- --------------
Net loss attributable to common
stockholders - as adjusted $ (223,416) $ (221,065) (1,879,765) $ (386,347) $(2,595,328) $(13,472,688)
============= ============ ============= ============ ============== ==============
Basic and diluted net loss per share
attributable to common
stockholders - as previously
reported (0.05) (0.05) (0.57) (0.01) (0.08) (0.41)
Adjustment of beneficial conversion (3) - - 0.32 - - -
------------- ------------ ------------- ------------ -------------- --------------
Basic and diluted net loss per share
attributable to commons
stockholders - as adjusted $ (0.05) $ (0.05) $ (0.25) $ (0.01) $ (0.08) $ (0.41)
============= ============ ============= ============ ============== ==============
Weighted average number
of common shares outstanding (1) 4,254,000 4,254,000 7,537,855 28,248,438 32,281,034 33,200,311
============= ============ ============= ============ ============== ==============
October 31, December 31,
------------------------------------------- --------------------------------------------
1998 1999 2000 2000 2001 2002
------------- ------------ ------------- ------------ -------------- --------------
BALANCE SHEET DATA:
Total assets 1,158,898 945,377 18,652,665 18,264,130 17,184,920 4,163,492
Total current liabilities 209,845 209,300 662,956 651,313 1,541,386 866,537
Long-term debt - 8,089 3,687 3,115 44,632 1,102,931
Accumulated deficit (192,219) (413,284) (787,624) (1,163,944) (3,593,336) (16,998,214)
Stockholders' equity(2) 949,053 727,988 17,986,022 17,609,702 14,965,464 1,540,586
Working capital/(deficit) 724,769 494,148 1,419,819 1,205,686 (320,525) (19,543)
(1) Excludes shares issuable upon the exercise of outstanding stock options,
warrants and convertible preferred stock, since their effect would be
antidilutive.
(2) Pro Tech has never declared nor paid cash dividends on common stock.
(3) See Note 18 - Adjustment included in October 2000 financial statements in
our Notes to Financial Statements.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the notes thereto included herein.
Caution Concerning Forward-Looking Statements
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document contains
such "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future
growth in revenues and cash flow. Words such as "anticipates," " estimates,"
"projects," "intends," "plans," "believes," "will be," "will continue," "will
likely result," and words and terms of similar substance used in connection with
any discussion of future operating or financial performance identify such
forward-looking statements. Those forward-looking statements are based on
management's present expectations about future events. As with any projection or
forecast, they are inherently susceptible to uncertainty and changes in
circumstances, and Pro Tech is under no obligation to (and expressly disclaims
any such obligation to) update or alter its forward-looking statements whether
as a result of such changes, new information, future events or otherwise.
In addition, Pro Tech's overall financial strategy, which includes growing
operations, maintaining financial ratios and strengthening our balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions, economic
slowdowns and changes in our plans, strategies and intentions.
Pro Tech operates in a highly competitive and rapidly changing environment and
in business segments that are dependent on our ability to: achieve
profitability; achieve a competitive position in design, development, licensing,
production and distribution of electronic systems; produce a cost effective
product that will gain acceptance in relevant consumer and other product
markets; increase revenues from products; realize funding from product sales to
sustain our current level of operation; introduce, on a timely basis, new
products; maintain satisfactory relations with our customers; attract and retain
key personnel; maintain and expand our strategic alliances; and protect our
know-how and inventions. Pro Tech's actual results could differ materially from
management's expectations because of changes in such factors. New risk factors
can arise and it is not possible for management to predict all such risk
factors, nor can it assess the impact of all such risk factors on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
Investors should also be aware that while Pro Tech might, from time to time,
communicate with securities analysts, it is against our policy to disclose to
them any non-public information or other confidential commercial information.
Accordingly, investors should not assume that Pro Tech agrees with any statement
or report issued by any analyst irrespective of the content of the statement or
report. Furthermore, Pro Tech has a policy against issuing or confirming
financial forecasts or projections issued by others. Thus, to the extent that
reports issued by securities analysts or others contain any projections,
forecasts or opinions, such reports are not the responsibility Pro Tech.
Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. As such, some
accounting policies have a significant impact on amounts reported in the
financial statements. A summary of those significant accounting policies can be
found in Notes to Financial Statements: Note 1 - Organization and Summary of
Significant Accounting Policies. In
12
particular, judgment is used in areas such as determining the allowance for
doubtful accounts, adjustments to inventory valuations, asset impairments and
the accrual for warranty expense.
RESULTS OF OPERATIONS
The Year Ended December 31, 2002 As Compared To The Year Ended December 31,
2001:
Net loss for the year ended December 31, 2002 increased approximately
$10,975,000, or 452%, compared to the year ended December 31, 2001. This
increase was due mainly to the recognition of a $11,500,000 intangible assets
impairment charge. Also included is the net effect of a reduction of
approximately $952,000 in selling, general and administrative expenses, offset
by a decrease of approximately $381,000 in gross profit margin.
Net sales generated during the year ended December 31, 2002 decreased
approximately $526,000, or 24%, compared to the year ended December 31, 2001.
Pro Tech continued the sale of products through distributors, augmenting these
sales with direct sales from our own outbound telemarketing operation. During
the year ended December 31, 2002, we sold a total of 60,540 headsets and headset
related products, as compared to 70,803 during the same period 2001, a 14%
decrease.
Revenues from the fast food market decreased approximately $473,000 in 2002 as
compared to the same period in 2001. Net unit sales of fast food headsets
decreased 23% due mainly to reduced purchases by three of our major
distributors. This decrease was primarily the result of slowed demand from their
customer base. In addition, a portion of this decrease was related to a
component failure issue that we experienced with one of our suppliers during the
second quarter 2001. Although this component issue has been resolved, we
continued to honor our customer agreements by replacing defective headsets,
therefore resulting in fewer new sales to these customers. These replacement
agreements were completed as of September 30, 2002.
Revenues from the radio market decreased approximately $118,000 in 2002 compared
to the same period in 2001. After evaluating the revenues and costs of this
market, we determined that it was not profitable for us and decided to exit this
market during the first quarter of 2002.
Revenues from the telephone market increased approximately $85,000 in 2002
compared to the same period in 2001. We have determined that the telephone
market is the growth market for our products and will focus our resources toward
expanding our presence in that market. We have faced delays in introduction of
new products for this market due to a lack of working capital. We and NCT
Hearing are actively pursuing new investments to utilize the technologies and
other assets available to us to expand and improve our product line for this
market.
