As filed with the Securities and Exchange Commission on
November 3, 2000 Registration No. __________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM S-1 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
PRO TECH COMMUNICATIONS, INC.
-----------------------------
(Exact name of Registrant as specified in Charter)
Florida 59-3281593
---------------------------- ---------------------
(State or Other Jurisdiction (I.R.S. Employer
Of Incorporation or Identification No.)
Organization)
3311 Industrial 25th Street, Fort Pierce, Florida 34946
(561) 464-5100
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
RICHARD HENNESSEY
PRESIDENT
3311 Industrial 25th Street, Fort Pierce , Florida 34946
(561) 464-5100
(Name and Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Copies of all communications and notices to:
WILLIAM P. O'NEILL, ESQ.
CROWELL & MORING LLP
1001 PENNSYLVANIA AVE, NW
WASHINGTON, DC 20004
(202) 624-2500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ] CALCULATION OF REGISTRATION FEE
<PAGE>
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES TO BE AMOUNT TO BE AGGREGATE PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER UNIT PRICE REGISTRATION FEE
---------- ----------------- -------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK 32,967,438 SHARES $0.7500 (2) $24,725,579 (2) $6,527.55 (2)
</TABLE>
(1)In accordance with Rule 416 promulgated under the Securities Act of 1933,
this registration statement also covers such indeterminate number of
additional shares of common stock as may become issuable upon conversion of
Pro Tech Communications, Inc.'s ("Pro Tech" or the "Company") Series A
Convertible Preferred Stock to prevent dilution resulting from stock splits,
stock dividends or similar transactions.
(2)Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act of 1933, based
on the average of the high and low prices for the common stock on the NASD
OTC Bulletin Board on November 1, 2000. The fees noted above were paid by the
registrant on November 2, 2000 in connection with the filing of this
registration statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
<PAGE>
PROSPECTUS
PRO TECH COMMUNICATIONS, INC.
32,967,438 shares of Common Stock for resale
by Selling Stockholders
PRO TECH COMMUNICATIONS, INC. We design, develop, manufacture and
3311 Industrial 25th Street market lightweight telecommunications
Fort Pierce, Florida 34946 headsets for a variety of commercial
applications.
Certain shareholders of Pro Tech Communications, Inc. (the "Selling
Stockholders") are offering 32,967,438 shares of the Company's common stock for
sale at prevailing market prices. The Company's common stock currently trades
under the symbol "PCTU" on the NASD OTC Bulletin Board. The Company will not
receive any proceeds from the resale of its common stock, which consist of:
o 4,312,500 shares of common stock that the Company may issue upon the
conversion of issued and outstanding shares of the Company's Series A
Convertible Preferred Stock in accordance with the Company's Articles of
Amendment to its Articles of Incorporation;
o 172,500 shares of common stock that the Company may issue to pay the
accretion on the stated value of the issued and outstanding shares of the
Company's Series A Convertible Preferred Stock as provided in the Articles
of Amendment to the Articles of Incorporation;
o 4,500,000 shares of common stock that the Company may issue upon the
exercise of warrants that the Company issued to investors in our Series A
Preferred Stock private placement;
o 559,375 shares of common stock issued by the Company to an outside
consultant in conjunction with the execution of the Stock Purchase
Agreement between the Company and NCT Hearing Products, Inc.; and
o 23,423,063 shares of common stock that the Company issued to NCT Hearing
Products, Inc. pursuant to the Stock Purchase Agreement between the Company
and NCT Hearing Products, Inc.
------------------------------------------------
This investment involves a High Degree of Risk. You should purchase shares
only after carefully considering the risks described in the "RISK FACTORS"
section beginning on Page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined that this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed. The
Selling Stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission becomes effective.
This prospectus is not an offer to sell these securities and neither we nor
the Selling Stockholders are soliciting offers to buy these securities in
any state where the offer or sale is not permitted.
The date of this prospectus is November 3, 2000.
<PAGE>
TABLE OF CONTENTS
PAGE
Prospectus Summary Information 1
The Company 1
Recent Developments 2
Risk Factors 5
Use of Proceeds 12
Selling Security Holders 12
Plan of Distribution 13
Description of Securities to be Registered 14
Interests of Named Experts and Counsel 14
Description of Business 15
Description of Property 23
Legal Proceedings 23
Market Price of and Dividends on Common Equity 24
Description of Securities 25
Selected Financial Data 26
Management's Discussion and Analysis 27
Changes in and Disagreements with Accountant 32
Directors and Executive Officers 33
Executive Compensation 34
Security Ownership of Certain Beneficial Owners 38
Certain Relationships and Related Transactions 39
Other Expenses of Issuance and Distribution 39
Indemnification of Directors and Officers 40
Recent Sales of Unregistered Securities 41
Exhibits and Financial Statements 42
Undertakings 46
Signatures 47
----------------------------------------------
IN DECIDING TO BUY THE COMPANY'S COMMON STOCK, YOU SHOULD RELY ONLY ON THE
INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS.
WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS
NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THE DOCUMENT.
<PAGE>
PROSPECTUS SUMMARY INFORMATION
This summary section briefly describes the key aspects of both the Company and
the offering covered by this prospectus. This section is a summary only and
refers to more specific and comprehensive information found in subsequent
sections. Investors should refer to these individual sections for a more
detailed explanation of each topic.
Whenever possible, the Company has provided definitions of its technologies
within the text. Also note that market data presented in this prospectus are
based on management's estimates, in reliance on third-party sources where
possible. While management believes these estimates are reasonable, in certain
cases such estimates cannot be verified by information from or analysis by
independent sources. Accordingly, the Company cannot give assurances that such
market data are accurate or complete in any material respect.
THE COMPANY
Pro Tech Communications, Inc. (hereinafter referred to as "Pro Tech" or the
"Company") presently designs, develops, manufactures and markets lightweight
telecommunications headsets. The Company's headsets employ new concepts in
advanced lightweight design and marketing strategies involving the sale of the
Company's product directly to the commercial headset market as a replacement for
its competitors' products. The Company presently sells its first design for the
commercial headset market comprised of fast food companies and other large
quantity users of headset systems, and is in the process of completing
development of several other headsets for the telephone user market, to include
telephone operating companies, government agencies, business offices, and
professional telephone centers. The Company's products include:
o ProCom Headset
o A-10 Amplifier (telephone)
o Apex Headset
o Trinity Headset
o A-27 Amplifier
The Company's operating revenues are comprised of product sales. Operating
revenues for the fiscal year ended October 31, 1999 consisted of approximately
$1,091,000 in product sales. For the nine months ended July 31, 2000, the
Company's operating revenues were approximately $1,025,000.
Pro Tech Communications, Inc. was incorporated in the State of Florida on
October 5, 1994. From August 30, 1991 to October 31, 1994, the Company's
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, Chief Executive Officer and Treasurer of the Company, was general partner
of Pro Tech Systems and there were 12 limited partners in the limited
partnership. From the formation of Pro Tech Systems in 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 product. From June 1993 until October 1994, Pro Tech Systems was engaged
in limited manufacturing and marketing activities for its product. On November
1, 1994, all of the assets of Pro Tech Systems were transferred to the Company
as consideration for the issuance of 2,000,000 shares of the Company's common
stock, par value $.001 per share, which 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 12, 2000, the
Company completed a transaction whereby it sold 60% of its common stock on a
fully diluted basis to NCT Hearing Products, Inc. ("NCT Hearing"), a
wholly-owned subsidiary of NCT Group, Inc. ("NCT"), in exchange for exclusive
rights to certain NCT technologies for use in lightweight cellular, multimedia
and telephony headsets.
STRATEGY
The Company's business strategy is to continually offer lightweight headsets and
telephony products that employ cutting edge sound technologies with an emphasis
on price/performance. In addition, the Company will continue to concentrate its
efforts on the production of that portion of the telephone headset that the user
wears. 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, the Company
presently has out-sourced to Asian manufacturers the production of amplifiers
engineered to the Company's specifications.
The Company will also continue to concentrate its efforts on the production and
distribution of new headset designs having the capability of connecting to and
interfacing with various electronic amplifiers and telephone systems currently
in use. The Company has adopted a co-engineering product development strategy
through the use of joint engineering agreements with companies with
complimentary engineering patents. The Company projects that this strategy will
greatly accelerate the product development cycle while offering far superior
products to its customers. The Company has continued to make investments in
technology and has incurred development costs with respect to engineering
prototypes, pre-production models and field testing of several new products.
Management believes that the Company's investment in technology will result in
the improvement of the functionality, speed and cost of components and products.
We anticipate that as the Company establishes distribution channels and as
consumer awareness of its products increases, so, too, will its product sales.
At the same time, Pro Tech continues to strive to lower the cost of its products
and enhance their technological performance.
Finally, the Company recognizes that it cannot achieve its corporate mission
without recruiting and retaining key personnel. As of September 30, 2000, the
Company had 3 part-time employees and 16 full-time employees, including 2
engineers and associated technical staff members.
RECENT DEVELOPMENTS
During 2000, the Company has entered into certain marketing agreements for the
marketing and sales of its headsets and amplifiers within established
distribution channels. On April 5, 2000, the Company signed a marketing
agreement with Hello Direct, a manufacturer and distributor of telephone
equipment, to market and sell the Company's Trinity headsets through Hello
Direct's catalogs and internet site. On April 26, 2000, the Company entered into
a marketing agreement with 3M Corporation for Pro Tech headsets to be resold
with 3M's C860 wireless drive through system for the fast food industry. On July
28, 2000, the Company entered into a marketing agreement with Muzak Corporation
whereby Muzak will offer the Company's headsets through its distribution
channels to more than 200 corporate offices and affiliates.
The Company's Board of Directors unanimously approved an amendment to the
Company's Articles of Incorporation to increase the number of authorized shares
of common stock, par value $0.001 per share, from 10,000,000 to 40,000,000 and
to authorize the creation of 1,000,000 shares of blank check preferred stock. At
the Company's adjourned annual meeting held August 11, 2000, the Company's
shareholders approved these amendments which became effective on September 29,
2000 when the Company filed an amendment to its Articles of Incorporation with
the Department of State of the State of Florida.
On September 12, 2000, the Company entered into a Stock Purchase Agreement with
NCT's subsidiary, NCT Hearing, pursuant to which NCT Hearing granted an
exclusive license to the Company for rights to certain NCT technologies for use
in lightweight cellular, multimedia and telephony headsets. The license is
royalty free unless and until NCT Hearing owns less than 50% of the Company's
common stock on a fully diluted basis. If NCT Hearing's percentage ownership of
common stock is less than 50%, the Company will be required to pay NCT Hearing a
royalty of 6% of net sales. In consideration for this license, the Company
issued NCT Hearing 23,702,750 shares, representing 60% of its common stock on a
fully diluted basis (approximately 83% of its common stock currently
outstanding). These shares, less a fee of 279,687 shares of the Company's common
stock, paid by NCT Hearing to an outside consultant, are included in this
registration statement and prospectus. As a condition precedent to the closing
of the transaction, NCT arranged $1.5 million in equity financing for the
Company through the sale of the Company's convertible preferred stock (see
below).
On September 29, 2000, the Company entered into a Securities Purchase and
Supplemental Exchange Rights Agreement with NCT, Austost Anstalt Schaan
("Austost"), Balmore S.A. ("Balmore") and Zakeni Limited (Austost, Balmore and
Zakeni Limited collectively the "Pro Tech Investors") to consummate the $1.5
million financing arranged by NCT for the Company in connection with its sale of
1,500 shares of Pro Tech Series A Convertible Preferred Stock ("Pro Tech
Preferred") to the Pro Tech Investors. The Pro Tech Preferred consists of 1,500
designated shares, par value of $0.01 per share and a stated value of one
thousand dollars ($1,000) per share with accretion of four (4%) per annum on the
stated value payable upon conversion or exchange in either cash or common stock
at the election of the Company. Under such agreement, the Pro Tech Investors may
elect to exchange their Pro Tech Preferred for shares of NCT's common stock or
convert their Pro Tech Preferred for shares of the Company's common stock at a
conversion price which shall be the lesser of (i) the then lowest average of the
average closing bid price for a share of the Company's common stock as reported
on the NASD OTC Bulletin Board for any consecutive five day period out of
fifteen trading days preceding the date of such conversion, less a discount of
20%; or (ii) a fixed conversion price of $0.50. For further details, see "Risk
Factors - Possible Future Dilution." This registration statement and prospectus
includes 4,312,500 shares of the Company's common stock, together with an
additional 172,500 shares of Pro Tech's common stock, that the Pro Tech
Investors may offer to sell if they elect to convert their Pro Tech Preferred
into the Company's common stock. The additional 172,500 shares of common stock
will allow the Company to pay the 4% annual accretion on the Pro Tech Preferred.
Under such Securities Purchase and Supplemental Exchange Rights Agreement, the
Pro Tech Investors also have the right to exchange their Pro Tech Preferred for
shares of common stock of NCT at a 20% discount of the then fair market value of
NCT common stock. One half of such Pro Tech Preferred may be exchanged with NCT
at any time after six months following the closing under such agreement, and the
remaining half at any time after the first anniversary of such closing.
In connection with the execution of the Securities Purchase and Supplemental
Exchange Rights Agreement on September 29, 2000, the Company issued warrants to
the Pro Tech Investors to acquire 4.5 million shares of the Company's common
stock. Such warrants are exercisable at $0.50 per share and expire on October
28, 2003. In addition, the Company has the right to require the warrant holders
to exercise upon a call from the Company. The warrants are callable as follows:
(i) one third of the warrants are callable by the Company if the closing bid
price of the common stock for each of the previous fifteen trading days equals
or exceeds $0.68 per share and the average daily trading volume during such
period is equal to or exceeds 150,000 shares; (ii) two thirds of the warrants
are callable by the Company if the closing bid price of the common stock for
each of the previous fifteen trading days equals or exceeds $0.94 per share and
the average daily trading volume during such period is equal to or exceeds
150,000 shares; and (iii) the warrants are callable in their entirety by the
Company if the closing bid price of the common stock for each of the previous
fifteen trading days equals or exceeds $1.135 per share and the average daily
trading volume during such period is equal to or exceeds 150,000 shares. The
shares that the Company may issue upon exercise of the warrants are included in
this registration statement and prospectus.
Upon the consummation of the Stock Purchase Agreement described above, the
Company became obligated to issue two percent (2%) of its outstanding common
stock to Union Atlantic LC ("UALC"), pursuant to a consulting agreement dated as
of March 15, 1999, as amended as of June 1, 1999, and as modified as of July 29,
1999, between the Company and UALC. The Company and NCT Hearing, as the
purchaser, were obligated to issue shares of the Company's common stock to UALC
to pay the consulting fee. In order to comply with the consulting agreement, the
Company agreed to issue 279,688 shares and NCT Hearing agreed to transfer
279,687 shares of the Company's common stock to Union Atlantic Capital, L.C., an
affiliated broker-dealer of UALC, totaling an aggregate of 559,375 shares of the
Company's common stock to UALC in full settlement of all obligations under the
consulting agreement. UALC has certain piggy-back registration rights for all of
the shares of common stock it may receive under its agreement with the Company.
As such, these shares of common stock are included under this registration
statement and prospectus.
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data set forth below is derived from the historical
financial statements of the Company. The data set forth below is qualified in
its entirety by and should be read in conjunction with the Company's "Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" that are included elsewhere in this registration
statement and prospectus. Operating results for the periods ended July 31, 2000
are not necessarily indicative of the results that may be expected for the year
ending October 31, 2000.