Cost of goods sold for the year ended December 31, 2002 decreased approximately
$146,000, or 16%, compared to the same period in 2001. This decrease was due
mainly to the decrease in sales volume for 2002, offset by additional costs
incurred to replace headsets in connection with the component issue mentioned
above.
Gross margin percent decreased from 57.7% for the year ended December 31, 2001
to 53.0% for the year ended December 31, 2002. This decline was a result of an
increase in production costs due to the increase in domestic production to
facilitate smaller production runs, along with the additional cost effect of
replacing headsets in connection with the component issue mentioned above.
Selling, general and administrative expenses for the year ended December 31,
2002 decreased approximately $952,000, or 26%, compared to the year ended
December 31, 2001. In the first quarter 2002, Pro Tech implemented cost savings
to reduce selling, general and administrative expenses. These cost savings
included a reduction of work force in all areas of the products operations,
tighter controls over expenditures and the continued reorganization of the call
center operation. The decrease in expenses was
13
due mainly to a decrease of approximately $636,000 in payroll and related
expenses, combined with a decrease of approximately $253,000 in marketing,
advertising and public relations.
Impairment charge on intangible assets was $11,500,000 for the year ended
December 31, 2002. We are required to test the recoverability of our long-lived
assets (which include our intangible assets) whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. As of
December 31, 2002, we have not been able to exploit the technologies underlying
our intangible assets due to the lack of available working capital during the
fiscal year 2002. Although we and NCT continue to try to obtain sufficient
working capital to produce the new products we have identified and developed
that use the technology included in our intangible assets, we determined that,
given our current situation, recoverability testing was appropriate at December
31, 2002. We determined that the carrying amount of such assets were greater
than their fair value. Using the estimated discounted future cash flows
attributable to the new products utilizing the technology, or the fair value of
the assets, we determined the carrying amount of the assets was impaired by
approximately $11,500,000.
Interest expense for the year ended December 31, 2002 increased approximately
$30,000, or 119%, from the comparable year ended December 31, 2001. This
increase was due to interest charges of approximately $21,000 from NCT Hearing.
These charges were incurred on the outstanding note payable to NCT Hearing. The
outstanding note payable represents amounts owed to NCT Hearing for services
provided to Pro Tech by NCT Hearing and its affiliated companies, as well as
cash advances. As of December 31, 2002, the balance of the outstanding note
payable, including interest, was $1,064,703.
The Year Ended December 31, 2001 As Compared To The Year Ended December 31, 2000
(Unaudited):
Net loss for the year ended December 31, 2001 increased $1,650,050, or 212%,
over the year ended December 31, 2000. This increase is attributed to the
following: (1) Pro Tech was adversely impacted by the September 11, 2001
terrorist attack. We experienced a major reduction in demand for our products
after the attack; therefore, reducing the actual sales gains over the previous
year. Actual revenues for the period September 12 through December 31 decreased
from $584,000 in 2000 to approximately $480,000 in 2001; (2) amortization
expense associated with the September 2000 acquisition of certain intangible
personal property from NCT Hearing increased from approximately $234,000 in 2000
to approximately $933,000 in 2001 due to a full year's amortization; (2) payroll
and related expenses increased approximately $785,000 due to additional
personnel, increased health benefit expenses, and salary increases for the
current year; (3) expenses charged by the parent company including overhead and
specific employee time allocations; and (4) growing competition in Pro Tech's
distributor selling channel in the fast food market causing a deterioration of
gross margins.
Despite the decrease in sales that we attributed to the terrorist attacks, net
sales generated during the year ended December 31, 2001 increased approximately
$445,000, or 26%, over the year ended December 31, 2000. This increase was a
result of two factors: (1) sales from the market introduction of several new
telephone headsets and related communication equipment; and (2) our ability to
continue to recoup fast food headset market share lost during the year ended
1999.
Pro Tech continued the sale of products through distributors, augmenting these
sales with direct sales from our own outbound telemarketing operation. During
the year ended December 31, 2001, we sold a total of 70,803 headsets and headset
related products, as compared to 46,314 headsets during the same 2000 period, a
53% increase. Net unit sales of fast food headsets increased 27% primarily from
the expansion of sales distribution channel previously mentioned. Consistent
with the our objectives, the indirect distribution channel accounted for 88% of
net revenues and 86% of unit volumes versus 77% of net revenues and 78% of unit
volumes in the comparable 2000 period. We successfully maintained our
relationship with the McDonald's Corporation and were selected to be a part of
the McDonald's International Owner Operator's trade show in April 2002. Sales
from outside the fast food market were only $450,660 for the year ended December
31, 2001, as a result of delays in the market introduction of the telephone
product line. These delays were the result of the lack of working capital
required to successfully enter this market. On July 30, 2001, we received a
capital infusion of $500,000 to support this working capital requirement.
14
Gross margin percent decreased 3.2% from the comparable year end period in 2000
as a result of our desire to regain lost market share due to price competition
in the fast food headset market as well as a temporary increase in manufacturing
of certain products here in the U.S.
Selling, general and administrative expenses for the year ended December 31,
2001 increased approximately $1,873,000, or 105%, over the comparable year ended
December 31, 2000. This increase was the result of the following: (1)
amortization expense associated with the 2000 acquisition of certain intangible
personal property from NCT Hearing increased from approximately $234,000 in 2000
to approximately $933,000 in 2001; (2) payroll and related expenses increased
$785,000 for the year ended December 31, 2001 over the comparable 2000 period;
and (3) expenses charged by the parent company including overhead and specific
employee time allocations increased approximately $131,000 over the comparable
2000 period.
We continued to invest in research and development and new product development
for mold designs and component testing. We are also reviewing several possible
alliances with companies that have complimentary products, which could provide
access into several key accounts in the telephone market. Although we intend to
form alliances, there are no formal agreements in place and no assurances that
they will occur in the future.
Interest expense for the year ended December 31, 2001 decreased approximately
$21,000, or 46%, from the comparable year ended December 31, 2000. This decrease
was due to the retirement of approximately $300,000 in loans outstanding in
2000. These loans served as bridge financing to the issuance of 1,500 shares of
Series A Convertible Preferred Stock in September 2000.
The Two Months Ended December 31, 2000 As Compared To The Two Months Ended
December 31, 1999 (Unaudited):
For the two months ended December 31, 2000, Pro Tech realized a net loss of
$376,320 compared to a net loss of $68,906 for the two months ended December 31,
1999. The current reporting period loss was attributed to three factors: (1)
acquisition of certain intangible property from NCT Hearing required
amortization expenses of $155,000 during the two months ended December 31, 2000,
(2) we incurred approximately $84,000 of overhead expense allocation during the
two months ended December 31, 2000 due to acquisition of approximately 83% of
Pro Tech's outstanding common stock by NCT Hearing; and (3) the result of the
growing competition in Pro Tech's distributor selling channel in the fast food
market causing a deterioration of gross margins.
Net sales generated during the two months ended December 31, 2000 increased 163%
to $307,902 from $116,716 for the two months ended December 31, 1999. This
increase in sales was as a result of two factors: (1) our ability to continue to
recoup fast food headset market share lost during the year ended 1999; and (2)
sales from the market introduction of several new telephone headsets and related
communication equipment.
Pro Tech continued the sale of products through distributors, augmenting these
sales with direct sales from our own outbound telemarketing operation. During
the two months ended December 31, 2000, we sold a total of 9,517 headsets, as
compared to 3,548 headsets in the same two-month period in 1999, a 168%
increase. Net unit sales of fast food headsets increased 189% primarily from the
expansion of sales distribution channel previously mentioned. Consistent with
the our objectives, the indirect distribution channel accounted for 77% of net
revenues and 78% of unit volumes versus 70% of net revenues and 64% of unit
volumes in the comparable 1999 two-month period. Sales from outside the fast
food market were only $63,336 for the two months ended December 31, 2000, as a
result of delays in the market introduction of the telephone product line. These
delays were the result of the lack of working capital required to successfully
enter this market. On September 29, 2000, we received a capital infusion of $1.5
million to support this working capital requirement.
15
Gross margin percent decreased 4% from the comparable two-month period in 1999
as a result of our desire to regain lost market share due to price competition
in the fast food headset market as well as an increase in costs related to the
manufacture of certain products here in the U.S.
Selling, general and administrative expenses for the two-month period ended
December 31, 2000 were $561,044 or 182% of revenues versus $145,119 or 124% of
revenues in the comparable 1999 period. This increase was the result of the
following: (1) due to the transaction resulting in the acquisition of the
intangible property from NCT Hearing, we incurred approximately $155,000 of
amortization expense of such intangible property and an allocation of overhead
expense which amounted to approximately $115,000 for the two-month period ended
December 31, 2000; and (2) we increased our marketing and advertising expenses
to $5,088 from $2,482 in the comparable 1999 two-month period as a result of an
increase in expenses in marketing material from the use of an alternative source
along with the decision to increase our attendance at trade shows showing
targeted return on investments.
We continued to invest in research and development and new product development
for mold designs and component testing. We are also reviewing several possible
alliances with companies that have complimentary products, which could provide
access into several key accounts in the telephone market. Although we intend to
form alliances, there are no formal agreements in place and no assurances that
they will occur in the future.
We generated interest income of $721 for the two months ended December 31, 2000
as compared to $1,008 for the comparable 1999 two-month period. The interest
income resulted from investment of the net proceeds from the private placement
of securities into short-term certificates of deposits.
LIQUIDITY AND CAPITAL RESOURCES
During the current fiscal year ended December 31, 2002, we funded working
capital requirements with continued use of our short-term factoring arrangement
and advances from NCT (our ultimate parent company) and its affiliates. In
addition, NCT paid expenses on behalf of Pro Tech, which had been allocated to
them. We have taken steps to reduce our working capital requirements. These
steps include the reorganization of the call center operations, the reduction of
work force levels in all areas of product operations, and the institution of
tighter controls over all expenditures. Subsequent to December 31, 2002, Pro
Tech received over $190,000 in cash advances from NCT to fund our working
capital needs during 2003. Management believes Pro Tech will have sufficient
funds to meet anticipated working capital requirements through December 31,
2003. In order to maximize the potential of the telephone user market and to
enable us to expand into additional markets, including government agencies and
personal computers, we will require additional capital. We will seek to raise
additional financing as a result of our relationship with NCT and NCT Hearing.
On March 27, 2002, we were able to roll the outstanding loan from Westek
Electronics, a stockholder, for $162,750 into a new note for $176,584, which
included accrued interest payable from the old note. The new note became payable
on June 27, 2002. We were able to roll this note plus accrued interest into a
$180,493 note with interest at 8.5% and payment terms of $3,500 due on the last
day of each month starting on August 31, 2002 through May 31, 2003 with the
remaining balance due on June 27, 2003.
At December 31, 2002, cash and cash equivalents were $13,624.
The current ratio (current assets to current liabilities) was .98 to 1.00 at
December 31, 2002, as compared to .79 to 1.00 at December 31, 2001. Pro Tech had
a working capital deficit of $19,543 at December 31, 2002 as opposed to a
deficit of $320,525 at December 31, 2001. This $300,982 decrease in working
capital deficit was due mainly to the exchange of $556,142 of current
liabilities, representing amounts owed to NCT and its subsidiaries as of
December 31, 2001, into noncurrent liabilities in conjunction with the signing
of a secured promissory note due on April 1, 2004. See Notes to Financial
Statements: Note 5 - Other Liabilities and Note 7 - Noncurrent Notes Payable Due
to Affiliates for further details. In addition, we decreased our outstanding
accounts payable by approximately $120,000. Offsetting these decreases in
current liabilities was a decrease in inventories of approximately $353,000.
16
Cash flows used in operating activities was $10,276 during the year ended
December 31, 2002. This use of funds was driven primarily by the 2002 generated
net loss (excluding the $11,5000,000 impairment charge) of $1,904,878 and the
decrease of approximately $120,000 in accounts payable. These uses of funds were
offset by depreciation and amortization expense of $1,093,778, an approximate
$509,000 increase in notes payable for services received; a decrease in accounts
receivable of approximately $56,000 and a decrease in inventories of
approximately $353,000 (including a current provision of $10,000).
The net cash used by financing activities was $22,414 during the year ended
December 31, 2002, due to payments made on notes payable and capital lease
obligations.
Pro Tech has no lines of credit with banks or other lending institutions.
Capital Expenditures
There were no material commitments for capital expenditures as of December 31,
2002, and no material commitments are anticipated in the near future.