(In thousands, except per share amount)
Years Ended October 31,
--------------------------------------------
1995 1996 1997 1998 1999
--------------------------------------------
STATEMENTS OF OPERATIONS DATA:
Net sales $ 831 $ 853 $ 997 $1,142 $1,091
Cost of goods sold 359 282 334 470 415
------- ------- ------- ------- --------
Gross profit 472 571 663 672 676
Operating expenses 415 505 703 921 897
------- ------- ------- ------- --------
Operating income (loss) 57 66 (40) (249) (221)
Interest income 2 28 29 25 10
Interest expense (2) (14) - - (1)
Other income (expense), net 1 (79) (1) - (9)
------- ------- ------- ------- --------
Income (loss) before income taxes 58 1 (12) (224) (221)
Income tax expense (benefit) 14 2 - (1) -
------- ------- ------- ------- --------
Net income (loss) $ 44 (1) (12) (223) (221)
======= ======= ======= ======= ========
Income (loss) per share - basic $ 0.02 $ - $ - $(0.05) $ (0.05)
Weighted average common shares
outstanding - basic 2,462 3,414 4,123 4,254 4,254
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------- --------------------
(Unaudited) 1999 2000 1999 2000
--------- ---------- --------- ----------
STATEMENTS OF OPERATIONS DATA:
Net sales $ 269 $ 507 $ 770 $ 1,025
Cost of goods sold 95 164 289 288
--------- ---------- --------- ----------
Gross profit 174 343 481 737
Operating expenses 240 351 676 862
--------- ---------- --------- ----------
Operating income (loss) (66) (8) (195) (125)
Interest income 2 - 9 2
Interest expense - (11) - (24)
Other income (expense), net - - - -
--------- ---------- --------- ----------
Income (loss) before income taxes (64) (19) (186) (147)
Income tax expense (benefit) - - - -
--------- ---------- --------- ----------
Net income (loss) $ (64) $ (19) $ (186) $ (147)
========= ========== ========= ==========
Income (loss) per share - basic $ (0.02) $ - $ (0.04) $ (0.03)
Weighted average common shares
outstanding - basic 4,254 4,266 4,254 4,266
<PAGE>
October 31,
----------------------------------------------------
1995 1996 1997 1998 1999
----------------------------------------------------
BALANCE SHEET DATA:
Total assets $ 876 $ 1,111 $ 1,239 $ 1,159 $ 945
Total current liabilities 313 99 82 210 210
Long-term debt - - - - 8
Retained earnings (deficit) 44 44 31 (192) (413)
Stockholders' equity 563 1,011 1,157 949 728
Working capital 473 878 997 725 494
July 31, 2000
-------------
(Unaudited)
BALANCE SHEET DATA:
Total assets $ 1,475
Total current liabilities 887
Long-term debt 2
Retained earnings (deficit) (560)
Stockholders' equity 586
Working capital 281
EXECUTIVE OFFICES
Our principal executive office is located at 3311 Industrial 25th Street, Fort
Pierce, Florida 34946. The telephone number is (561) 464-5100. The Company's
corporate headquarters are co-located with NCT Group at 20 Ketchum Street,
Westport, Connecticut 06880.
RISK FACTORS
The shares of common stock covered by this registration statement and prospectus
represent a speculative investment and entail elements of substantial risk.
Investors should carefully consider the following risk factors before making a
decision to invest in the Company. Investors also should examine the information
included in subsequent sections of and as exhibits to this registration
statement and prospectus.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This prospectus contains certain "forward-looking statements" - those which are
not historical facts but rather predictions about the future made by Company
management. All forward-looking statements involve risks and uncertainties. The
Company cautions investors that the important factors discussed below have, or
could, both (1) affect the Company's actual performance, and (2) cause actual
performance to differ materially from our predictions.
The Company believes that the assumptions underlying such forward-looking
statements are reasonable. At the same time, it would be prudent to remember
that our assumptions could be inaccurate or incomplete. Therefore, we cannot
give any assurances that these statements will, in fact, be correct.
OUR CURRENT FINANCIAL CONDITION
As of October 31, 1999, Pro Tech had cash and cash equivalents of $160,428,
decreasing from $198,797 at October 31, 1998. In addition, as of October 31,
1999, Pro Tech had no short-term investments as compared to $254,545 at October
31, 1998. At July 31, 2000, the Company's cash and cash equivalents were
$136,503. The Company's short-term borrowings and notes payable as of July 31,
2000 totaled $633,475 compared to no short-term borrowings and notes payable as
of October 31, 1999.
Management believes that its working capital requirements at present levels are
dependent upon product sales. Whether the level of our product sales will be
sufficient to generate cash flows for continued Company operations at present
levels is presently uncertain. In the event that product sales do not generate
sufficient cash, management believes that the Company would have to raise
additional working capital. There is no assurance, however, that the Company
could raise such capital. In the event that the cash generated from product
sales is insufficient and the Company is unable to raise additional working
capital on a timely basis, the Company would have to substantially cut back its
level of operations. These reductions could, in turn, adversely affect our
relationships with our suppliers, distributors and customers.
NO HISTORY OF DIVIDENDS
The Company has never declared or paid dividends on its common stock. We have no
present intention to pay dividends on our common stock.
RECENT OPERATING LOSSES AND ACCUMULATED DEFICIT
The Company incurred a net loss of $221,065 for the year ended October 31, 1999.
This loss was attributable to three factors: (1) the Company maintained
production of its products at the Company's Florida office for nine months of
fiscal 1999 corresponding with incurring one-time charges from the transition of
the Company's production operations to the Far East; (2) the Company's revenues
were negatively impacted late in the second half of fiscal 1999 as a result of a
competitor's attempt to take away the Company's distributor selling channel in
the fast-food market; and (3) a five-week delay in the market introduction of
the Company's telephone headset as a result of the Taiwan earthquake in the 4th
quarter of fiscal 1999. The Company's net loss for the nine months ended July
31, 2000 was $146,977, attributable to insufficient sales volume to cover the
Company's operating expenses.
The Company's accumulated deficit as of July 31, 2000 totaled $560,261.
To make a profit, the Company must successfully develop, manufacture and sell a
sufficiently large quantity of our products. The Company can give no assurances,
however, that future operations will be profitable enough to generate sufficient
cash to fund such development, manufacturing and sales or that the Company can
generate or rely upon sufficient funding sources to meet our obligations.
LIMITED REVENUES
Although the Company actively markets its products, operating revenues have been
limited. In total over the five years ended October 31, 1999, the Company has
generated net revenues of $4.9 million from the sale of products.
POSSIBLE FUTURE DILUTION
The following sections discuss the risks associated with investing in the
Company's common stock given that future dilution is possible. Specifically,
these sections outline the myriad circumstances which could lead to a possible
negative effect on the value per share of our common stock should holders of the
Pro Tech Preferred and the Company's options and warrants convert their
securities or exercise their rights to acquire common stock. At its adjourned
annual meeting held on August 11, 2000, the Company obtained the approval of its
shareholders to increase the number of shares of common stock the Company is
authorized to issue from 10,000,000 to 40,000,000. Nearly all of those
additional shares have either been used by the Company in connection with its
recent Stock Purchase Agreement with NCT Hearing, or are reserved for future
issuance upon the exercise of warrants and conversion rights granted by the
Company in connection with financing arrangements recently put into place for
the Company.
1996 Plan
On April 15, 1996, the Board of Directors of the Company adopted the Company's
1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan provides for the grant
by the Company of options to purchase up to an aggregate of 590,000 of the
Company's 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 the
Company.
The purposes of the 1996 Plan are to provide incentive to employees, including
officers, directors and consultants of the Company, to encourage such persons to
remain in the employ of the Company and to attract to the Company persons of
experience and ability. The 1996 Plan terminates on April 15, 2002.
Options granted under the 1996 Plan may be either incentive stock options within
the meaning of the Internal Revenue Code of 1986, as amended ("incentive
options"), or options that do not qualify as incentive options ("nonqualified
options"). The exercise price of incentive options must be at least equal to the
fair market value of the shares of common stock on the date of grant; provided,
however, that the exercise price of any incentive option granted to any person
who, at the time of the grant of the option, owns stock aggregating 10% or more
of the total combined voting power of the Company or any parent or subsidiary of
the Company, must not be less than 110% of the fair market value.
On April 15, 1996, options to purchase 540,000 shares were granted to Keith
Larkin and 25,000 shares to each of Richard Hennessey and Kenneth Campbell, who
was the Vice President of Operations at the time of the grant. The exercise
price of all of the stock options was $0.50 per share. The stock option exercise
price was the fair value at the date of the grant, which was determined from the
price paid per share during the Company's stock offering in 1996. The stock
options were exercisable upon the grant date, extending over a period of three
years.
Prior to fiscal year 1998, the Company received $25,000 upon issuance of 50,000
shares of common stock upon the exercise of 50,000 options by Company officers.
On April 13, 1999, the exercise period of the remaining 540,000 options issued
to Keith Larkin were extended by vote of the Board of Directors for two years to
April 15, 2001.
1998 Plan
On March 5, 1998, the Board of Directors adopted the Company's 1998 Stock Option
Plan (the "1998 Plan") for the benefit of directors, officers, employees and
consultants to the Company. The 1998 Plan is intended to attract and retain the
services of qualified officers, employees and directors while providing an
incentive for such persons to make a maximum contribution to the Company's
success. This plan initially authorized the issuance of up to 500,000 shares of
common stock. On August 4, 1998, options to purchase 200,000 shares were granted
to Company officers (Messrs. Hennessey and Campbell) and options to purchase
100,000 shares were granted to 15 employees, all at an option 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 the options granted to Mr. Hennessey, an
aggregate of 150,000 shares, 50,000 vested immediately, 50,000 vested on August
4, 1999 and 50,000 options vested on August 4, 2000. All other options granted
on August 4, 1998 vested immediately. All options under the 1998 Plan 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
were granted to Richard Hennessey at an exercise price of $0.38 per share. The
exercise price was greater than the fair market value of a share of common stock
at the date of the grant. The options vested as follows: 100,000 immediately;
50,000 on April 13, 2000; and 50,000 on April 13, 2001. All of these opitons
expire on April 13, 2004.
In August 1999, Mr. Campbell resigned from his employment with the Company. The
exercise period for his options, which would have expired upon his resignation,
was extended to August 3, 2001.
As of July 31, 2000, a total of 500,000 shares of common stock had been reserved
for issuance under the 1998 Plan and stock options had been granted for all
500,000 shares. In order to provide the Company with the ability to issue
additional options under the 1998 Plan, the Board of Directors of the Company
had approved an amendment to the 1998 Plan to increase the number of shares of
the Company's common stock reserved for issuance upon exercise of stock options
granted under the 1998 Plan from 500,000 shares to 2,000,000 shares. The
Company's shareholders approved such amendment to the 1998 Plan at the adjourned
annual meeting of stockholders held on August 11, 2000.
Other Investors' Warrants and Options
In connection with the sale of the Pro Tech Preferred (see below), the Company
issued warrants to the Pro Tech Investors to acquire 4,500,000 shares of the
Company's common stock. Such warrants are exercisable at $0.50 per share and
expire on October 28, 2003. In addition, the Company has the right to require
the warrant holders to exercise the warrants upon a call from the Company. The
warrants are callable as follows: (i) one third of the warrants are callable by
the Company if the closing bid price of the common stock for each of the
previous fifteen trading days equals or exceeds $0.68 per share and the average
daily trading volume during such period is equal to or exceeds 150,000 shares;
(ii) two thirds of the warrants are callable by the Company if the closing bid
price of the common stock for each of the previous fifteen trading days equals
or exceeds $0.94 per share and the average daily trading volume during such
period is equal to or exceeds 150,000 shares; and (iii) the warrants are
callable in their entirety by the Company if the closing bid price of the common
stock for each of the previous fifteen trading days equals or exceeds $1.135 per
share and the average daily trading volume during such period is equal to or
exceeds 150,000 shares. The shares that the Company may issue upon exercise of
the warrants are included in this registration statement and prospectus.
NCT Hearing Transaction
On September 12, 2000, the Company entered into a Stock Purchase Agreement with
NCT Hearing pursuant to which NCT Hearing granted an exclusive license to the
Company for rights to certain NCT technologies for use in lightweight cellular,
multimedia and telephony headsets. In consideration for this license, the
Company issued 23,702,750 shares of common stock to NCT Hearing, representing
60% of its common stock on a fully diluted basis (approximately 83% of the
Company's currently outstanding common stock). These shares, less shares used to
pay a fee to UALC, are included in this registration statement and prospectus.
As a condition precedent to the closing of the transaction, NCT arranged $1.5
million in equity financing for the Company through the sale of the Company's
convertible preferred stock (see below).
The Series A Convertible Preferred Stock
On August 14, 2000, the Company's Board of Directors designated a series of
preferred stock based upon a negotiated term sheet, the Series A Convertible
Preferred Stock. The Pro Tech Preferred consists of 1,500 designated shares, par
value $0.01 per share and a stated value of one thousand dollars ($1,000) per
share with accretion of 4% per annum on the stated value payable upon conversion
or exchange in either cash or common stock at the Company's election. On
September 29, 2000, the Company, NCT and three accredited investors entered into
an agreement under which the Company sold 1,500 shares of the Pro Tech Preferred
for an aggregate of $1.5 million. Each share of such stock, in addition to being
exchangeable for shares of NCT common stock, is convertible into fully paid and
nonassessable shares of the Company's common stock pursuant to a predetermined
conversion formula. The conversion formula provides that the conversion price
shall be the lesser of (i) the then lowest average of the average closing bid
price for a share of the Company's common stock as reported on the NASD OTC
Bulletin Board for any consecutive five day period out of fifteen trading days
preceding the date of such conversion, less a discount of 20%; or (ii) a fixed
conversion price of $0.50. This registration statement and prospectus includes
4,312,500 shares of the Company's common stock, together with an additional
172,500 shares of the Company's common stock, that the Pro Tech Investors may
offer to sell if they elect to convert their Pro Tech Preferred into the
Company's common stock. The additional 172,500 shares of common stock will allow
the Company to pay the 4% annual accretion on the Pro Tech Preferred.
Consulting Agreement
Pursuant to a consulting agreement dated as of March 15, 1999, as amended as of
June 1, 1999, and as modified as of July 29, 1999, between the Company and ULAC,
the Company would be obligated to issue two percent (2%) of its outstanding
common stock to UALC if the transaction with NCT Hearing were completed. In
order to comply with the consulting agreement, the Company agreed to issue
279,688 shares and NCT Hearing agreed to transfer 279,687 shares of the
Company's common stock to Union Atlantic Capital, L.C., an affiliated
broker-dealer of UALC, totaling an aggregate of 559,375 shares of the Company's
common stock to UALC in full settlement of all obligations under the consulting
agreement. UALC has certain piggy-back registration rights for all of the shares
of common stock it may receive under its agreement with the Company. As such,
the 559,375 shares of common stock are included under this registration
statement and prospectus.
The possibility of sale of the shares of common stock described in this
"Possible Future Dilution" section, all of which are either already registered
or which the Company plans to register, including shares of common stock under
this registration statement and prospectus, may adversely affect the market
price of the common stock.
MATERIAL DEPENDENCE ON UNPROTECTED INTELLECTUAL PROPERTY; POSSIBLE INFRINGEMENT
OF THIRD PARTY RIGHTS
The Company holds an extensive library of know-how and other unpatented
technology. The Company's policy is to enter into confidentiality agreements
with all of its executive officers, key technical personnel and advisors. At the
same time, we cannot give any assurances that such persons will not disclose
Company know-how, inventions and other secret or unprotected intellectual
property to third parties, whether in violation of those agreements or
otherwise.
The Company is not aware of any asserted claims that its products or its
unprotected intellectual property infringes the intellectual property rights of
third parties. The lines of business in which the Company is engaged, however,
can be characterized as one in which competitors act aggressively to protect
their rights. It is possible that the Company could face claims and lawsuits
that its products infringe or misappropriate the rights of others, and such
claims and lawsuits could be materially adverse to the Company and its ability
to offer products to customers and to introduce new products.
COMPETITION
The Company intends to engage continually in research and development
activities. This includes improving our current products and developing new
products. Our success, however, depends on the popularity of our products in the
commercial arena, which the Company cannot guarantee. Further, the Company also
cannot guarantee that our products will not become unmarketable or obsolete by a
competitor's more rapid introduction of higher quality or lower cost products to
the marketplace.
The lightweight telephone headset industry is highly competitive and
characterized by a few dominant manufacturers. The Company is aware of several
companies who manufacture telephone headsets, each of which possesses greater
financial, manufacturing, marketing and other resources than the Company.
Primary among the Company's competitors is Plantronics, Inc. ("Plantronics"),
the world's largest manufacturer of lightweight telephone headsets. Plantronics
was founded by Mr. Larkin. The Company estimates 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) were approximately $286 million for the fiscal year
1999. Other competitors include GN Netcom, Inc. and Hello Direct. In 1997, GN
NetCom, Inc. purchased both UNEX Corporation and ACS Wireless in an attempt to
grow its market share through acquisitions and recently announced the potential
acquisition of Hello Direct. ACS Wireless was founded by Mr. Larkin. The Company
believes GN Netcom, Inc. has a market share of approximately 29% worldwide.
The Company believes that in selecting telephone headsets, users primarily
consider price, product quality, reliability, product design and features, and
warranty terms. The Company believes that its headsets are superior in design
and construction and substantially lower in price than the models currently
available from the Company's competitors. No assurances can be given, however,
that the Company's products will be perceived by users and distributors as
providing a competitive advantage over competing headsets. In addition, no
assurance can be given 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 with substantially
greater resources than the Company.
In addition to direct competition from other companies offering lightweight
telephone headsets, the Company may face indirect competition in its industry
from technological advances such as interactive voice response systems which
require no human operators for certain applications such as account balance
inquiries or airplane flight information. The Company believes that this
competition will be more than offset by increased demand for headsets as voice
telecommunication applications expand.
RELIANCE UPON STRATEGIC ALLIANCES AND COMMERCIAL ACCEPTANCE
From time to time, the Company enters into strategic alliances related to the
design, manufacture, marketing and distribution of its products. The Company
markets its products by identifying potential markets and teaming up with
domestic distributors to support product distribution. The Company's ability to
enter and succeed in new markets is dependent upon these distributors'
assessment of the Company and its products' profitability. Success also depends
on end-users' acceptance of our products.
The Company also arranges for the supply of products by entering into alliances
with dependable manufacturers believed to be dependable sources of supply. The
Company cannot, however, make assurances that these manufacturers will be able
to meet the demands of the Company and our customers in the future.
DEPENDENCE UPON EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL
The Company's operations now and in the near future are in large part dependent
upon the efforts of our executive officers and other key personnel. None of the
Company's executive officers is contractually bound to remain with the Company.
Moreover, the Company's growth and expansion into new products could require
additional expertise in areas like manufacturing and marketing. This could put
an additional strain on our human resources and may require hiring additional
personnel or training existing personnel. The Company cannot give any assurances
that its employees will remain with Pro Tech. The loss of key personnel or the
failure to recruit new employees could impede the achievement of our corporate
mission.
CONTROLLING SHAREHOLDER
As a result of the Stock Purchase Agreement between NCT Hearing and the Company,
NCT Hearing now holds 60% of the Company's common stock on a fully diluted basis
(approximately 83% of its common stock currently issued and outstanding). In
addition, three officers of NCT sit on the Company's Board of Directors. NCT
Hearing, a wholly owned subsidiary of NCT, has sufficient votes to effect
significant business transactions involving the Company, including a merger, the
sale of all or substantially all of the Company's assets, and recapitalizations.
NCT Hearing has agreed that so long as it remains the holder of a majority of
the outstanding common stock of the Company, Rich Hennessey and Keith Larkin
shall continue to serve as directors of the Company.
It is also possible that if either (I) the Company does not experience further
dilution of its common stock, or (ii) the Pro Tech Investors elect to exchange
all or substantially all of their Pro Tech Preferred for shares of NCT common
stock, NCT Hearing could effect a merger of the Company without the meeting or
vote of the other shareholders of the Company.
POSSIBLE RISKS ASSOCIATED WITH AGREEMENTS WITH RELATED PARTIES
From time to time, the Company has entered into lending arrangements with its
executive officers or has borrowed funds from its shareholders. On March 27,
2000, the Company received a loan of $150,000 from Westek Communications, a
shareholder of the Company. The loan matures matures on March 27, 2001 and bears
interest at 8.5% per annum, payable at maturity.
POSSIBLE RISKS ASSOCIATED WITH PERIODIC LOW TRADING VOLUME
Stockholders may find it difficult to buy, sell and obtain pricing information
about our common stock. In addition, the Company's failure to have either (1)
net tangible assets in excess of $2.0 million or (2) average revenue of at least
$6.0 million for the last three years, could cause the common stock to become
subject to the SEC's "penny stock" rules. The penny stock rules impose
additional sales practice requirements on broker-dealers who sell penny stock
securities to people who are not established customers or accredited investors.
For example, the broker must make a special suitability determination for the
buyer and the buyer must give written consent before the sale. The rules also
require that the broker-dealer:
o send buyers an SEC-prepared disclosure schedule before completing the sale,
o disclose his commissions and current quotations for the security,
o disclose whether the broker-dealer is the sole market maker for the penny
stock and, if so, his control over the market, and
o send monthly statements disclosing recent price information held in the
customer's account and information on the limited market in penny stocks.
These additional burdens may discourage broker-dealers from effecting
transactions in penny stocks. Thus, if our common stock were to fall within the
definition of a penny stock, the Company's liquidity could be reduced. In turn,
there could be an adverse effect on the trading market for our common stock.
POSSIBLE VOLATILITY OF COMMON STOCK
Historically, the market prices for the securities of emerging and
high-technology companies have been highly volatile. Any future announcement
concerning the Company or its competitors could have a significant impact on the
price of our common stock.
BLANK CHECK PREFERRED STOCK
The Board of Directors has total discretion in the issuance and determination of
the rights and privileges of any shares of preferred stock which the Company may
issue in the future. Such rights and privileges may be detrimental to the
holders of common stock. The Company is authorized to issue 1.0 million shares
of preferred stock. Effective September 29, 2000, the Company issued 1,500
shares of its Series A Convertible Preferred Stock. If the Company were to issue
preferred stock in the future, it could discourage or impede a tender offer,
proxy contest or other similar transaction involving a change in control. Other
shareholders may favor such a transaction. Management is not aware of any effort
at present, however, to acquire or change the control of the Company away from
NCT Hearing.
RECENT AUTHORITATIVE ACCOUNTING GUIDANCE
SEC Staff Accounting Bulletin No. 101 ("SAB 101") was released on December 3,
1999 and provides the SEC staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. Generally, the
staff believes that revenue relating to nonrefundable, up-front fees in certain
arrangements for research and development activities should be deferred and
recognized over the term of the agreement. Adoption of SAB 101 is expected to
have no material impact on the Company's financial condition or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"). As amended by SFAS No. 137,
the Company is required to adopt SFAS 133 for the year ending October 31, 2001.
SFAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Because the Company currently holds no derivative financial
instruments and does not currently engage in hedging activities, adoption of
SFAS 133 is expected to have no material impact on the Company's financial
condition or results of operations.
LITIGATION
Presently, the Company is not a party to any litigation and is unaware of
unasserted claims against it. In the normal course of business, the Company may
be subjected to, or may initiate, litigation which may require significant
financial and management resources. Such litigation claims could have a material
adverse effect on the Company's financial position and its operations.
<PAGE>
USE OF PROCEEDS
All of the shares of common stock offered hereby are being offered by the
Selling Stockholders. The Company will not receive any of the proceeds from
their sale. The Company estimates that expenses payable in connection with this
registration statement will be approximately $60,000. There are no other
material incremental expenses attributable solely to the issuance and
distribution of the above-described shares.
SELLING SECURITY HOLDERS
The following table sets forth certain information with respect to the Selling
Stockholders. The shares of common stock set forth therein have been included in
the registration statement of which this prospectus forms a part pursuant to
registration commitments afforded to the Selling Stockholders by contractual
obligations. The Company will not receive any proceeds from the sale of the
shares by the Selling Stockholders.
<TABLE>
<CAPTION>
Beneficial
Ownership
of Shares
Beneficial Number of of Common
Ownership Shares of Stock After
of Shares Common Giving
Relationship of Common Stock Effort to
With Stock at Offered Proposed
Name of Selling Stockholder The Company October 23, 2000 For Sale Sale
--------------------------- --------------- ----------------- ------------- ----------
<S> <C> <C> <C>
Austost Anstalt Schaan 2,246,250(1) 2,246,250(1) -
Balmore S.A. 2,246,250(1) 2,246,250(1) -
Zakeni Limited 4,492,500(1) 4,492,500(1) -
NCT Hearing Products, Inc. 23,423,063(2) 23,423,063(2) -
Union Atlantic Capital, L.C. 559,375(3) 559,375(3) -
----------------- ------------- ----------
TOTAL 32,967,438 32,967,438 -
================= ============= ==========
</TABLE>
(1) Includes shares underlying callable warrants issued to Selling Stockholder
and includes Selling Stockholder's allotment of the number of shares of
common stock which the Company may issue upon conversion of the Company's
Series A Convertible Preferred Stock in accordance with the Amendment of
Articles of Incorporation. Such conversion share amount was determined by
dividing the stated value of the issued and outstanding Pro Tech Preferred
by 80% of an assumed 5-day average closing bid price of $0.50, plus
accretion thereon calculated at 4% per annum for a one-year period, then
applying a factor of 115% in accordance with the related Registration
Rights Agreement between the Company and the Selling Shareholder. The
number of shares of common stock issued upon conversion may be more or less
than the amount calculated depending on (i) the length of time the Pro Tech
Preferred is held and (ii) the conversion price as determined under the Pro
Tech Preferred conversion formula.
(2) Reflects shares issued in conjunction with the Stock Purchase Agreement
between the Company and Selling Shareholder less shares paid by Selling
Stockholder as a consulting fee.
(3) Includes shares issued to Selling Stockholder as a consulting fee.
<PAGE>
PLAN OF DISTRIBUTION
The shares offered by this prospectus may be sold from time to time by Selling
Stockholders, who consist of the persons named under "Selling Security Holders"
above and those pledgees, donees, transferees or other successors in interest to
the Selling Security Holders. The Selling Stockholders may sell the shares on
the NASD OTC Bulletin Board or otherwise, at market prices or at negotiated
prices. They may sell shares by one or a combination of the following:
o a block trade in which a broker or dealer so engaged will attempt to sell
the shares as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchase by a broker or dealer as principal and resale by the broker or
dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which a broker solicits
purchasers;
o privately negotiated transactions;
o if such a sale qualifies, in accordance with Rule 144 promulgated under the
Securities Act of 1933, as amended ("Securities Act") rather than pursuant
to this prospectus; and
o any other method permitted pursuant to applicable law.
In making sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from Selling Stockholders in amounts to be
negotiated prior to the sale.
With regard to the shares offered hereby, the Selling Stockholders and any
broker-dealers that participate in the distribution may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
proceeds or commissions received by them, and any profits on the resale of
shares sold by broker-dealers, may be deemed to be underwriting discounts and
commissions.
If any Selling Stockholder notifies us that a material arrangement has been
entered into with a broker-dealer for the sale of shares through a block trade,
special offering, exchange distribution or secondary distribution or a purchase
by a broker or dealer, we will file a prospectus supplement, if required
pursuant to Rule 424(c) under the Securities Act, setting forth:
o the name of each of the participating broker-dealers,
o the number of shares involved,
o the price at which the shares were sold,
o the commission paid or discounts or concessions allowed to the
broker-dealers, where applicable,
o a statement to the effect that the broker-dealers did not conduct any
investigation to verify the information set out or incorporated by
reference in this prospectus, and
o any other facts material to the transaction.
We are paying the expenses incurred in connection with preparing and filing this
prospectus and the registration statement to which it relates, other than
selling commissions. In addition, in the event the Selling Stockholders sell
short shares of common stock issuable upon conversion of our Series A
Convertible Preferred Stock, this prospectus may be delivered in connection with
such short sales and the shares offered by this prospectus may be used to cover
such short sales. To the extent, if any, that the Selling Stockholders may be
considered "underwriters" within the meaning of the Securities Act, the sale of
the shares by them shall be covered by this prospectus.
We have advised the Selling Stockholders that the anti-manipulation rules under
the Exchange Act of 1934 ("Exchange Act") may apply to sales of shares in the
market and to the activities of the Selling Stockholders and their affiliates.
In addition, we will make copies of this prospectus available to the Selling
Stockholders and have informed them of the need for delivery of copies of this
prospectus to purchasers at or prior to the time of any sale of the shares
offered hereby.
<PAGE>
DESCRIPTION OF SECURITIES TO BE REGISTERED
This offering consists of an aggregate of 32,967,438 shares of common stock of
the Company that may be offered for sale by the Selling Stockholders. The
Company will not receive any of the proceeds from the sale of such shares.
This offering includes 4,312,500 shares of common stock that the Company may
issue upon the conversion of issued and outstanding shares of the Company's
Series A Convertible Preferred Stock in accordance with the Company's Articles
of Amendment to its Articles of Incorporation.
This offering also includes 172,500 shares of common stock that the Company may
issue to pay the accretion on the stated value of the issued and outstanding
shares of the Company's Series A Convertible Preferred Stock as provided in the
Articles of Amendment to the Articles of Incorporation.
In addition, this offering includes 4,500,000 shares of common stock that the
Company may issue upon the exercise of warrants that the Company issued to the
investors in the Pro Tech Preferred private placement.
This offering also includes 559,375 shares of common stock issued by the Company
to an outside consultant in conjunction with the execution of the Stock Purchase
Agreement between the Company and NCT Hearing Products, Inc.
This offering also includes 23,423,063 shares of common stock that the Company
issued to NCT Hearing pursuant to the Stock Purchase Agreement between the
Company and NCT Hearing.
INTERESTS OF NAMED EXPERTS AND COUNSEL
Matters relating to the legality of 32,967,438 shares of common stock being
offered by this prospectus have been reviewed for the Company by its outside
counsel, Crowell & Moring LLP, Washington, D.C.
The financial statements of the Company at October 31, 1998 and 1999 and for the
years ended October 31, 1997, 1998 and 1999 included in this prospectus have
been audited by Morgan, Jacoby, Thurn, Boyle & Associates, P.A., independent
auditors, as set forth in their report included therein. The financial
statements referred to above are included in reliance upon such reports given
upon the authority of such firms as experts in auditing and accounting.
<PAGE>
INFORMATION WITH RESPECT TO THE REGISTRANT
DESCRIPTION OF BUSINESS
General Development of Business
Pro Tech Communications, Inc. was incorporated in the State of Florida on
October 5, 1994. From August 30, 1991 to October 31, 1994, the Company's
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, Chief Executive Officer and Treasurer of the Company, was general partner
of Pro Tech Systems and there were 12 limited partners in the limited
partnership. From the formation of Pro Tech Systems in 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 product. From June 1993 until October 1994, Pro Tech Systems was engaged
in limited manufacturing and marketing activities for its product. On November
1, 1994, all of the assets of Pro Tech Systems were transferred to the Company
as consideration for the issuance of 2,000,000 shares of the Company's common
stock, par value $.001 per share, which were subsequently distributed on a pro
rata basis to each of the partners of the partnership. As of December 13, 1994,
Pro Tech Systems was formally dissolved. On September 12, 2000, the Company
entered into a Stock Purchase Agreement with NCT's subsidiary, NCT Hearing,
pursuant to which NCT Hearing granted an exclusive license to the Company for
rights to certain NCT technologies for use in lightweight cellular, multimedia
and telephony headsets. In consideration for this license, the Company issued
23,702,750 shares of its common stock to NCT Hearing, representing 60% of its
common stock on a fully diluted basis (approximately 83% of its currently
outstanding common stock).
The Company presently designs, develops, manufactures and markets lightweight
telecommunications headsets employing what the Company believes are new concepts
in advanced lightweight design and marketing strategies involving the sale of
the Company's product directly to the commercial headset market as a replacement
for its competitors' products. The Company presently sells its first design for
the commercial headset market comprised of fast food companies and other large
quantity users of headset systems and is in the process of completing
development of several other headsets for the telephone user market, which
includes telephone operating companies, government agencies, business offices,
and professional telephone centers. The Company introduced the APEX in the 1st
quarter of 1999. The Company plans to introduce several versions of these
telephone headsets, including the Trinity, in the 1st quarter of fiscal year
2000. The Company also plans on introducing several new products this fiscal
year through marketing agreements with its strategic partners.