ITEM 7A. QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Pro Tech's primary market risk exposures are fluctuations in interest rates and
foreign exchange rates. We are exposed to short-term interest rate risk on
certain debts and trade accounts receivable sales. We do not use derivative
financial instruments to hedge cash flows for such obligations. In the normal
course of business, we employ established policies and procedures to manage
these risks.
Based upon a hypothetical 10% proportionate increase in interest rates from the
average level of interest rates during the last twelve months, and taking into
consideration expected investment positions, commissions paid to selling agents,
growth of new business and the expected borrowing level of variable-rate debt,
the expected effect on net income related to our financial instruments would be
immaterial.
17
ITEM 8. FINANCIAL STATEMENTS
The Reports of the Independent Auditors, Eisner LLP and Morgan, Jacoby, Thurn,
Boyle & Associates, P.A., and the financial statements and accompanying notes
are attached.
Page
-----
Independent Auditors' Report (Eisner LLP) F-1
Independent Auditors' Report (Morgan, Jacoby, Thurn, Boyle & Associates, P.A.) F-2
Balance Sheets as of December 31, 2001 and 2002 F-3
Statements of Operations for the year ended October 31, 2000; the two months
ended December 31, 2000; and the years ended December 31, 2001 and 2002 F-4
Statements of Stockholders' Equity for the year ended October 31, 2000; the two
months ended December 31, 2000; and the years ended December 31, 2001 and 2002 F-5
Statements of Cash Flows for the year ended October 31, 2000; the two months
ended December 31, 2000; and the years ended December 31, 2001 and 2002 F-6
Notes to Financial Statements F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On June 4, 2002, the Company notified its principal independent accountant,
Morgan, Jacoby, Thurn, Boyle & Associates, P.A. ("MJTB") that the auditing
services of MJTB would no longer be required. MJTB's dismissal was approved by
the Pro Tech's Board of Directors.
During Pro Tech's year ended December 31, 2001; the two months ended December
31, 2000; and the years ended October 31, 2000 and 1999, and for the subsequent
interim period, there were no disagreements with MJTB on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement(s), if not resolved to the satisfaction
of MJTB, would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report. The report of MJTB, dated March
1, 2002, on Pro Tech's financial statements as of and for the year ended
December 31, 2001; the two months ended December 31, 2000; and the years ended
October 31, 2000 and 1999, included in Pro Tech's 2001 Annual Report on Form
10-K, did not contain an adverse opinion and was not qualified or modified as to
audit scope or accounting principles.
On June 4, 2002, Pro Tech engaged the accounting firm of Eisner LLP ("Eisner")
as principal independent accountant to audit the financial statements of Pro
Tech for the fiscal year ending December 31, 2002. The engagement was authorized
by Pro Tech's Board of Directors. During the year ended December 31, 2001; the
two months ended December 31, 2000; and the year ended October 31, 2000, and the
subsequent interim period, neither Pro Tech nor any person on Pro Tech's behalf
consulted Eisner regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on Pro Tech's financial statements, except for
consultations regarding consolidation into NCT Group, Inc.'s (Pro Tech's
ultimate parent company) financial statements audited by Eisner.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages, positions and the offices held
by each of the executive officers and directors of Pro Tech as of March 11,
2003.
Name Age Positions and Offices
---------------------- ----- -----------------------------------------------
Keith Larkin 79 Chairman of the Board
Richard Hennessey 43 President, Chief Operating Officer and Director
Michael J. Parrella 55 Director
Irene Lebovics 50 Director
Cy E. Hammond 48 Director
Mark Melnick 44 Secretary
Debra Kirven 38 Chief Financial Officer and Treasurer
Keith Larkin is the founder and Chairman of the Board of Directors of Pro Tech.
He served as the company's Chief Executive Officer and Treasurer from inception
in 1994 until his resignation from these positions on February 1, 2002. Mr.
Larkin's 40-year professional career has been devoted to designing,
manufacturing and marketing his new designs in lightweight telephone headsets.
In 1961, Mr. Larkin founded Plantronics, the current industry leader in
lightweight telephone headsets with annual sales of all its products (including
the electronic amplifier) in 2000 of approximately $320 million. From 1961 until
he sold his interest in 1967, Mr. Larkin served as the President and Chairman of
Plantronics, during which Plantronics established itself as the main source of
lightweight telephone headsets to the telephone industry and provided the
headsets for NASA Mercury, Gemini and Apollo moon flights. In the late 1970's,
Mr. Larkin conceived, developed and patented a new design in headsets to compete
against Plantronics' headsets. With Mr. Larkin as its President, ACS Wireless
attained $1 million monthly sales figures to the telephone market within three
years of operation and replaced Plantronics' headsets on the NASA Space Shuttle.
In 1986, he left ACS Wireless to become involved in Christian children's relief
programs in Haiti and Honduras for a period of three years. From January 1989 to
August 1991, Mr. Larkin served as the President of Advanced Recreational
Technology, Inc., an engineering research and development company owned by Mr.
Larkin. In August 1991, Mr. Larkin founded Pro Tech Systems, a California
limited partnership that he managed as general partner. Pro Tech Systems was
formed to design, manufacture, and market lightweight telephone headsets. Upon
the transfer of all of the assets of Pro Tech Systems to the company in November
1994, Mr. Larkin became the Chairman of the Board of Directors, Chief Executive
Officer, President and Treasurer of Pro Tech, positions which he held until
February 2, 1999, when he resigned as President of Pro Tech then until February
1, 2002, when he resigned as Chief Executive Officer and Treasurer but retained
his position as Chairman of the Board of Directors.
Richard Hennessey joined Pro Tech as Director of Marketing in August 1995 and
was appointed Vice President, Marketing on June 10, 1996. On August 4, 1998, Mr.
Hennessey was appointed Secretary and became a director of Pro Tech. On February
2, 1999, Mr. Hennessey was appointed President and Chief Operating Officer of
Pro Tech. On January 1, 2002, Mr. Hennessey resigned from the position of
Secretary but retained the positions of President and Chief Operating Officer.
From 1982 through 1984, Mr. Hennessey was a salesman with the computer sales
division of Lanier Business Products located in Boston, Massachusetts. From 1984
through April 1994, Mr. Hennessey held various new venture sales and sales
management positions with Digital Equipment Corporation.