Business Strategy
The Company's business strategy is to continually offer lightweight headsets and
telephony products that employ cutting edge sound technologies with an emphasis
on price/performance.
In addition, the Company will continue to concentrate its efforts on the
production of that portion of the telephone headset that the user wears. 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, the Company presently has
sourced the first of several amplifiers engineered to the Company's
specifications.
The Company will also continue to concentrate its efforts on the production and
distribution of new headset designs having the capability of connecting to and
interfacing with various electronic amplifiers and telephone systems currently
in use. The Company has adopted a co-engineering product development strategy
through the use of joint engineering agreements with companies with
complementary engineering patents. The Company projects that this strategy will
greatly increase the product development cycle while offering far superior
products to its customers. The Company has continued to make investments in
technology and has incurred development costs with respect to engineering
prototypes, pre-production models and field testing of several new products.
Management believes that the Company's investment in technology will result in
the improvement of the functionality, speed and cost of components and products.
Industry Background
The lightweight telephone headset industry commenced in 1961 when Plantronics, a
company founded by Keith Larkin, the Company's Chairman of the Board, Chief
Executive Officer and Treasurer, began marketing and selling the first
lightweight telephone headset under a patent issued to Mr. Larkin. Mr. Larkin
remained with Plantronics until May 1967, at which time Plantronics was the
principal manufacturer of lightweight telephone headsets in the world, and its
products were standard on the National Aeronautics and Space Administration's
Mercury, Gemini, and Apollo moon flights. Today, Plantronics is the world's
largest lightweight telephone headset manufacturer, with approximately $286
million of net sales for the 1999 fiscal year.
The Company estimates that sales of lightweight telephone headsets exceeded $500
million in 1999 and currently approximates $700 million with the market
dominated by two companies -- Plantronics and GN Netcom. The product lines of
these companies generally share similar configurations and are marketed at
higher prices than the products offered by the Company.
Designed specifically for air traffic controllers and other aerospace
applications, the first headsets were intended as a replacement for the heavy,
bulky headsets in use. While lightweight telephone headsets continue to be used
for such purposes, today telephone headsets are predominantly used as a
substitute to telephone handsets used by a wide variety of users, 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 communications clarity and
security. The Company believes that these advantages will lead to increased
demand for telephone headsets.
Telephone headsets also have 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.
Technology
Outlined below is information about technologies Pro Tech has licensed from NCT
Hearing:
Active Noise Reduction.
Active noise reduction systems are particularly effective at reducing low
frequency noise. ANR creates sound waves that are equal in frequency but
opposite in phase to the noise. The illustration which follows shows the
relationship, in time, of a noise signal, an anti-noise signal and the residual
noise that results when they meet.
ACTIVE NOISE REDUCTION
[OBJECT OMITTED]
<PAGE>
ClearSpeech(R)-Adaptive Speech Filter ("ClearSpeech(R)" and "ASF").
The ClearSpeech(R) algorithm removes noise from voice transmissions.
ClearSpeech(R) - ASF is effective against a variety of stationary noises whose
amplitude and pitch change slowly compared to the spectral variations
characteristic of human speech. ClearSpeech(R) - ASF is currently available for
use on three hardware platforms including personal computers ("PCs") and fixed
and floating digital signal processors ("DSP").
ClearSpeech(R)-Acoustic Echo Cancellation ("AEC").
ClearSpeech(R) - AEC removes acoustic echoes in hands-free full duplex
communication systems. ClearSpeech(R) - AEC is an adaptive, frequency-based
algorithm that continuously tracks and updates the changes in the acoustic path
between the loudspeaker and the microphone to eliminate the acoustic echo. The
algorithm can be changed to accommodate different audio bandwidths and acoustic
tail lengths for use in a variety of applications.
ClearSpeech(R)-Compression and TurboCompression ("CTC").
ClearSpeech(R) - CTC maximizes bandwidth efficiency in wireless, satellite and
intra- and Internet transmissions and creates smaller, more efficient voice
files while maintaining speech quality. The compression can be combined with
ClearSpeech(R) - ASF technology to further improve the compression rate and
voice quality. ClearSpeech(R) - CTC comes in two versions and can be implemented
as either a fixed or variable-rate speech coder.
ClearSpeech(R)-Referenced Noise Filter ("RNF")
ClearSpeech(R) - RNF isolates and removes interfering signals, such as
background radio, television, machine and siren noise, so communications can be
heard more clearly. The ClearSpeech(R) - RNF algorithm was designed to remove
interference from a desired signal in applications where a reference signal for
the interference is available.
Proprietary Rights and Protection
Historically, until its license agreement with NCT Hearing, the Company did not
own any patents for any of its products or technologies. The Company does not
currently own any registered trademarks, although the Company has filed one
trademark application with respect to its logo.
Due to the license agreement with NCT Hearing, Pro Tech now holds rights to a
large number of patents and patent applications. Pro Tech's intellectual
property strategy will be to build upon its base of core technology patents with
newer advanced technology patents developed by, purchased by or exclusively
licensed to the Company. The Company believes this building-block approach will
provide greater protection to the Company than relying solely on the original
core patents.
As a result of the transaction with NCT Hearing, Pro Tech has rights to 38
inventions, including 20 United States patents and over 7 corresponding foreign
patents for a total of 27 patents and related rights. The Company has pending
rights to 29 U.S. and foreign patent applications and has 3 of its own pending
US patent applications. NCT's engineers have made 7 invention disclosures for
which NCT is in the process of preparing patent applications. The Company's
licensed patents have expiration dates ranging from December 2000 through
October 2018.
The Company has applied for the following trademark:
Mark Field of Use
----- -------------
Pro Tech logo Company logo
No assurance can be given as to the range or degree of protection any patent or
trademark issued to, or licensed by, the Company will afford or that such
patents, trademarks or licenses will provide protection that has commercial
significance or will provide competitive advantages for the Company's products.
No assurance can be given that the Company's trademarks or licensed patents will
afford protection against competitors with similar patents, products or
trademarks. No assurance exists that the Company's trademarks or licensed
patents will not be challenged by third parties, invalidated, or rendered
unenforceable. Furthermore, there can be no assurance that any pending patent or
trademark applications or applications filed in the future will result in the
issuance of a patent or trademark. The invalidation, abandonment or expiration
of patents or trademarks owned or licensed by the Company which the Company
believes to be commercially significant could permit increased competition, with
potential adverse effects on the Company and its business prospects.
The Company's policy is to enter into confidentiality agreements with all of its
executive officers, key technical personnel and advisors as a condition of
employment but no assurances can be made that Company know-how, inventions and
other secret or unprotected intellectual property will not be disclosed to third
parties by such persons.
Products
The ProCom.
The Company's initial entry into the lightweight fast-food headset market is the
"ProCom." Weighing less than 2 ounces, the ProCom is worn by users 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 several various plug types offered by the
wireless belt-pack providers sold in many fast-food franchises around the world.
See "DESCRIPTION OF BUSINESS -- Competition." The Company is presently selling
the ProCom to distributors at prices ranging from $28.00 to $49.00 per headset,
and the product is sold by the Company to retailers for $54.00 per headset.
The Freedom.
The Freedom is an adaptation of the ProCom headset to allow for it to be worn
without a headband and is currently being sold in the fast-food market. Through
the use of a Company engineered clip, this headset attaches to the standard hat
or visor being worn in the fast-food franchise. The electronics in the Freedom
are virtually the same as the ProCom headset providing the same market
acceptance. Through its own research, the Company found the need for user
comfort from the use of headsets over very long time periods. The Company
introduced this product in April 1998.
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 in February of this fiscal
year and the Company will continue to offer this headset in the Company's
fast-food product line for the fiscal year 2000. The Company sells this headset
in a range from $28.00 to $50.00 depending on volumes purchased.
The APEX.
The Company introduced the APEX headset for sale in the second quarter of 1999.
After conducting its own market research, the Company determined that there is a
demand for a headset which combines both over-the-head and over-the-ear
features. As a result, the Company designed the APEX to incorporate both of
these features, which should enhance the Company's ability to market the product
to cellular, personal computer and small office telephone users. The Company had
offered the headset version initially, followed by the interchangeable version.
The APEX is a commercial adaptation of the headset that the Company has designed
for use by the National Aeronautics and Space Administration ("NASA"). Boeing
Defense and Space Group ("Boeing") is a prime contractor for NASA, and as such
has the responsibility to choose certain components and products used in NASA's
space program. The Company was chosen by The Boeing Corporation as a supplier of
telephone headsets for NASA projects after the Company provided Boeing with
product specifications which met NASA's requirements for the product. Boeing
also subjected the Company's product to various tests in order to ensure that
the product would function under conditions for space travel. See "Description
of Business -- Marketing and Sales". The APEX is a smaller design of the
Trinity, with components reduced by 20% in order to create a lightweight
headset. The speaker and microphone positioning can be easily adjusted by the
user for the headset thereby allowing the product to fit numerous head and ear
sizes. In addition, the APEX has a detachable headband allowing the users the
choice of wearing the headset over the head or over the ear. The Company
presently sells the APEX to distributors at prices ranging from $40.00 to $62.00
per headset. The APEX is being sold by distributors and directly by the Company
to end-users for $99.00 per headset.
The ASTRA.
The Company introduced the Astra headset for sale in the fourth quarter of 1999.
The Astra headset is a variation of the Apex headset in that it has been adapted
for use directly in non-amplified phone systems. A preamplifier circuit has been
inserted inside the headset to allow for a direct connection into an automatic
call distributor (ACD) or phone system that provides this required configuration
headset.
The A-10 Amplifier.
The A-10 amplifier is the first in a series of multi-line amplifiers being
offered with each of the Company's headsets. It is designed for the SOHO market
(small office/home office) and has been engineered to work with over 90% of all
existing phone systems in the world. The size is very small and engineered to
plug and play with most phone systems.
The A-27 Amplifier.
The A-27 amplifier is the first in a series of amplifiers specifically designed
for automatic control distributors (ACD) or phone systems which use the standard
PJ-237 2-prong plug as their interface. This amplifier will employ noise
suppression technology designed by the company. Three patent applications were
filed in fiscal year 2000. The A-27 was introduced into the call-center market
in the 2nd quarter of fiscal year 2000.
The Advent.
The Advent is the first in a series of wireless products being developed by the
Company. The Advent is designed for use in the small office market, and market
introduction started in the 3rd quarter of fiscal year 2000.
The Active Series Headset.
The Active Series Headset was introduced in the 2nd quarter of fiscal year 2000.
These headsets are designed for the mobile headset user. Cellular phone users
and automobile hands-free kits will be the primary market focus of this product.
The Trinity.
The Trinity has been designed for users in noisy environments. The Company
completed the development of this product early in the 2000 calendar year.
Unlike other headsets currently available, the Trinity will employ 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 the Company believes 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
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 will be produced with a choice of adapters capable of
interfacing with the electronic amplifiers and telephone systems of most major
manufacturers. The Company presently intends to sell the Trinity to distributors
at prices ranging from $40.00 to $75.00 per headset, and the product is planned
to be sold by the Company to retailers for $100.00 per headset.
The disparity in price between the cost to distributors and retailers for each
product described in this section is primarily a result of a shifting of direct
selling expenses from the Company to distributors. These expenses, averaging
approximately $10.26 of the individual unit retail price, have been accepted by
distributors in return for a lower average purchase price. The Company offers
lower prices for its products to distributors who purchase certain quantities of
products to increase sales and gain market share for the Company's products.
Products Under Development
Pro Tech is continually striving to develop lower cost, higher performance
headset products. There are currently advanced headset models under development
which utilize Pro Tech's proprietary digital technology for both the consumer
and industrial markets.
Marketing and Sales
The Company presently intends to market its product primarily through its
officers and staff, utilizing industry contacts and calling upon potential
purchasers. The Company plans on supplementing the marketing efforts of its
employees by using electronic commerce from the Company's web site along with
independent sales representatives and strategic marketing agreements.
The following summarizes the Company's key alliances:
-----------------------------------------------------------------------------
Date Initial
Relationship
Key Marketing Alliances Established Applications
------------------------------- --------------- -----------------------------
McDonalds 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
-----------------------------------------------------------------------------
The Company markets and will continue to market its headsets directly to the
commercial headset market as a replacement for its competitors' headsets.
Examples of such purchasers include fast food companies and franchisees and
other large quantity users of commercial headset systems. The Company entered
into a non-binding business relationship agreement with McDonalds Corp.
("McDonalds") which allows the Company to sell its products on a non-exclusive
basis to McDonalds' franchises and company-owned restaurants. Initial test sales
to McDonalds and its franchisees by the Company and Pro Tech Systems totaled
$424,300 in 1994, which included sales to more than 3,500 McDonalds'
restaurants. These numbers increased to more than 7,000 restaurants during
fiscal year 1995 and to more than 8,000 restaurants during fiscal year 1998. The
Company's 1999 sales of headsets decreased in fiscal year 1999 by 7.7% as a
result of an increase in competition for the existing fast-food market. The sale
of the Company's products to McDonalds'-owned restaurants and franchisee
restaurants represented approximately 17% and 12% of the Company's net sales for
the fiscal year 1998 and fiscal 1999, respectively.
As the Company expands, it will direct its marketing and sales efforts at: (i)
telephone operating companies; (ii) telephone system manufacturers; (iii)
personal computer manufacturers; and (iv) government agencies. In addition,
manufacturers of new telephone systems and other telecommunication equipment
that utilize headsets have been targeted by the Company as a developing market
for telephone headsets. The Company will also supplement the above strategies
with joint ventures and marketing agreements with companies with complementary
technologies. Although the Company presently intends to sell its products to
several large telephone users, there can be no assurance that the Company 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, the Company plans to market
its products to government agencies. The Company's headset has been approved for
sale to Boeing, a prime contractor of NASA, for use by astronauts in space
travel. To date, the Company has had $6,456 of sales to Boeing for prototype
headsets. While profits from government contracts are anticipated to be minimal,
such sales enhance the credibility and reputation of the selected headset and
its manufacturer, especially within the telephone industry.
Finally, the Company's directed marketing and sales efforts will be supplemented
by the distribution of the Company's products through established channels of
distribution. These include: (i) specialized headset distributors that derive a
majority of their revenues from the sale of headsets to both end users, and, to
a lessor extent, resellers; and (ii) large electronic wholesalers that offer
hundreds of products, including headsets. It is anticipated that a majority of
sales of the Company's headsets to commercial users such as credit card
companies and airlines will be through such distributors.
In addition to marketing its technology through its marketing alliances as
described above, as of September 30, 2000, the Company has an internal sales and
marketing force of 6 employees, 1 independent sales representative and its
executive officers and directors.
The Company does not have a significant foreign exchange transaction risk
because its non-U.S. revenue is denominated and settled in U.S. dollars.
Manufacturing
In fiscal year 1999, the Company made a major shift in its production by
completing the transition of its final assembly manufacturing process to a Far
East manufacturer. This transition was completed on August 1, 1999. This
decision was made as a result of major improvements in the quality of components
being provided to the Company from its principal suppliers along with a 44%
savings in production costs. The Company is currently sourcing all components
from several Far East suppliers who build each component according to Company
specifications. An interruption in the supply of a component for which the
Company is unable to readily procure a substitute source of supply could
temporarily result in the Company's inability to deliver products on a timely
basis, which in turn could adversely affect its operations. To date, the Company
has not experienced any shortages of supplies. In order to meet forecasted
customer requirements the Company has multiple suppliers for every component to
reduce the risk in a disruption of the supply chain. At October 31, 1998 and
1999, the amount of the Company's inventory was $245,610 and $285,883,
respectively. The increase in inventory level is attributed to two factors.
First, the Company benefited from an individual headset component price
reduction for larger purchases made from its suppliers. Second, the Company made
larger purchases of finished product in order to benefit from a further
reduction in costs from the manufacture of larger quantities.
As a result of the move of all production to the Far East, all existing
production facilities in the principal offices in Fort Pierce, Florida are now
being used for storing inventory, engineering, and specialty headset production.
The Company believes that the Fort Pierce office presently possesses sufficient
capacity for these uses. In the event that purchase orders were to exceed the
capabilities of the Fort Pierce location or the Company's supply chain from the
Far East were to be disrupted, the Company would immediately enter into
subcontracting arrangements for the products with other third parties. A delay
in establishing such arrangements, if necessary, could adversely affect the
Company's ability to deliver products on a timely basis to its customers, which
in turn could adversely affect the Company's operations. The Company, however,
believes that subcontracting the manufacture of the Company's products could be
accomplished on short notice given the simple design of the Company's products.
Concentrations of Credit Risk
The Company sells its products and services to OEMs, distributors and end users
in various industries worldwide. The Company's 10 largest customers accounted
for approximately 60% of revenues during fiscal 1999 and 40% of gross accounts
receivable at October 31, 1999. For the nine months ended July 31, 2000, 10
customers comprised approximately 70% of total revenues and 3 customers each
exceeded 8% of the July 31, 2000 accounts receivable, net of reserves. The
Company does not require collateral or other security to support customer
receivables.
The Company regularly assesses the realizability of its accounts receivable and
performs a detailed analysis of its aged accounts receivable. When quantifying
the realizability of accounts receivable, the Company takes into consideration
the value of past due receivables and the collectibility of such receivables,
based on credit worthiness.
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents and trade
receivables. The Company's cash equivalents consist of commercial paper and
other investments that are readily convertible into cash and have original
maturities of three months or less. The Company primarily maintains its cash and
cash equivalents in two banks.
Competition
The lightweight telephone headset industry is highly competitive and
characterized by a few dominant manufacturers. The Company is aware of several
companies who manufacture telephone headsets, each of which possesses greater
financial, manufacturing, marketing and other resources than the Company.
Primary among the Company's competitors is Plantronics, the world's largest
manufacturer of lightweight telephone headsets. Plantronics was founded by Mr.
Larkin. The Company estimates 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) were approximately $286 million for the fiscal year 1999. Other
competitors include GN Netcom, Inc. and Hello Direct. In 1997, GN NetCom, Inc.
purchased both UNEX Corporation and ACS Wireless in an attempt to grow its
market share through acquisitions and recently announced the potential
acquisition of Hello Direct. ACS Wireless was founded by Mr. Larkin. The Company
estimates that GN Netcom, Inc. has approximately 29% market share worldwide.
These companies are well established and have substantially greater management,
technical, financial, marketing and product development resources than Pro Tech.
The Company believes that in selecting telephone headsets, users primarily
consider price, product quality, reliability, product design and features, and
warranty terms. The Company believes that its headsets are superior in design
and construction and substantially lower in price than the models currently
available from the Company's competitors. No assurances can be given, however,
that the Company's products will be perceived by users and distributors as
providing a competitive advantage over competing headsets. In addition, no
assurance can be given 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 with substantially
greater resources than the Company.
In addition to direct competition from other companies offering lightweight
telephone headsets, the Company may face indirect competition in its industry
from technological advances such as interactive voice response systems which
require no human operators for certain applications such as account balance
inquiries or airplane flight information. The Company believes that this
competition will be more than offset by increased demand for headsets as voice
telecommunication applications expand.
Government Contracts
The Company currently is the contract provider of headsets to the Boeing
Corporation, the prime contractor to NASA (National Aeronautical Space
Administration), 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 the Company's business.
Research and Development
Company-sponsored research and development expenses aggregated approximately
$21,400, $40,815 and $70,809 for the fiscal years ended October 31, 1997, 1998
and 1999, respectively, and $7,318 and $74,595 for the three and nine months
ended July 31, 2000, respectively.
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 the Company.
Compliance by existing and potential customers of the Company with Federal,
state and local laws and regulations pertaining to maximum permissible noise
levels occurring from the operation of machinery or equipment or the conduct of
other activities could be beneficial to sellers of noise reduction products and
enhance demand for certain applications of the Company's technology, as well as
products developed or to be developed by the Company. At the present time, it is
premature to determine what quantitative effect such laws and regulations could
have on the sale of the Company's products and technology.
Employees
The Company currently has 16 full-time employees and 3 part-time employees,
including 3 persons in management, 5 persons in administration and shipping, 4
persons in marketing and 2 persons in assembly and production. The Company
intends to hire up to 3 additional employees within the next six months, one of
whom will work in engineering, 2 in marketing. None of the Company's employees
are represented by a collective bargaining unit, and the Company believes that
its relationship with its employees is good.
Business Segments
The Company operates in one business segment (lightweight headsets for
commercial use) predominantly within one geographic area (North America).
Available Information
The Company files annual, quarterly and special reports, proxy statements and
other information with the Securities Exchange Commission ("SEC"). You may read
and copy any publically filed document at the SEC's public reference rooms in
Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Pro
Tech's SEC filings are also available to the public from the SEC's website at
"http://www.sec.gov."
DESCRIPTION OF PROPERTY
The Company's executive, sales and manufacturing offices occupy approximately
5,000 square feet of space located at 3309 and 3311 Industrial 25th Street, Fort
Pierce, Florida 34946, pursuant to three leases expiring on November 30, 2000.
The Company's aggregate monthly rent under all leases is $2,450. The Company
considers its rental space adequate for its present operations, and believes
additional space is available near its present location, if needed.
LEGAL PROCEEDINGS
The Company is not party to any legal proceeding.
<PAGE>
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock began trading on the NASD OTC Bulletin Board on March 22, 1996.
The Company's 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 Company's last two fiscal years and the interim period of
the current fiscal year. The market quotations reflect inter-dealer prices,
without retail mark-up, markdown, or commission and may not represent actual
transactions.
Year ended October 31, 2000 High Low
--------------------------- ------- -------
First Quarter $0.310 $0.299
Second Quarter $0.880 $0.788
Third Quarter $0.670 $0.625
Fourth Quarter ** $0.640 $0.625
** Through 10/12/00
Year ended October 31, 1999 High Low
--------------------------- ------- -------
First Quarter $ 0.50 $ 0.38
Second Quarter $ 0.38 $ 0.27
Third Quarter $ 0.50 $ 0.31
Fourth Quarter $ 0.50 $ 0.19
Year ended October 31, 1998 High Low
--------------------------- ------- -------
First Quarter $ 4.49 $ 4.20
Second Quarter $ 2.86 $ 2.60
Third Quarter $ 0.97 $ 0.94
Fourth Quarter $ 0.36 $ 0.26
On November 1, 2000, the last reported sale of the Company's common stock as
reported by the NASD OTC Bulletin Board was $0.750. As of November 1, 2000,
there were approximately 52 record holders of the common stock.
The Company has neither declared nor paid any dividends on its shares of common
stock since its incorporation in October 1994 and does not anticipate declaring
a cash dividend in the reasonably foreseeable future. Any decisions as to the
future payment of dividends will depend on the earnings and financial position
of the Company and such other factors as the Board of Directors deems relevant.
The Company anticipates that it will retain earnings, if any, in order to
finance expansion of its operations.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a description of
the Company's sales of unregistered securities during fiscal 2000.
The annual meeting of the Company's shareholders was held on August 11, 2000.
Shareholders voted to approve an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of common stock from
10,000,000 shares to 40,000,000 shares and to create a new class of 1,000,000
shares of blank check preferred stock. The Company shareholders voted to amend
the Company's 1998 Stock Option Plan increasing the number of shares under the
1998 Plan from 500,000 to 2,000,000 shares of common stock.
As part of the Stock Purchase Agreement executed on September 12, 2000, the
Company appointed three representatives of NCT, Michael J. Parrella, Irene
Lebovics and Cy E. Hammond, to the Company's Board of Directors.
<PAGE>
DESCRIPTION OF SECURITIES
This offering consists of an aggregate of 32,967,438 shares of common stock of
the Company that may be offered for sale by the Selling Stockholders. The
Company will not receive any of the proceeds from the sale of such shares. Each
share of common stock of the Company has one vote per share. The Company has
never declared a dividend on its common stock and has no present intention of
doing so.
This offering includes 4,312,500 shares of common stock that the Company may
issue upon the conversion of issued and outstanding shares of the Company's
Series A Convertible Preferred Stock in accordance with the Company's Articles
of Amendment to its Articles of Incorporation.
This offering also includes 172,500 shares of common stock that the Company may
issue to pay the accretion on the stated value of the issued and outstanding
shares of the Company's Series A Convertible Preferred Stock as provided in the
Articles of Amendment to the Articles of Incorporation.
In addition, this offering includes 4,500,000 shares of common stock that the
Company may issue upon the exercise of warrants that the Company issued to the
investors in the Series A Convertible Preferred Stock private placement.
This offering also includes 559,375 shares of common stock issued by the Company
to an outside consultant in conjunction with the execution of the Stock Purchase
Agreement between the Company and NCT Hearing Products, Inc.
This offering also includes 23,423,063 shares of common stock that the Company
issued to NCT Hearing Products, Inc. pursuant to the Stock Purchase Agreement
between the Company and NCT Hearing Products, Inc.
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from the historical
financial statements of the Company. The data set forth below is qualified in
its entirety by and should be read in conjunction with the Company's "Financial
Statements" and Item 7 -"Management's Discussion and Analysis of Financial
Condition and Results of Operations" that are included elsewhere in this
registration statement and prospectus. Operating results for the periods ended
July 31, 2000 are not necessarily indicative of the results that may be expected
for the year ending October 31, 2000.
(In thousands, except per share amount)
Years Ended October 31,
----------------------------------------------
1995 1996 1997 1998 1999
----------------------------------------------
STATEMENTS OF OPERATIONS DATA:
Net sales $ 831 $ 853 $ 997 $ 1,142 $ 1,091
Cost of goods sold 359 282 334 470 415
------- ------- ------- -------- ---------
Gross profit 472 571 663 672 676
Operating expenses 415 505 703 921 897
------- ------- ------- -------- ---------
Operating income (loss) 57 66 (40) (249) (221)
Interest income 2 28 29 25 10
Interest expense (2) (14) - - (1)
Other income (expense), net 1 (79) (1) - (9)
------- ------- ------- -------- ---------
Income (loss) before income taxes 58 1 (12) (224) (221)
Income tax expense (benefit) 14 2 - (1) -
------- ------- ------- -------- ---------
Net income (loss) $ 44 (1) (12) (223) (221)
======= ======= ======= ======== =========
Income (loss) per share - basic $ 0.02 $ - $ - $ (0.05) $ (0.05)
Weighted average common shares
outstanding - basic 2,462 3,414 4,123 4,254 4,254
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------- --------------------
(Unaudited) 1999 2000 1999 2000
--------- ---------- --------- ----------
STATEMENTS OF OPERATIONS DATA:
Net sales $ 269 $ 507 $ 770 $ 1,025
Cost of goods sold 95 164 289 288
--------- ---------- --------- ----------
Gross profit 174 343 481 737
Operating expenses 240 351 676 862
--------- ---------- --------- ----------
Operating income (loss) (66) (8) (195) (125)
Interest income 2 - 9 2
Interest expense - (11) - (24)
Other income (expense), net - - - -
--------- ---------- --------- ----------
Income (loss) before income taxes (64) (19) (186) (147)
Income tax expense (benefit) - - - -
--------- ---------- --------- ----------
Net income (loss) $ (64) $ (19) $ (186) $ (147)
========= ========== ========= ==========
Income (loss) per share - basic $ (0.02) $ - $ (0.04) $ (0.03)
Weighted average common shares
outstanding - basic 4,254 4,266 4,254 4,266
<PAGE>
October 31,
----------------------------------------------------
1995 1996 1997 1998 1999
----------------------------------------------------
BALANCE SHEET DATA:
Total assets $ 879 $ 1,111 $1,239 $ 1,159 $ 945
Total current liabilities 313 99 82 210 210
Long-term debt - - - - 8
Retained earnings (deficit) 44 44 31 (192) (413)
Stockholders' equity 563 1,011 1,157 949 728
Working capital 473 878 997 725 494
July 31, 2000
--------------
(Unaudited)
BALANCE SHEET DATA:
Total assets $ 1,475
Total current liabilities 887
Long-term debt 2
Retained earnings (deficit) (560)
Stockholders' equity 586
Working capital 281
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.
Forward-Looking Statements
Statements in this registration statement and prospectus which are not
historical facts are forward-looking statements which involve risks and
uncertainties. The Company's actual results in fiscal 2000 and beyond may differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. Important factors that could cause actual results to
differ materially include but are not limited to the Company's ability to:
achieve profitability; achieve a competitive position in design, development,
production and distribution of headsets and related products; produce a cost
effective product that will gain acceptance in relevant commercial and other
product markets; increase revenues from products; realize funding from product
sales to sustain the Company's current level of operation; timely introduce new
products; maintain satisfactory relations with its customers; attract and retain
key personnel; prevent invalidation, abandonment or expiration of patents owned
or licensed by the Company; maintain and expand its strategic alliances; and
protect Company know-how, inventions and other secret or unprotected
intellectual property.
Results of Operations
Three months ended July 31, 2000 compared to three months ended July 31, 1999.
For the quarter ended July 31, 2000, the Company realized a net loss of
$(19,133) compared to a net loss of $(64,631) for the quarter ended July 31,
1999. The current reporting year loss improved as result of an increase of sales
of the Company's new telephone products along with maintaining the current
spending levels to the operation.
Net sales for the current period were 88% above the comparable 1999 period,
$506,826 versus $269,379 respectively. These sales resulted from the market
introduction of the Company's telephone headset products targeted for the
telephone headset user. Sales were to several small office and call-center
environments. The Company hopes to continue to expand the penetration of this
market through its existing direct and distributor channels. In addition, the
Company has increased shipments this quarter as a result of a marketing
agreement with Hello-Direct, a large manufacturer and distributor of telephone
headsets and telephony equipment, to market and sell Pro Tech's Trinity headset.
The agreement provides for the marketing and distribution of headsets through
Hello-Direct's large catalog distribution channel. In addition the Company has
begun the sale on its own of this new telephone headset, the Trinity, to several
customers. Several of these customers responded positively to this headset. The
Company expects sales to increase upon the market introduction of several new
products planned for sale during the fourth quarter of the current fiscal year.
Although this is the Company's intention, there can be no assurances that such
sales will occur in the fourth quarter or at any time in the future.
The Company continued the sale of its fast food products through distributors
augmenting these sales with direct sales from the Company's own outbound
telemarketing operation. Sales remained strong in this market particularly
through the Company's distributor sales channel. In addition, the Company
continues to benefit from a previously announced market introduction of colored
headsets at the International McDonald's Convention.
Gross margin percent improved 3.06% to 67.66% versus 64.60% in the comparable
1999 period as result of the cost savings from the transition of all production
offshore to the Far East. This action showed a major reduction in cost of goods
produced through the Company's now established Far East manufacturing partners.
However this improvement was offset by the need to continue to produce some
sub-assemblies at the Company's corporate offices in order to support the
dramatic increase in sales this quarter. The Company plans to keep the same
supply-chain and manufacturing process in place for all existing and new
products planned for market introduction in the 4th quarter of the current
fiscal year. Selling, general and administrative expenses (SG&A) for the fiscal
year were $351,174 or 69% of revenues versus $240,364 or 89% in revenues in the
comparable 1999 period. This increase of $110,810 was the result of the
Company's increasing expenditures in marketing and sales relating to the
expansion into the telephone headset market.
The Company increased its total marketing and associated advertising expenses to
$109,940 with $97,266 in the comparable 1999 period to support several telephone
trade shows attended by the Companies marketing staff. These trade shows allowed
the Company the opportunity to successfully present the new products planned for
market introduction in the current fiscal year along with the opportunity to
perform needed market research necessary to have successful product
introductions in the future. The Company also incurred one-time charges of
$15,000 in support of an existing investment banking relationship.
The Company has continued its investment in research and development and new
product development accounting for investments in mold designs and component
testing. The Company is also reviewing several possible alliances with companies
that have complementary products, which could provide access into several key
accounts in the telephone market. Although this is the Company's intention,
there are no formal agreements in place and no assurances can be given that they
will occur in the future. Net depreciation expenses increased to $10,371 or 2.1%
of revenues in the current fiscal year versus $9,942 or 3.6% of revenues in the
comparable 1999 period. This increase was as a result of an increased investment
in production molding associated with new product development.