Michael J. Parrella currently serves as a director of Pro Tech. Mr. Parrella is
Chief Executive Officer and Chairman of the Board of Directors of NCT Group, the
ultimate parent company of Pro Tech, and serves as Chairman of the Board of NCT
Hearing Products, Inc., the direct parent company of Pro Tech. Mr. Parrella was
elected Chairman of the Board of Directors of NCT Group on April 21, 2000, on
which date he relinquished the position of President. From August 1995 to April
21, 2000, Mr. Parrella served as NCT Group's President and Chief Executive
Officer. From November 1994 to July 1995, Mr. Parrella served as Executive Vice
President of NCT Group. Prior to that, from February 1988 until November 1994,
he
19
served as President and Chief Operating Officer of NCT Group. He initially
became a director of NCT Group in 1986. Mr. Parrella also serves as Chief
Executive Officer and Acting President of NCT Audio Products, Inc., a subsidiary
of NCT Group, a position to which he was elected on September 4, 1997. He became
a director of NCT Audio on August 25, 1998. On January 5, 2001, Mr. Parrella was
elected Acting Chief Executive Officer of Advancel Logic Corporation, a
subsidiary of NCT Group. Mr. Parrella is a director of Advancel and serves as
Chairman of the Board of Distributed Media Corporation, a subsidiary of NCT
Group. Mr. Parrella became a director of subsidiaries acquired directly or
indirectly by NCT Group in 2000, including Midcore Software, Inc. and Pro Tech,
and NCT Group subsidiaries formed in 2000, including DMC Cinema, Inc., NCT Video
Displays, Inc., DMC New York, Inc., ConnectClearly.com, Inc., DMC HealthMedia
Inc., Distributed Media Corporation International Limited, Artera Group, Inc.
and Artera Group International Limited.
Irene Lebovics currently serves as a director of Pro Tech. She is a director and
President of NCT Group and director and President of NCT Hearing Products, Inc.
She served as Secretary of NCT Group from February 1999 until September 2001. On
April 25, 2001, Ms. Lebovics became a director of NCT Group. On January 5, 2000,
Ms. Lebovics was elected Acting Chief Marketing Officer and Secretary of
Advancel Logic Corporation. She joined NCT Group as Vice President of NCT Group
and President of NCT Medical Systems in July 1989. In January 1993, she was
appointed Senior Vice President of NCT Group. In November 1994, Ms. Lebovics
became President of NCT Hearing Products, Inc. In 1999, Ms. Lebovics was
appointed as Executive Vice President of NCT Group, and in April 2000, she
became President of NCT Group. She has held various positions in product
marketing with Bristol-Myers, a consumer products company, and in advertising
with McCaffrey and McCall. In addition to serving as a director of Pro Tech, Ms.
Lebovics serves as a director of various NCT Group subsidiaries as follows: NCT
Hearing Products, Inc., Distributed Media Corporation, ConnectClearly.com, Inc.,
NCT Video Displays, Inc., DMC New York, Inc., Artera Group, Inc., Artera Group
International Limited, Midcore Software, Inc., Advancel Logic Corporation, DMC
HealthMedia Inc., Distributed Media Corporation International Limited and DMC
Cinema, Inc.
Cy E. Hammond currently serves as a director of Pro Tech. He is Senior Vice
President, Chief Financial Officer, Treasurer and Assistant Secretary of NCT. He
joined NCT as Controller in January 1990 and was appointed a Vice President in
February 1994. On September 4, 1997, Mr. Hammond was elected to serve as Acting
Chief Financial Officer, Treasurer and Assistant Secretary of NCT Audio
Products, Inc. On January 5, 2000, he was elected to serve as Acting Chief
Financial Officer, Treasurer and Assistant Secretary for Advancel Logic
Corporation. On August 20, 2002, Mr. Hammond was elected to serve as President
and Treasurer of DMC New York, Inc. He also serves as Treasurer for the
following NCT subsidiaries: Artera Group, Inc., Chaplin Patents Holding Company,
Inc., Distributed Media Corporation, DMC HealthMedia Inc., Midcore Software,
Inc., NCT Far East, Inc., NCT Hearing Products, Inc., NCT Muffler, Inc., and NCT
Video Displays, Inc. During 1989, he was Treasurer and Director of Finance for
Alcolac, Inc., a multinational specialty chemical producer. Prior to 1989 and
from 1973, Mr. Hammond served in several senior finance positions at the
Research Division of W.R. Grace & Co., the last of which included management of
the division's worldwide financial operations. Mr. Hammond also serves as a
director of various NCT subsidiaries, as follows: Artera Group, Inc.,
ConnectClearly.com, Inc., DMC Cinema, Inc., DMC New York, Inc., NCT Video
Displays, Inc., Artera Group International Limited, and Noise Cancellation
Technologies (Europe), Inc.
Mark Melnick currently serves as Secretary of Pro Tech, the position which he
has held since January 1, 2002. Mr. Melnick is Vice President, General Counsel
and Secretary of NCT Group, Inc., positions he has held since September 2001. He
also serves as Secretary of Distributed Media Corporation, DMC Cinema, Inc., DMC
HealthMedia, Inc., NCT Audio Products, Inc., NCT Hearing Products, Inc., NCT
Medical Systems, Inc., ConnectClearly.com, Inc., Midcore Software, Inc., Artera
Group, Inc., Advancel Logic Corporation, NCT Muffler, Inc., Chaplin Patents
Holding Company, Inc., NCT Far East, Inc. and NCT Video Displays, Inc. From 1989
to 2000, Mr. Melnick was Counsel, Senior Counsel and then Assistant General
Counsel of CBS Cable and its predecessor-in-interest Group W Satellite
Communications (a division of Westinghouse Broadcasting Co.), in the cable
television field. From 1984 to 1988, he was an associate at the law firm of
Stults & Marshall (now known as Balber Pickard Battistoni Maldonado & Van
20
Der Tuin) in New York, NY. From 1982 to 1984, he was an associate at the law
firm of Seyfarth, Shaw, Fairweather & Geraldson in New York, NY.
Debra Kirven currently serves as Chief Financial Officer and Treasurer of Pro
Tech, positions that she has held since February 1, 2002. Ms. Kirven is
Assistant Controller of NCT Group Inc., the position which she has held since
November 27, 2000. From 1991 to 2000, Ms. Kirven held various accounting and
finance positions with Southern New England Telecommunications, Inc. in New
Haven, CT. From 1986 to 1991, Ms. Kirven was an accountant and then senior
accountant with Deloitte & Touche.