Nine months ended July 31, 2000 compared to nine months ended July 31, 1999.
For the nine months ended July 31, 2000, the Company realized a net loss of
$(146,977) compared to a net loss of $(186,411) for the nine months ended July
31,1999. The current reporting year loss improved as result of an increase of
sales of the Company's new telephone products along with maintaining the current
spending levels to the operation.
Net sales for the current period were 33% above the comparable 1999 period,
$1,025,164 versus $769,624, respectively. These sales resulted from the market
introduction of the Company's telephone headsets products targeted for the
telephone headset user. Sales were to several small office and call-center
environments. The Company hopes to continue to expand the penetration of this
market through its existing direct and distributor channels. In addition, the
Company continues to benefit from an expanded marketing agreement with
Hello-Direct, a large manufacturer and distributor of telephone headsets and
telephony equipment, to market and sell Pro Tech's Trinity headset. The
agreement provides the market and distribution of headsets through
Hello-Direct's large catalog distribution channel. In addition the Company has
begun the sale on its own of this new telephone headset, the Trinity, to several
customers. Several of these customers responded positively to this headset. The
Company expects sales to increase upon the market introduction of several new
products planned in the fourth quarter of the current fiscal year. Although this
is the Company's intention, there can be no assurances that such sales will
occur in the fourth quarter or at any time in the future.
Gross margin percent improved 9.36% to 71.88% versus 62.52% in the comparable
1999 period primarily as a result of an adjusting entry of cost of good expenses
accrued in the previous year offset this year along with the cost savings from
the transition of all production offshore to the Far East. This action showed a
major gain in cost of goods produced through the Company's now established Far
East manufacturing partners. The Company plans to keep this same supply-chain in
place for all current and new products planned for market introduction in the
4th quarter of the current fiscal year. Selling, general and administrative
expenses (SG&A) for the fiscal year were $861,521 or 84% of revenues versus
$676,383 or 88% in revenues in the comparable 1999 period. This increase of
$180,592 was the result of the Company's expansion into the telephone headset
market.
The Company increased its total marketing and advertising expenses to $129,856
from $112,614 in the comparable 1999 period to support several telephone trade
shows attended by the Companies marketing staff. These trade shows allowed the
Company the opportunity to successfully present the new products planned for
market introduction in the 2nd quarter of the current fiscal year along with the
opportunity to perform market research necessary to have successful product
introductions in the future.
The Company has continued its investment in research and development and new
product development accounting for investments in mold designs and component
testing. The Company is also reviewing several possible alliances with companies
that have complimentary products which could provide access into several key
accounts in the telephone market. Although this is the Company's intention,
there are no formal agreements in place and no assurances can be given that they
will occur in the future. Net depreciation expenses increased to $30,878 or 3.0%
of revenues in the current fiscal year versus $28,175 or 3.7% of revenues in the
comparable 1999 period. This increase was as a result of an increased investment
in production molding associated with new product development.
Year ended October 31, 1999 compared to the year ended October 31, 1998.
For the year ended October 31, 1999, the Company realized a net loss of
$(221,065) compared to a net loss of $(223,416) for the year ended October 31,
1998. The current reporting year loss was attributed to three factors: (1) the
Company maintained production of its products at the Company's Florida office
for nine months of this fiscal year corresponding with incurring one-time
charges from the transition of the Company's production operations to the Far
East; (2) the Company's revenues were negatively impacted late in the second
half of this fiscal year as a result of a competitor's attempt to take away the
Company's distributor selling channel in the fast-food market; and (3) a
five-week delay in the market introduction of the Company's telephone headsets
as a result of the Taiwan earthquake in the 4th quarter of fiscal year 1999. For
fiscal year 1998, the loss is attributed to the following adjustments: (1) an
additional accrued warranty expense of $97,000, (2) the write-off of $36,062
owed to the Company from the closing of the Company's investment banker firm
under retainer; (3) a one time charge of $50,000 to the Company's production
department as a result of a product recall; and (4) the payment of $25,000 due
to the result of a mediated settlement with the Company's public relations firm.
Net sales generated during the year ended October 31, 1999 decreased 4.5% to
$1,090,551 from $1,142,482 in fiscal year ended October 31, 1998. This decrease
in sales was as a result of two factors: (1) delays in the market introduction
of several telephone products resulting in very little sales benefit for the
current fiscal year and (2) the adoption of the Company's distributor sales
strategy from one of the Company's direct competitors in the fast food market.
This action from this competitor severely impacted the ability of Pro Tech to
sell into this channel in the fourth quarter of the fiscal year 1999. This
channel represented 72% of the Company's sales volume for the fiscal year. The
Company, after realizing this competitive tactic, countered with increased
discounts of the Company's products. The result of this counter action has
allowed the Company to recoup approximately 30% of the revenues lost late in the
current fiscal year and the Company plans on using the same tactics to win back
business lost during this period in fiscal year 2000.
The Company continued the sale of its products through distributors augmenting
these sales with direct sales from the Company's own outbound telemarketing
operation. During fiscal year 1999, the Company sold 6.8% less headsets (units)
than the comparable fiscal 1998 twelve-month period. Net unit sales of fast-food
headsets decreased 6.7% primarily from the increase in competitive activity
described in the previous paragraph. Consistent with the Company's objectives,
the indirect distribution channel accounted for 64% of net revenues and 72% unit
volumes versus 64% of net revenues and 74% of unit volumes in the comparable
1998 period. The Company has successfully maintained its relationship with The
McDonald's Corporation and once again was selected to be a part of McDonald's
International Owner Operator's trade show held in April 2000. In addition, the
Company has been invited to present its products at KFC's International trade
show planned to be held in January of fiscal year 2000. Sales from outside the
fast-food market were negligible as a result of delays in the market
introduction of the Company's telephone product line. The Company expects sales
to increase upon the market introduction of new products planned in the 1st and
2nd quarter of fiscal year 2000.
Gross margin percent increased 3.13% to 61.95% versus 58.82% in comparable 1998
period as result of the fourth quarter cost savings from the transition of all
production offshore to the Far East. This action showed a 48% gain in cost of
goods produced through the Company's now established Far East manufacturing
partners. The Company plans to keep this same supply chain in place for all
existing and new products planned for market introduction in the 1st and 2nd
quarter of fiscal year 2000.
Selling, general and administrative expenses (SG&A) for the fiscal year were
$893,384 or 81% of revenues versus $882,385 or 76% in revenues in the comparable
1998 period. This increase was the result of several factors. First, in fiscal
year 1999, an unaffiliated investment banking firm was retained in order to
proceed with the structuring of a potential investment of capital into the
Company. The capital would be used for new product development along with the
associated expansion of sales personnel developing the telephone market. For
fiscal year 1999, the Company's expenses to this firm were $35,000. Second, the
Company increased its marketing and advertising expenses to $98,738 from $43,143
in the comparable 1998 period to support several telephone trade shows attended
by the Companies marketing staff. These trade shows allowed the Company the
opportunity to successfully present the new products planned for market
introduction in the 1st and 2nd quarter of fiscal year 2000 along with the
opportunity to perform needed market research necessary to have successful
product introductions in the future. The Company has continued its investment in
Research and Development and new product development accounting for investments
mold designs and component testing. Although this is the Company's intention
there is no formal agreements in place and no assurances that they will occur in
the future. The Company is also reviewing several possible alliances with
companies that have complimentary products which could provide access into
several key accounts in the telephone market. The Company was able to reduce its
accrued expenses associated with warranty charges for its product to $78,038 in
1999 from $152,503 1998. This change was as a result of major improvements made
in the quality and price of components used in the company's products.
Depreciation expenses increased to $45,222 or 4% of revenues in the current
fiscal year versus $38,783 or 3% of revenues in the comparable 1998 period. This
increase was as a result of an increased investment in production molding
associated with new product development along with investment in the improvement
of the Company's trade show marketing displays being used in call-center trade
shows.
The Company generated interest income of $10,202 for fiscal year 1999 as
compared to $24,719 for the comparable 1998 year. The interest income resulted
from the Company's investment of the net proceeds from the private placement of
securities into short-term certificates of deposits less cash available for
investment used in operations.
Year ended October 31, 1998 compared to the year ended October 31, 1997.
For the year ended October 31, 1998, the Company realized a net loss of
$(223,416) compared to a net loss of $(12,241) for the year ended October 31,
1997. This difference is attributed to the following adjustments: (1) an
additional accrued warranty expense of approximately $97,000, (2) the write-off
of $36,062 owed to the Company from the closing of the Company's investment
banker firm under retainer, (3) a one time charge of approximately $50,000 to
the Company's production department as a result of a product recall (4) the
payment of $25,000 due to the result of a mediated settlement with the Company's
public relations firm.
Net sales for the year ended October 31, 1998 totaled $1,142,482 versus $996,993
representing an increase of $145,489 or 14.6% over fiscal 1997. The Company
continued the sale of its products through distributors augmenting these sales
with direct sales from the Company's own outbound telemarketing operation. The
Company sold 19.7% more headsets (units) in fiscal 1998 compared to fiscal 1997.
Net unit sales of the ProCom headset increased 8% primarily from the expansion
of sales into international markets. Consistent with the Company's objectives,
the indirect distribution channel accounted for 64% of net revenues and 74% unit
volumes versus 63% of net revenues and 70% of unit volumes in the comparable
1997 period. Sales form the Freedom headset, and adaptation of the ProCom
headset, increased to 10% of sales to the fast-food market as this headset
begins to receive market acceptance.
Gross margin percent decreased 8% to 58% versus 66% in the comparable 1997
period partially as a result of the above mentioned non-recurring recall expense
of approximately $50,000. The Company has since received customer assurances of
the acceptance of the changes made in the product recall.
Selling, general and administrative expenses for the fiscal year were $882,385
versus $698,785 in the comparable 1997 period. This increase was the result of
several factors. First, the Company incurred a $97,000 charge in accrued
warranty expense to support the continual increase in sales of its products and
warranty activity. Second, the Company has continued its investment in research
and development and new product development accounting for investments in mold
designs and component testing. The Company intends to and is currently reviewing
the feasibility of adapting new sound technologies into its current and all
future products. The adaptation may result in several alliances with companies
that have these patented technologies. Although this is the Company's intention,
there are no formal agreements in place and no assurances that they will occur
in the future. Finally, the Company has increased its investment in marketing
and advertising expenses to support the introduction of several new products in
fiscal year 1999. In addition, in the fiscal year 1997, an unaffiliated
investment banking firm was retained in order to proceed with the structuring of
a potential purchase of another business. The acquisition did not occur
therefore requiring the balance of the retainer, $36,062, to be repaid to the
Company. The firm did not honor its agreement and in fiscal year 1998 announced
that it closed its business. The Company, consequently, assumed this loss.
The Company generated interest income of $24,719 for fiscal year 1998 as
compared to $28,688 for the comparable 1997 year. The interest income resulted
from the Company's investment of the net proceeds from the 1996 private
placement of securities into short-term certificates of deposits.
Liquidity and Capital Resources
The Company's current ratio (current assets to current liabilities) was 1.32 to
1.00 at July 31, 2000 as compared to 2.88 to 1.00 at July 31, 2000. At July 31,
2000, the Company's current assets exceeded its current liabilities by
approximately $281,038. The current ratio (current assets to current
liabilities) of the Company was 3.36 to 1.00 at October 31, 1999, as compared to
4.45 to 1.00 as of October 31, 1998. At October 31, 1999, the Company's current
assets exceeded its current liabilities by approximately $494,148.
During the current fiscal year ending October 31, 2000, the Company has funded
its working capital requirements with cash flow from operations and short-term
borrowings. Management does not believe that the Company has sufficient funds to
meet the Company's anticipated working capital requirements for the next 12
months. As such, on December 22, 1999, the Company entered into a short-term
factoring arrangement providing for advances of up to $300,000, based on 80% of
selected accounts receivable factored under the agreement on a recourse basis.
The Company is charged a factoring fee of 1% of each advance, plus 2% per month
on advances outstanding. In addition, the minimum fee charged per month is 1% of
the total factoring plan, or $3,000, during the life of the agreement, which is
for a six-month term with automatic renewals of additional six-month terms,
unless terminated by the Company with 30 days notice. The Company's obligations
are collateralized by all of the Company's accounts receivable, inventory, and
equipment. During 2000, the Company has obtained advances totaling $339,446
under the agreement.
In addition, in order for the Company to maximize the potential of the telephone
user market and to enable the Company to expand into additional markets,
including government agencies and personal computers, the Company will require
additional capital. On March 27, 2000, the Company obtained a loan from Westek
Communications Inc. for $150,000 payable in one year with an interest rate of
8.5%. These funds will finance ongoing product development along with the
associated market introduction and promotion of these new products. It is
anticipated that the Company will seek to raise additional financing as a result
of its relationship with NCT Hearing Products, Inc. and its parent company NCT
Group, Inc. On June 7, and July 7, 2000, the Company obtained bridge financing
of $300,000 through its relationship with NCT Group, Inc. in order to support
existing product development and working capital requirements.
There were no material commitments for capital expenditures as of July 31, 2000,
and no other material commitments are anticipated in the near future.
On September 12, 2000, the Company entered into a Stock Purchase Agreement with
NCT's subsidiary, NCT Hearing, pursuant to which NCT Hearing granted an
exclusive license to the Company for rights to certain NCT technologies for use
in lightweight cellular, multimedia and telephony headsets. The license is
royalty free unless and until NCT Hearing owns less than 50% of the Company's
common stock on a fully diluted basis. If NCT Hearing's percentage ownership of
common stock is less than 50%, the Company will be required to pay NCT Hearing a
royalty of 6% of net sales. In consideration for this license, the Company
issued 60% of its common stock on a fully diluted basis to NCT Hearing. These
shares are included in this registration statement and prospectus. As a
condition precedent to the closing of the transaction, NCT arranged $1.5 million
in equity financing for the Company through the sale of the Company's
convertible preferred stock (see below).
On September 29, 2000, the Company entered into a Securities Purchase and
Supplemental Exchange Rights Agreement with NCT, Austost, Balmore and Zakeni
Limited to consummate the $1.5 million financing arranged by NCT for the Company
in connection with its sale of Pro Tech Preferred to the Pro Tech Investors. The
Pro Tech Preferred consists of 1,500 designated shares, par value of $0.01 per
share and a stated value of one thousand dollars ($1,000) per share with
accretion of four percent (4%) per annum on the stated value payable upon
conversion or exchange in either cash or common stock at the election of the
Company. Under such agreement, the Pro Tech Investors may elect to exchange
their Pro Tech Preferred for shares of NCT common stock or convert their Pro
Tech Preferred for shares of the Company's common stock at a conversion price
which shall be the lesser of (i) the then lowest average of the average closing
bid price for a share of the Company's common stock as reported on the NASD OTC
Bulletin Board for any consecutive five day period out of fifteen trading days
preceding the date of such conversion, less a discount of 20%; or (ii) a fixed
conversion price of $0.50. This registration statement and prospectus includes
4,312,500 shares of the Company's common stock, together with an additional
172,500 shares of our common stock, that the Pro Tech Investors may offer to
sell if they elect to convert their Pro Tech Preferred into the Company's common
stock. The additional 172,500 shares of common stock will allow the Company to
pay the 4% annual accretion on the Pro Tech Preferred.
In connection with the execution of the Securities Purchase and Supplemental
Exchange Rights Agreement on September 29, 2000, the Company issued warrants to
the Pro Tech Investors to acquire 4.5 million shares of the Company's common
stock. Such warrants are exercisable at $0.50 per share and expire on October
28, 2003. In addition, the Company has the right to require the warrant holders
to exercise upon a call from the Company. The warrants are callable as follows:
(i) one third of the warrants are callable by the Company if the closing bid
price of the common stock for each of the previous fifteen trading days equals
or exceeds $0.68 per share and the average daily trading volume during such
period is equal to or exceeds 150,000 shares; (ii) two thirds of the warrants
are callable by the Company if the closing bid price of the common stock for
each of the previous fifteen trading days equals or exceeds $0.94 per share and
the average daily trading volume during such period is equal to or exceeds
150,000 shares; and (iii) the warrants are callable in their entirety by the
Company if the closing bid price of the common stock for each of the previous
fifteen trading days equals or exceeds $1.135 per share and the average daily
trading volume during such period is equal to or exceeds 150,000 shares. The
shares that the Company may issue upon exercise of the warrants are included in
this registration statement and prospectus.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There have been no disagreements with independent accountants on accounting and
financial disclosure matters as of the Company's fiscal 1999 10-KSB filing,
filed as of January 31, 2000, as amended April 12 and April 26, 2000.
Morgan, Jacoby, Thurn, Boyle & Associates, P.A. ("Morgan Jacoby"), independent
public accountants, currently serves as the Company's independent auditors.
Morgan Jacoby acted as auditors of the Company for the fiscal year ended October
31, 1999 and will audit the accounts of the Company for the fiscal year ending
October 31, 2000.
<PAGE>
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 the Company as of October 23,
2000.
Name Age Positions and Offices
----------- --- ---------------------------------------
Keith Larkin 76 Chairman of the Board, Chief Executive
Officer and Treasurer
Richard Hennessey 41 President, Director and Secretary
Michael J. Parrella 52 Director
Cy E. Hammond 46 Director
Irene Lebovics 47 Director
Keith Larkin is the founder, Chairman of the Board of Directors, Chief Executive
Officer and Treasurer of the Company. Mr. Larkin's 30-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 1999 of approximately
$286 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 the
Company, positions which he held until February 2, 1998, when he resigned as
President of the Company but retained his position as Chairman of the Board of
Directors, Chief Executive Officer and Treasurer.
Richard Hennessey joined the Company 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 to Secretary and Director of the Company. On February 2,
1999 Mr. Hennessey was appointed President and Chief Operating Officer of the
Company. 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. From January 1995
until Mr. Hennessey joined the Company, he was engaged in voluntary missionary
work.
Michael J. Parrella currently serves as a Director of the Company. Mr. Parrella
is Chairman of the Board of Directors and Chief Executive Officer of NCT. From
November 1994 to July 1995, Mr. Parrella served as Executive Vice President of
NCT. Prior to that, from February 1988 until November 1994, he served as
President and Chief Operating Officer of NCT. He initially became a director of
NCT in 1986 after evaluating the application potential of NCT's noise
cancellation technology. At that time, he formed an investment group to acquire
control of the Board of Directors and to raise new capital to restructure NCT
and its research and development efforts. Mr. Parrella also serves as Chief
Executive Officer and Acting President of NCT Audio Products, Inc. ("NCT
Audio"), a subsidiary of the Company, a position to which he was elected on
September 4, 1997. He became a director of NCT Audio on August 25, 1998. Mr.
Parrella is a director of Advancel Logic Corp. ("Advancel"), a subsidiary of
NCT, serves as Chairman of the Board of Distributed Media Corporation ("DMC"), a
subsidiary of NCT, serves as Chairman of the Board of NCT Hearing Products, Inc.
("NCT Hearing"), a subsidiary of NCT, and serves as Chairman of the Board of
Midcore Software, Inc., ("Midcore"), a subsidiary of NCT.
Cy E. Hammond currently serves as a Director of the Company. Mr. Hammond 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. Mr. Hammond also serves as Acting Chief
Financial Officer and Treasurer of NCT Audio, a position to which he was elected
on September 4, 1997, and Acting Chief Financial Officer, Treasurer and
Assistant Secretary for Advancel, a position to which he was elected on January
5, 2000. Mr. Hammond serves as a director of Midcore. 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.
Irene Lebovics currently serves as a Director of the Company. Ms. Lebovics is
President and Secretary of NCT and President of NCT Hearing. On January 5, 2000,
Ms. Lebovics was elected Acting Chief Marketing Officer and Secretary of
Advancel. She joined NCT as Vice President of NCT and President of NCT Medical
Systems ("NCTM") in July 1989. In March 1990, NCTM became part of NCT Personal
Quieting and Ms. Lebovics served as President. In January 1993, she was
appointed Senior Vice President of NCT. In November 1994, Ms. Lebovics became
President of NCT Hearing. From August 1, 1995, to May 1, 1996, she also served
as Secretary of NCT. Ms. Lebovics has held various positions in product
marketing with Bristol-Myers, a consumer products company, and in advertising
with McCaffrey and McCall. Ms. Lebovics serves as a director of DMC and Midcore.
EXECUTIVE COMPENSATION
Executive Compensation and Summary Compensation Table
Set forth below is certain information for the three fiscal years ended October
31, 1999, 1998 and 1997 relating to compensation received by the Company's Chief
Executive Officer and, if applicable, the other four most highly compensated
officers of the Company whose total annual salary and bonus for the fiscal year
ended October 31, 1999 exceeded $100,000.
<TABLE>
<CAPTION>
Securities
Other Underlying All
Name and Principal Salary Bonus Annual Options/Warrants Other
Position Year ($) ($) Compensation ($) SARs (#) Compensation
------------------------ -------- ---------- ----------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Keith Larkin 1999 $ 25,000 $ - $ - 540,000 $ -
Chairman of the Board 1998 45,000 - - - -
Chief Executive Officer 1997 42,500 - - - -
and Treasurer
</TABLE>
Compensation Arrangements with Certain Officers and Directors
The Company had an employment agreement with Keith Larkin, which was terminated
on February 2, 1999. The agreement provided for a maximum annual salary of
$90,000 with additional amounts added using the consumer price index as a
minimum. Mr. Larkin was eligible for the maximum annual salary during a given
year only if the Company generated annual sales of at least $2,000,000 and
pre-tax income equal to at least 20% of the Company's annual sales. Since the
Company did not meet the minimum requirements during fiscal years 1997, 1998 or
1999, the Board of Directors paid Mr. Larkin the compensation set forth in the
preceding table.
The Company has no set salary obligations to Mr. Larkin for his services for the
current or future fiscal years. Mr. Larkin, however, has agreed to assign to the
Company 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, Chief Executive Officer and Treasurer of the Company.
The Company does not have a written employment agreement with Richard Hennessey.
During each of the fiscal years ended October 31, 1999, 1998 and 1997, Mr.
Hennessey received a salary of $51,000, $51,000 and $45,000, respectively.
Messrs. Larkin and Hennessey did not receive any additional compensation for
serving as directors of the Company.
Compensation of Directors
No directors of the Company have received any fees for serving as a director.
Stock Options and Warrants
The following table summarizes the stock option activity of the Company's
executive officers during fiscal 1999:
Options Granted in Fiscal 1999
Percent of
Total Options
Granted
Shares To Exercise
Underlying Employees Fiscal Price Expiration
Name Options Granted Year 1999 Per Share Date
---- --------------- --------- --------- ----
Keith Larkin 540,000(1) 73% $ 0.50 4/15/01(1)
Richard Hennessey 200,000(2) 27% $ 0.38 4/13/04(2)
(1) Options to purchase these shares were granted on April 15, 1996 pursuant to
the 1996 Stock Option Plan, and the options were to expire on April 14,
1999. On April 13, 1999, the Board of Directors extended the expiration
date for these options until April 15, 2001.
(2) Options to purchase these shares were granted on April 13, 1999 pursuant to
the 1998 Plan and are exercisable until April 13, 2004. The vesting
schedule of such grant is as follows: 100,000 shares, immediately; 50,000
shares on April 13, 2000; and 50,000 shares on April 13, 2001.
1999 Aggregated Option and Warrant Exercises and
October 31, 1999 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 fiscal year ended
October 31, 1999, and the unexercised options and warrants held and the value
thereof at that date, by each of Mr. Larkin and Mr. Hennessey.
<TABLE>
<CAPTION>
Number of Shares
Number Underlying Value of Unexercised
of Unexercised Options In-the-Money Options
Shares and Warrants at And Warrants at
Acquired October 31, 1999 October 31, 1999
On Value ---------------------------------- -------------------------
Name Exercise (#) Realized (#) Exercisable (#) Unexercisable (#) Exercisable Unexercisable
---------------- ------------ ------------- --------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Keith Larkin - - 540,000 - $ - $ -
Richard Hennessey - - 200,000 150,000 $ - $ -
</TABLE>
During fiscal year 1999, neither Mr. Larkin nor Mr. Hennessey exercised any
stock options. The fair market value of the Company's common stock as of October
31, 1999 was less than the exercise price for both Mr. Larkin's and Mr.
Hennessey's stock options. Accordingly, as of October 31, 1999, Mr. Larkin's and
Mr. Hennessey's unexercised stock options had no value.
1996 Stock Option Plan
On April 15, 1996, the Board of Directors of the Company adopted the Company's
1996 Stock Option Plan. The 1996 Plan provides for the grant by the Company of
options to purchase up to an aggregate of 590,000 of the Company's 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 the Company.
The purposes of the 1996 Plan are to provide incentive to employees, including
officers, directors and consultants of the Company, to encourage such persons to
remain in the employ of the Company and to attract to the Company persons of
experience and ability. The 1996 Plan terminates on April 15, 2002.
Options granted under the 1996 Plan may be either incentive stock options within
the meaning of the Internal Revenue Code of 1986, as amended, or options that do
not qualify as incentive options. The exercise price of incentive options must
be at least equal to the fair market value of the shares of common stock on the
date of grant; provided, however, that the exercise price of any incentive
option granted to any person who, at the time of the grant of the option, owns
stock aggregating 10% or more of the total combined voting power of the Company
or any parent or subsidiary of the Company, must not be less than 110% of the
fair market value
On April 15, 1996, 540,000 and 50,000 shares were granted to the Company's then
president and officers, respectively, at an option price of $0.50 per share. The
stock option exercise price was the fair value at the date of the grant, which
was determined from the price paid per share during the Company's stock offering
carried out in 1996. The stock options are exercisable upon the grant date,
extending over a period of three years.
Prior to fiscal year 1998, the Company received $25,000 upon issuance of 50,000
shares of common stock upon the exercise of 50,000 options by the Company's
officers. On April 13, 1999 the remaining 540,000 options issued to the
Company's previous president were extended for 2 years to April 15, 2001.
1998 Stock Option Plan
On March 5, 1998, the Board of Directors adopted the 1998 Stock Option Plan for
the benefit of directors, officers, employees and consultants to the Company.
The 1998 Plan authorized the issuance of up to 500,000 shares of common stock.
On August 4, 1998, 200,000 and 100,000 shares were granted to the Company's
officers and employees, respectively, at an option price of $0.375 per share.
The stock option exercise price was the fair market value of a share of common
stock at the date of the grant. Options to purchase 150,000 shares of common
stock granted to Richard Hennessey vest and are exercisable 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
were granted to Richard Hennessey at an option price of $0.38 per share. The
stock option 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.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company's Board of Directors for the last
completed fiscal year consisted of Richard Hennessey, President of the Company
and Keith Larkin, Chief Executive Officer and Treasurer of the Company.
Report on Executive Compensation by the Compensation and Stock Option Committees
The primary objective of the compensation policy of the Company is to align
executive compensation in a way that will encourage enhanced shareholder value,
while concurrently allowing the Company to attract, retain and satisfactorily
reward all employees who contributed to the Company's long-term growth and
economic success. The main principles of the compensation program are (1) the
development of incentive plans, (2) the attainment of both the Company's
short-term and long-term growth operational goals and strategic initiatives, (3)
the development of competitive compensation packages that will enable the
Company to attract, retain and motivate high caliber employees without depleting
the Company's resources, and (4) to provide incentives to the Company's
executives and other employees to share in appreciation of the price of the
Company's common stock, thereby aligning their interests with those of the
Company's shareholders. The compensation program for the Company's executives
includes an annual salary and stock options.
THE COMPENSATION COMMITTEE
By: /s/ KEITH LARKIN
-----------------------------------
Keith Larkin
Chairman of the Board of Directors
/s/ RICHARD HENNESSEY
-----------------------------------
Richard Hennessey
President and a Director
Performance Graph
Note: The stock price performance shown on the graph below is not necessarily
indicative of future price performance.
Pro Tech Communications, Inc.
Stock Performance (1)
[OBJECT OMITTED]
----------------------------------------------------------------
10/31/96 10/31/97 10/30/98 10/29/99
----------------------------------------------------------------
PCTU 100 187 21 13
----------------------------------------------------------------
NASDAQ Composite Index 100 132 147 246
----------------------------------------------------------------
NASDAQ Telecommunications
Stock Index (2) 100 145 199 364
----------------------------------------------------------------
(1) Assumes an investment of $100.00 in the Company's common stock and in each
index on October 31, 1996.
(2) The Company has selected the NASDAQ Telecommunications Stock Index composed
of companies in the telecommunications industry listed on the NASDAQ
National Market System because it is unable to identify a sufficient peer
group or an appropriate published industry or line of business index other
than the NASDAQ Telecommunications Stock Index.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of October 23, 2000, information concerning
the shares of common stock beneficially owned by each person who, to the
knowledge of the Company, is (i) the beneficial owner of more than five percent
of the common stock of the Company, (ii) each director of the Company, (iii) the
five most highly compensated executive officers of the Company, if such
compensation was at least $100,000, (including the Company's Chief Executive
Officer) in the last fiscal year, and (iv) all executive officers and directors
of the Company 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 Approximate
of Beneficial Percentage
Name of Beneficial Owner Ownership of Class
------------------------ ------------------ -------------
Keith Larkin 1,380,000(1) 4.8%
Richard Hennessey 300,000(2) 1.1%
Michael J. Parrella(4) - -
Irene Lebovics(4) - -
Cy E. Hammond(4) - -
NCT Hearing Products, Inc. 23,423,063 82.9%
Austost Anstalt Schaan 2,007,768(3) 6.6%
Balmore S.A. 2,007,768(3) 6.6%
Zakeni Limited 4,015,537(3) 12.4%
All Executive Officers and Directors as a
Group (5 persons) 1,680,000(1)(2) 5.8%
----------------
Note: 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.
(1) Includes 540,000 shares of common stock underlying a stock option, which is
presently exercisable at $.50 per share and expires on April 15, 2001, and
40,000 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.
(2) Represents 300,000 shares of common stock underlying two stock options,
which are presently exercisable. Of such options, 50,000 expire on August
4, 2001, 50,000 expire on August 4, 2002, 50,000 expire on August 4, 2003
and 200,000 expire on August 13, 2004.
(3) Includes shares of common stock that beneficial owner has the right to
acquire pursuant to exercise of currently exercisable warrants as follows:
Austost - 1,125,000 shares; Balmore - 1,125,000 shares; and Zakeni Limited
- 2,250,000 shares. Also includes shares of common stock that beneficial
owner has the right to acquire pursuant to conversion rights. Such
conversion shares were determined using 80% of the lowest, consecutive
five-day average close of the fifteen-day trading period ending October 23,
2000, or $0.531 per share. No accretion shares have been included in the
calculation. The conversion shares included above are as follows: Austost -
882,768 shares; Balmore - 882,768 shares; and Zakeni Limited - 1,765,537
shares.
(4) Messrs. Parrella and Hammond, and Ms. Lebovics, are officers of NCT and Mr.
Parrella is a director of NCT. NCT Hearing is a wholly owned subsidiary of
NCT. Messrs. Parrella and Hammond, and Ms. Lebovics, disclaim beneficial
ownership in respect of the Company's common stock held by NCT Hearing.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Certain Relationships
From time to time, the Company has entered into lending arrangements with its
executive officers or has borrowed funds from its shareholders. On March 27,
2000, the Company received a loan of $150,000 from Westek Communications, a
shareholder of the Company. The loan matures on March 27, 2001 and bears
interest at 8.5% per annum, payable at maturity.
The Pro Tech Investors provided an aggregate of approximately $300,000 in bridge
financing to the Company. On June 6, 2000, the Company received a loan of
$100,000 from Balmore S.A. The loan was due September 1, 2000 and bore a 10%
interest rate from issuance until the loan was paid in full. On June 7, 2000,
the Company received a loan of $100,000 form Austost Anstalt Schaan. The loan
matures on September 1, 2000 and bears interest at 10%. On July 6, 2000, the
Company received a loan of $99,975 from Zakeni Limited. The loan matures on
October 1, 2000 and bears a 10% interest rate from issuance until it is paid in
full. Each of these loans were repaid when the Pro Tech Investors funded the Pro
Tech Preferred.