Section 16(a) of the Securities Exchange Act of 1934 requires Pro Tech's
directors, executive officers and persons who own more than 10% of a registered
class of our equity securities to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership in
the Common Stock. Executive officers, directors and persons who own more than
10% of a registered class of our equity securities are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file with
the SEC.
To Pro Tech's knowledge, based solely on review of the copies of such reports
furnished to us and representations that no other reports were required, Pro
Tech believes that all filing requirements applicable to its officers,
directors, and greater than 10% shareholders were complied with during the
period from January 1, 2002 to December 31, 2002.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid to or
accrued by all persons who served as Chief Executive Officer during the last
calendar year and by each other executive officer receiving in excess of
$100,000 (the "Named Executive Officers") for services rendered to Pro Tech
during the fiscal year ended October 31, 2000; the two months ended December 31,
2000 and the fiscal years ended December 31, 2001 and 2002.
Securities
Other Underlying All
Name and Annual Options/Warrants Other
Principal Position Year Salary Bonus Compensation SARs(#) Compensation
- --------------------------- --------- -------------- --------- --------------- ------------------- -----------------
Keith Larkin
Chairman of the Board 10/31/00 $ 22,500 - - - -
12/31/00 $ 7,500 - - - -
12/31/01 $ 56,750 - - 540,000 -
12/31/02 $ 7,500 - - 250,000 -
Richard Hennessey
President 10/31/00 $ 77,000 - - - -
12/31/00 $ 16,000 - - 250,000 -
12/31/01 $ 142,896 (a) - - - -
12/31/02 $ 151,667 (a) - - - -
(a) The 2001 amount includes $21,250 of salary accrued but not paid during
2001. This amount was paid during 2002. The 2002 amount does not include
the $21,250 accrued for in 2001, but does include $62,500 of salary accrued
but not paid during 2002.
Compensation Arrangements with Certain Officers and Directors
Pro Tech has no set salary obligations to Mr. Larkin for his services for the
current or future fiscal years. However, Mr. Larkin has agreed to assign to Pro
Tech all of his rights, title and interest in and to any and all inventions,
discoveries, developments, improvements, processes, trade secrets, trademark,
copyright and patent rights of which he conceives during his tenure as Chairman
of the Board of Directors.
Pro Tech does not have a written employment agreement with Richard Hennessey.
21
In addition, Messrs. Larkin and Hennessey have been granted stock options under
the 1998 Stock Option Plan as described below.
Compensation of Directors
On February 1, 2002, Pro Tech and Mr. Larkin entered into an agreement regarding
compensation to Mr. Larkin for his services as Chairman of the Board of
Directors of Pro Tech. This agreement provides for the following:
1. Options to purchase 250,000 shares of Pro Tech common stock (described
below)
2. Coverage under the health benefit plans then in effect for employees
of Pro Tech
3. A nominal salary of $4,550 per annum included in the above noted
compensation table.
No other directors of Pro Tech have received any fees for serving as a director.
22
2002 Aggregated Option and Warrant Exercises and
December 31, 2002 Option and Warrant Values
The following table sets forth certain information with respect to the exercise
of options and warrants to purchase common stock during the year ended December
31, 2002 and the unexercised options and warrants held and the value thereof at
that date, by each of Mr. Larkin and Mr. Hennessey.
Number of Shares
Underlying Value of Unexercised
Number of Unexercised Options In-the-Money Options
Shares and Warrants at And Warrants at
Acquired December 31, 2002 December 31, 2002
On Value ---------------------------------------- ----------------------------
Name Exercise (#) Realized Exercisable (#) Unexercisable (#) Exercisable Unexercisable
- ----------------- ---------------- ----------- ------------------- ------------------- ----------- ------------
Keith Larkin - - 790,000 - $ - $ -
Richard Hennessey - - 437,500 62,500 $ - $ -
During the fiscal year ended October 31, 2000; the two months ended December 31,
2000; and the fiscal years ended December 31, 2001 and 2002, neither Mr. Larkin
nor Mr. Hennessey exercised any stock options. The fair market value of Pro
Tech's common stock as of December 31, 2002 was less than the exercise price for
both Mr. Larkin's and Mr. Hennessey's stock options. Accordingly, as of December
31, 2002, Mr. Larkin's and Mr. Hennessey's unexercised stock options had no
value as indicated above.
1996 Stock Option Plan
On April 15, 1996, the Board of Directors adopted the 1996 Stock Option Plan.
The 1996 Plan provided for the grant of options to purchase up to an aggregate
of 590,000 of authorized but unissued shares of common stock (subject to
adjustment in certain cases including stock splits, recapitalizations and
reorganizations) to officers, directors, consultants, and other persons
rendering services to Pro Tech. The 1996 Plan terminated on April 15, 2002. As
of December 31, 2002, there were no options outstanding under this Plan.
1998 Stock Option Plan
On March 5, 1998, the Board of Directors adopted the 1998 Stock Option Plan for
the benefit of directors, officers and employees of and consultants to Pro Tech.
The 1998 Plan originally authorized the issuance of options to purchase up to
500,000 shares of common stock and was increased to 2,000,000 shares of common
stock on August 11, 2000. The authorized shares for this plan was increased to
30,000,000 on April 12, 2002 at Pro Tech's annual meeting of stockholders.
On August 4, 1998, options to purchase 200,000 and 100,000 shares were granted
to officers and employees, respectively, at an exercise price of $0.375 per
share. The exercise price was the fair market value of a share of common stock
at the date of the grant. Of these, options to purchase 150,000 shares of common
stock were granted to Richard Hennessey and vested as follows: 50,000
immediately, 50,000 on August 4, 1999 and 50,000 on August 4, 2000. The
remaining options vested immediately. All options are exercisable over a
three-year period from the date of vesting.
On April 13, 1999, the remaining 1998 Plan options to purchase 200,000 shares of
common stock were granted to Richard Hennessey at an exercise price of $0.38 per
share. The exercise price was greater than the fair market value of a share of
common stock at the date of the grant. The options vest and are exercisable as
follows: 100,000 immediately; 50,000 on April 13, 2000; and 50,000 on April 13,
2001. The options expire April 13, 2004.
On November 28, 2000, the Board of Directors authorized the issuance to Pro Tech
employees of options to purchase an aggregate of 500,000 shares of common stock
at an exercise price of $0.4375 per share, the fair market value on the date of
grant. Included in these grants was a grant to Mr. Hennessey to acquire 250,000
shares of common stock. The shares underlying Mr. Hennessey's stock option vest
as follows:
23
25% (or 62,500 shares) on the date of grant and 25% on each of the first, second
and third anniversaries of the date of grant. The options expire on November 28,
2007.
On June 1, 2001, the Board of Directors granted options to three employees of
Pro Tech for the purchase of an aggregate of 940,000 shares of common stock,
including an option to Mr. Larkin to acquire 540,000 shares. Mr. Larkin's
options have an exercise price of $0.17 per share, the fair market value on the
date of grant, and vest on the date of grant. The options expire on June 1,
2008.
On February 1, 2002, the Board of Directors granted options to Mr. Larkin to
purchase up to 250,000 shares of common stock at an exercise price of $0.06 per
share, the fair market value on the date of grant. The options vested on the
date of grant. The options expire on February 1, 2009.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information concerning the shares of common stock
beneficially owned as of March 12, 2003 by each person who: (1) to the knowledge
of Pro Tech, was the holder of 5% or more of the common stock of Pro Tech as of
such date; (2) serves as a director of Pro Tech; (3) was among the five most
highly compensated executive officers of Pro Tech (including Pro Tech's Chief
Executive Officer) in the fiscal year ending December 31, 2002; and by all
executive officers and directors of Pro Tech as a group. Except as otherwise
noted, each beneficial owner has sole investment and voting power with respect
to the listed shares.
Amount and
Nature of Approximate
Beneficial Percentage
Name of Beneficial Owner Ownership (1) Of Class (1)
-------------------------------------- --------------------- ---------------
Keith Larkin 1,550,000 (2) 4.5%
Richard Hennessey 437,500 (3) 1.3%
Michael J. Parrella - (4) -
Irene Lebovics - (4) -
Cy E. Hammond - (4) -
NCT Hearing Products, Inc. 27,102,174 (5) 81.6%
Alpha Capital Aktiengesellschaft 67,458,985 (6) 67.0%
Zakeni Limited 9,105,535 (7) 21.5%
All Executive Officers and Directors
as a Group (7 persons) 1,987,500 5.7%
(1) Assumes the exercise of currently exercisable options or warrants to
purchase shares of common stock and the conversion of convertible
securities. The percentage of class ownership is calculated separately for
each person based on the assumption that the person listed on the table has
exercised all options and warrants currently exercisable by that person and
converted the convertible securities held by that person, but that no other
holder of options or warrants has exercised such options or warrants or
converted such convertible securities.
(2) Includes 790,000 shares of common stock underlying stock options that are
presently exercisable. 540,000 of such stock options are exercisable at
$0.17 per share and expire on June 1, 2008; 250,000 of such stock options
are exercisable at $0.06 per share and expire on February 1, 2009. Also
includes 240,000 shares of common stock owned by The Seek Foundation, an
organization described in Section 501(c)(3) of the Internal Revenue Code of
1954, as amended. The directors of such organization are Keith Larkin and
his wife, Cynthia Larkin. Excludes 40,000 shares held by Westek
Electronics, a company controlled by Mr. Larkin's son and 400 shares held
by Mr. Larkin's grandchildren, shares over which Mr. Larkin disclaims
beneficial ownership.
24
(3) Includes shares of common stock from stock option agreements, as follows:
(1) 250,000 shares of common stock underlying stock option agreements, all
of which are presently exercisable (of such options, 50,000 expire on
August 4, 2003 and 200,000 expire on August 13, 2004); and (2) 250,000
shares of common stock underlying a stock option agreement, of which
187,500 are presently exercisable (the 250,000 options expire on November
28, 2007).
(4) Messrs. Parrella and Hammond, and Ms. Lebovics are officers of, and Mr.
Parrella and Ms. Lebovics serve as directors of, NCT Group. NCT Hearing is
a wholly-owned subsidiary of NCT Group. Mr. Parrella and Ms. Lebovics are
directors of NCT Hearing and disclaim beneficial ownership in respect of
Pro Tech's common stock held by NCT Hearing.
(5) The address of NCT Hearing Products, Inc. is 20 Ketchum Street, Westport,
Connecticut 06880. Mr. Parrella, Chairman of the Board of NCT Hearing
Products, Inc., has voting and dispositive control over Pro Tech shares on
behalf of NCT Hearing.
(6) Alpha Capital Aktiengesellschaft's business address is Pradafant 7, 9490
Furstentums, Vaduz, Lichtenstein. Konrad Ackermann, Director, has voting
and dispositive control of Pro Tech's shares on behalf of Alpha Capital. In
addition to shares owned, includes shares of common stock that Alpha
Capital has the right to acquire pursuant to the exercise of a currently
exercisable warrant for 1,000,000 shares. Also includes shares of common
stock that Alpha Capital has the right to acquire pursuant to its right to
convert its 500 shares of our Series B Convertible Preferred Stock for our
common stock plus accretion thereon at 4% per annum through March 12, 2003.
Such conversion shares were determined using 80% of an assumed $0.01 price
per share five-day average closing bid price of the 15-day trading period
immediately preceding the assumed conversion. Pursuant to a contractual
restriction between Pro Tech and Alpha Capital, Alpha Capital is prohibited
from holding in excess of 4.99% of our common stock at any given time,
subject to certain exceptions.
(7) Includes shares of common stock that Zakeni Limited has the right to
acquire pursuant to the exercise of a currently exercisable warrant for
2,250,000 shares. Also includes shares of common stock that Zakeni Limited
has the right to acquire pursuant to its right to convert its 50 shares of
Pro Tech Series A Convertible Preferred Stock for our common stock plus
accretion thereon at 4% per annum through March 12, 2003. Such conversion
shares were determined using 80% of an assumed $0.01 price per share
five-day average closing bid price of the 15-day trading period immediately
preceding the assumed conversion. The business address of Zakeni Limited is
620 Wilson Avenue, Suite 501, Toronto, Ontario, Canada MSK 1Z3. Sheldon
Salcman, Vice President, has voting and dispositive control of Pro Tech's
shares on behalf of Zakeni Limited.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14. CONTROLS AND PROCEDURES.
Pro Tech's President and the Chief Financial Officer, conducted an evaluation of
the effectiveness of Pro Tech's disclosure controls and procedures (as defined
in Exchange Act Rule 13a-14 and 15(d)-14) within 90 days of the filing of this
report. Based on that evaluation, the President and the Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this annual report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the President and the Chief Financial
Officer completed their evaluation.
25
PART IV
ITEM 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K.
(a) (1) Financial Statements. The following financial statements are filed as
part of this Form 10-K.
Independent Auditors' Report (Eisner LLP)
Independent Auditors' Report (Morgan, Jacoby, Thurn, Boyle & Associates,
P.A.)
Balance Sheets as of December 31, 2001 and 2002
Statements of Operations for the year ended October 31, 2000; for the two
months ended December 31, 2000; and for the years ended December 31, 2001
and 2002
Statements of Stockholders' Equity for the year ended October 31, 2000; for
the two months ended December 31, 2000; and for the years ended December
31, 2001 and 2002
Statements of Cash Flows for the year ended October 31, 2000; for the two
months ended December 31, 2000; and for the years ended December 31, 2001
and 2002
Notes to Financial Statements
(2) Financial Statements Schedules- Schedules are omitted as not
applicable or not required
(3) Exhibits including those Incorporated by Reference.
10 (a) *Stock Option Agreement, dated February 1, 2002, between the
Company and Keith Larkin, incorporated herein by reference to
exhibit 10(a) of Pro Tech's Form 10-Q filed on May 13, 2002.
16 Change in certifying accountants, dated June 4, 2002,
incorporated herein by reference to Pro Tech's current report on
Form 8-K filed on June 7, 2002.
99 (a) Certification of Form 10-K for the fiscal year ended December
31, 2002 pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
On June 7, 2002, the company filed a report on Form 8-K, dated June 4, 2002
announcing a change in independent accountants.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 31, 2003.
PRO TECH COMMUNICATIONS, INC.
(Registrant)
By: /s/ RICHARD HENNESSEY
_______________________________________
Richard Hennessey, President
By: /s/ DEBRA KIRVEN
_______________________________________
Debra Kirven, Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signature Capacity Date
---------------------------------------- ----------------------------------------------------------------------------------
/s/ RICHARD HENNESSEY Director and President March 31, 2003
----------------------------------------
Richard Hennessey
/s/ KEITH LARKIN Chairman of the Board March 31, 2003
----------------------------------------
Keith Larkin
/s/ MICHAEL J. PARRELLA Director March 31, 2003
----------------------------------------
Michael J. Parrella
/s/ CY E. HAMMOND Director March 31, 2003
----------------------------------------
Cy E. Hammond
/s/ IRENE LEBOVICS Director March 31, 2003
----------------------------------------
Irene Lebovics
27
CERTIFICATION OF PRESIDENT (Principal Executive Officer)
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard Hennessey, certify that:
1. I have reviewed this annual report on Form 10-K of Pro Tech Communications,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and c) presented in this
annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ RICHARD HENNESSEY
-----------------------------------------
Richard Hennessey
President (Principal Executive Officer)
28
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Debra Kirven, certify that:
1. I have reviewed this annual report on Form 10-K of Pro Tech Communications,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ DEBRA KIRVEN
------------------------
Debra Kirven
Chief Financial Officer
29
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Pro Tech Communications, Inc.
We have audited the accompanying balance sheet of Pro Tech Communications, Inc.
as of December 31, 2002 and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pro Tech Communications, Inc.
as of December 31, 2002 and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
Eisner LLP
New York, New York
January 31, 2003
With respect to Note 1(a)
March 31, 2003
F-1
Independent Auditors' Report
The Board of Directors
Pro Tech Communications, Inc.:
We have audited the accompanying balance sheet of Pro Tech Communications, Inc.
as of December 31, 2001 and the related statements of operations, stockholders'
equity and cash flows for the year ended October 31, 2000; for the two months
ended December 31, 2000; and for the year ended December 31, 2001. These
financial statements are the responsibility of Pro Tech's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pro Tech Communications, Inc.
as of December 31, 2001, and the results of its operations and its cash flows
for the year ended October 31, 2000; for the two months ended December 31, 2000;
and for the year ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Morgan, Jacoby, Thurn, Boyle & Associates, P.A.
- -----------------------------------------------------
Morgan, Jacoby, Thurn, Boyle & Associates, P.A.
Vero Beach, Florida
March 1, 2002
F-2
PRO TECH COMMUNICATIONS, INC.
BALANCE SHEETS
December 31,
---------------------------------------
2001 2002
------------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 46,881 $ 13,624
Accounts receivable, less allowance for doubtful accounts
of $24,784; and $27,309, respectively 219,434 160,961
Inventories, net of reserves (Note 2) 945,744 592,536
Due from officer/stockholder and employees 2,876 63,113
Other current assets 5,926 16,760
------------------ ----------------
Total current assets 1,220,861 846,994
Property and equipment, net (Note 3) 756,365 601,183
Intangible assets (at adjusted cost for 2002),
net of accumulated amortization of
$1,164,821 and $2,096,677, respectively (Note 1) 15,142,671 2,710,815
Due from officer/stockholder 59,670 -
Other assets 5,353 4,500
------------------ ----------------
$ 17,184,920 $ 4,163,492
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 546,917 $ 426,976
Accrued expenses (Note 4) 199,526 222,980
Current portion of capital lease obligations (Note 12) 10,083 9,662
Due to factor (Note 11) 64,030 34,165
Other liabilities due to affiliates (Notes 5 and 7) 556,142 -
Notes payable (Note 6) 1,938 2,150
Notes payable to stockholder (Note 6) 162,750 170,604
------------------ ----------------
Total current liabilities 1,541,386 866,537
Noncurrent notes payable (Note 6) 8,611 6,461
Noncurrent notes payable due to affiliates (Note 7) - 1,064,703
Capital lease obligations (Note 12) 36,021 31,767
------------------ ----------------
Total liabilities 1,586,018 1,969,468
------------------ ----------------
Commitments (Note 12)
Series B redeemable convertible preferred stock, $.01 par value, $1,000
stated value, authorized, issued and outstanding 500 shares (Note 8) 633,438 653,438
------------------ ----------------
Stockholders' equity (Notes 9 and 10):
Preferred stock, $.01 par value, authorized 998,000 shares, none
issued and outstanding - -
Series A convertible preferred stock, $.01 par value, $1,000 stated
value, authorized 1,500 shares, issued and outstanding 50 shares 52,521 54,521
Common stock, $.001 par value, authorized 40,000,000 and 300,000,000
shares, respectively; issued and outstanding 33,200,311 shares 33,200 33,200
Additional paid-in-capital