Indebtedness of Management
During fiscal year 1996, the Company loaned $28,882 to Keith Larkin. The
outstanding principal and interest, at the rate of 5% per annum, are due August
2, 2003. During fiscal year 1998, the Company loaned an additional $3,650 to Mr.
Larkin, which is due October 31, 2002, with interest at the rate of 5% per
annum. As of October 31, 1999, Mr. Larkin owed the Company outstanding principal
and interest totaling $43,743.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than 10% shareholders are required by
regulations of the Securities and Exchange Commission to furnish the Company
with copies of all such reports. Based solely on its review of the copies of
such reports received by it, or written representations from certain reporting
persons that no reports were required for those persons, the Company believes
that, during the period from November 1, 1998 to October 31, 1999 and through
the date hereof, its officers, directors, and greater than 10% shareholders
complied with the filing requirements of Section 16(a) of the Exchange Act.
OTHER INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by the registrant
with respect to the offering described in this registration statement:
Securities and Exchange Commission
registration fee $ 6,527.55
Legal fees and expenses 30,000.00*
Accounting fees and expenses 15,000.00*
Miscellaneous expenses 8,472.45*
------------
Total $60,000.0*
============
* Estimated
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Registrant's Bylaws provides as follows:
Section 1. General. To the fullest extent permitted by law, this Corporation
shall be entitled but not obligated to indemnify any person who is or was a
party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or other type of proceeding (other than an action by or
in the right of this Corporation), whether civil, criminal, administrative,
investigative or otherwise, and whether formal or informal, by reason of the
fact that such person is or was a director or officer of this Corporation or is
or was serving at the request of this Corporation as a director, officer,
employee, agent, trustee or fiduciary of another corporation, partnership, joint
venture, trust (including, without limitation, an employee benefit trust) or
other enterprise, against judgments, amounts paid in settlement, penalties,
fines (including an excise tax assessed with respect to any employee benefit
plan) and expenses (including attorneys' fees, paralegals' fees and court costs)
actually and reasonably incurred in connection with any such action, suit or
other proceeding, including any appeal thereof, if such person acted in good
faith and in a manner such person reasonably believed to be in, or not opposed
to, the best interests of this Corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful. The termination of any such action, suit or other proceeding by
judgment, order, settlement or conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner that such person reasonably believed to be
in, or not opposed to, the best interests of this Corporation or, with respect
to any criminal action or proceeding, had reasonable cause to believe that such
person's conduct was unlawful.
Section 2. Actions by or in the Right of this Corporation. To the fullest extent
permitted by law, whenever indemnification is proper as determined below, this
Corporation shall be obligated to indemnify any person who is or was a party, or
is threatened to be made a party, to any threatened, pending or completed
action, suit or other type of proceeding (as further described in Section 1 of
this Article VI) by or in the right of this Corporation to procure a judgment in
its favor by reason of the fact that such person is or was a director or officer
of this Corporation or is or was serving at the request of this Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees,
paralegals' fees and court costs) and amounts paid in settlement not exceeding,
in the judgment of the Board of Directors, the estimated expenses of litigating
the action, suit or other proceeding to conclusion, actually and reasonably
incurred in connection with the defense or settlement of such action, suit or
other proceeding, including any appeal thereof, if such person acted in good
faith and in a manner such person reasonably believed to be in, or not opposed
to, the best interests of this Corporation, except that no indemnification shall
be made under this Section 2 in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable unless, and only to the
extent that, the court in which such action, suit or other proceeding was
brought, or any other court of competent jurisdiction, shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnification for such expenses that such court shall deem proper.
Section 3. Obligation to Indemnify. To the extent that a director or officer has
been successful on the merits or otherwise in defense of any action, suit or
other proceeding referred to in Section 1 or Section 2 of this Article VI, or in
the defense of any claim, issue or matter therein, such person shall, upon
application, be indemnified against expenses (including attorneys' fees,
paralegals' fees and court costs) actually and reasonably incurred by such
person in connection therewith.
Section 4. Determination that Indemnification is Proper. Indemnification
pursuant to Section 1 or Section 2 of this Article VI, unless made under the
provisions of Section 3 of this Article VI or unless otherwise made pursuant to
a determination by a court, shall be made by this Corporation only as authorized
in the specific case upon a determination that the indemnification is proper in
the circumstances because the indemnified person has met the applicable standard
of conduct set forth in Section 1 or Section 2 of this Article VI. Such
determination shall be made either (1) by the Board of Directors by a majority
vote of a quorum consisting of Directors who were not parties to the action,
suit or other proceeding to which the indemnification relates; (2) if such a
quorum is not obtainable or, even if obtainable, by majority vote of a committee
duly designated by the Board of Directors (the designation being one in which
directors who are parties may participate) consisting solely of two or more
directors not at the time parties to such action, suit or other proceeding; (3)
by independent legal counsel (i) selected by the Board of Directors in
accordance with the requirements of subsection (1) or by a committee designated
under subsection (2) or (ii) if a quorum of the directors cannot be obtained and
a committee cannot be designated, selected by majority vote of the full Board of
Directors (the vote being one in which directors who are parties may
participate); or (4) by the shareholders by a majority vote of a quorum
consisting of shareholders who were not parties to such action, suit or other
proceeding or, if no such quorum is obtainable, by a majority vote of
shareholders who were not parties to such action, suit or other proceeding.
Section 5. Evaluation and Authorization. Evaluation of the reasonableness of
expenses and authorization of indemnification shall be made in the same manner
as is prescribed in Section 4 of this Article VI for the determination that
indemnification is permissible; provided, however, that if the determination as
to whether indemnification is permissible is made by independent legal counsel,
the persons who selected such independent legal counsel shall be responsible for
evaluating the reasonableness of expenses and may authorize indemnification.
Section 6. Prepayment of Expenses. Expenses (including attorneys' fees,
paralegals' fees and court costs) incurred by a director or officer in defending
a civil or criminal action, suit or other proceeding referred to in Section 1 or
Section 2 of this Article VI may, in the discretion of the Board of Directors,
be paid by this Corporation in advance of the final disposition thereof upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if such person is ultimately found not to be entitled to
indemnification by this Corporation pursuant to this Article VI.
Section 7. Nonexclusivity and Limitations. The indemnification and advancement
of expenses provided pursuant to this Article VI shall not be deemed exclusive
of any other rights to which a person may be entitled under any law, bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, both
as to action in such person's official capacity and as to action in any other
capacity while holding office with this Corporation, and shall continue as to
any person who has ceased to be a director or officer and shall inure to the
benefit of such person's heirs and personal representatives. The Board of
Directors may, at any time, approve indemnification of or advancement of
expenses to any other person that this Corporation has the power by law to
indemnify, including, without limitation, employees and agents of this
Corporation. In all cases not specifically provided for in this Article VI,
indemnification or advancement of expenses shall not be made to the extent that
such indemnification or advancement of expenses is expressly prohibited bylaw.
Section 8. Continuation of Indemnification Right. Unless expressly otherwise
provided when authorized or ratified by this corporation, indemnification and
advancement of expenses as provided for in this Article VI shall continue as to
a person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors, and administrators of such person.
For purposes of this Article VI, the term "corporation" includes, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger, so that any
person who is or was a director or officer of a constituent corporation, or is
or was serving at the request of a constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, is in the same position under this Article VI with
respect to the resulting or surviving corporation as such person would have been
with respect to such constituent corporation if its separate existence had
continued.
Section 9. Insurance. The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
this Corporation, or who is or was serving at the request of this Corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity or arising out of
such person's status as such, whether or not this Corporation would have the
power to indemnify such person against the liability under Section 1 or Section
2 of this Article VI.
RECENT SALES OF UNREGISTERED SECURITIES
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a description of
the Company's sales of unregistered securities.
<PAGE>
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements.
The financial statements and notes thereto are included herein beginning at page
F-1. The following financial statements are filed as part of this Registration
Statement Form S-1.
Independent Auditors' Report
Balance Sheets as of October 31, 1998 and October 31, 1999
Statements of Operations for the years ended October 31, 1997, 1998 and 1999
Statements of Stockholders' Equity for the years ended October 31, 1997, 1998
and 1999
Statements of Cash Flows for the years ended October 31, 1997, 1998 and 1999
Notes to Financial Statements
Condensed Balance Sheets as of July 31, 1999 and July 31, 2000 (unaudited)
Condensed Statements of Operations for the three and nine months ended July 31,
1999 and 2000 (unaudited)
Condensed Statements of Cash Flows for the nine months ended July 31, 1999 and
2000 (unaudited)
Notes to Condensed Financial Statements (unaudited)
(a) (2) Financial Statement Schedules.
Financial statement schedules are omitted because the conditions requiring their
filing do not exist or the information required thereby is included in the
consolidated financial statements filed or notes thereto.
(a) (3) Exhibits.
The exhibits listed on the accompanying Index to Exhibits are filed as part of
this Registration Statement on Form S-1.
<PAGE>
Pro Tech Communications, Inc.
Index to Exhibits
Item 16(a)(3)
Exhibit
Number Description of Exhibit
* 3(a) Amended and Restated Articles of Incorporation of the Company as
filed with the Secretary of the State of Florida on August 2, 2000,
incorporated herein by reference to Exhibit 3(a) to the Company's
Quarterly Report on Form 10-QSB for the quarter ended July 31, 2000.
3(b) Amended and Restated Articles of Incorporation of the Company as filed
with the Department of State of the state of Florida on September 29,
2000.
3(c) Bylaws of the Company.
4(a) Warrant to purchase 1,125,000 shares of common stock of the Company at
a purchase price of $0.50 per share issued to Austost Anstalt Schaan.
4(b) Warrant to purchase 1,125,000 shares of common stock of the Company at
a purchase price of $0.50 per share issued to Balmore S.A.
4(c) Warrant to purchase 2,250,000 shares of common stock of the Company at
a purchase price of $0.50 per share issued to Zakeni Limited.
5 Opinion of Crowell & Moring LLP.
* 10(a) 1996 Stock Option Plan. (1)
10(b) 1998 Stock Option Plan (1); incorporated herein by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-8 filed
on August 3, 1998.
* 10(c) Stock Option, dated April 15, 1996, issued by the Company to
Keith Larkin. (1)
10(d) Stock Option, dated August 4, 1998, issued by the Company to Richard
Hennessey. (1)
10(e) Stock Option, dated April 13, 1999, issued by the Company to Richard
Hennessey. (1)
10(f) Promissory Note, dated March 27, 2000 issued by the Company to Westek
Communications.
10(g) Stock Purchase Agreement between the Company and NCT Hearing
Products, Inc., dated September 12, 2000.
10(h) License Agreement between the Company and NCT Hearing Products, Inc.,
dated September 12, 2000.
10(i) Securities Purchase and Supplemental Exchange Rights Agreement, dated
as of September 29, 2000, among the Company, NCT Group, Inc., Austost
Anstalt Schaan, Balmore S.A. and Zakeni Limited.
10(j) Registration Rights Agreement, dated as of September 29, 2000, among
the Company, NCT Group, Inc., Austost Anstalt Schaan, Balmore S.A. and
Zakeni Limited.
10(k) Consulting Agreement with Union Atlantic LC dated March 15, 1999.
10(l) Amendment No. 1 to Consulting Agreement between the Company and Union
Atlantic LC dated June 1, 1999.
10(m) Modification to Consulting Agreement between the Company and Union
Atlantic LC dated July 29, 1999.
23(a) Consent of Morgan, Jacoby, Thurn, Boyle & Associates, P.A.
23(b) Consent of Crowell & Moring LLP is contained in Exhibit 5.
** 27 Financial Data Schedule.
-----------------------
* Incorporated by reference to the initial filing with the SEC of the
Company's Form 10-SB on July 5, 1996.
** Filed with the Company's Annual Report on Form 10-KSB for its fiscal year
ended October 31, 1999.
(1) Denotes a management contract or compensatory plan or arrangement.
<PAGE>
FINANCIAL STATEMENT INDEX
Page
Independent Auditors' Report F-1
Balance Sheets as of October 31, F-2
1998 and 1999
Statements of Operations for the
years ended October 31, 1997, 1998 F-3
and 1999
Statements of Stockholders'Equity
for the years ended October 31, F-4
1997, 1998 and 1999
Statements of Cash Flows for the
years October 31, 1997, 1998 and 1999 F-5
Notes to Financial Statements F-6
Condensed Balance Sheets at July 31,
1999 and 2000 (Unaudited) F-14
Condensed Statements of Operations
for the Three months ended July 31,
1999 and 2000 (Unaudited) F-15
Condensed Statements of Operations
for the Nine months ended July 31,
1999 and 2000 (Unaudited) F-16
Condensed Statements of Cash Flows
for the Nine months ended July
31,1999 and 2000 (Unaudited) F-17
Notes to Condensed Financial
Statements (Unaudited) F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pro Tech Communications, Inc.:
We have audited the accompanying balance sheets of Pro Tech Communications,
Inc. as of October 31, 1998 and 1999 and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended October 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pro Tech Communications,
Inc. as of October 31, 1998 and 1999, and the results of its operations and its
cash flows for each of the years in the three-year period ended October 31, 1999
in conformity with generally accepted accounting principles.
/s/ MORGAN, JACOBY, THURN, BOYLE & ASSOCIATES, P.A.
Vero Beach, Florida
November 30, 1999,
except for note 11,
as to which the date is
January 10, 2000
<PAGE>
PRO TECH COMMUNICATIONS, INC.
BALANCE SHEETS
October 31, 1998 and 1999
1998 1999
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 198,797 $ 160,428
Short-term investments 254,545 -
Accounts receivable less
allowance for doubtful accounts of
$14,868 in 1998 and $18,661 in 1999 200,235 205,923
Inventory (note 2) 245,610 285,883
Due from officers and employees 14,591 14,298
Other current assets 20,836 36,916
------------ -------------
Total current assets 934,614 703,448
Net property and equipment (note 3) 181,269 196,747
Due from officer (note 9) 42,860 43,743
Other assets 155 1,439
------------ -------------
$ 1,158,898 $ 945,377
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease
obligations (note 7) - 8,808
Accounts payable 36,380 100,104
Accrued expenses (note 4) 173,465 100,388
------------ -------------
Total current liabilities 209,845 209,300
Capital lease obligations (note 7) - 8,089
------------ -------------
Total liabilities 209,845 217,389
Stockholders' equity (notes 5 and 6):
Common stock, $.001 par value,
authorized 10,000,000 shares,
issued and outstanding 4,254,000 4,254 4,254
Additional paid-in capital 1,137,018 1,137,018
Retained earnings (deficit) (192,219) (413,284)
------------ -------------
Total stockholders' equity 949,053 727,988
Commitments (note 7) ------------ -------------
$ 1,158,898 $ 945,377
============ =============
See accompanying notes to financial statements.
<PAGE>
PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
Years ended October 31, 1997, 1998 and 1999
1997 1998 1999
----------- ------------ -----------
Net sales $ 996,993 $ 1,142,482 $1,090,551
Cost of goods sold 333,755 470,450 414,931
----------- ------------ -----------
Gross profit 663,238 672,032 675,620
Selling, general and
administrative expenses 698,785 882,385 893,384
Provision for doubtful accounts 3,924 38,835 3,771
----------- ------------ -----------
Loss from operations (39,471) (249,188) (221,535)
Other income (expense):
Interest income 28,668 24,719 10,202
Interest expense - - (1,021)
Miscellaneous income 58 89 697
Loss on disposal of fixed assets (1,116) - (9,408)
----------- ------------ -----------
Loss before income taxes (11,841) (224,380) (221,065)
Income tax expense
(benefit) (note 8) 400 (964) -
----------- ------------ -----------
Net loss $ (12,241) $ (223,416) $ (221,065)
=========== ============ ===========
Basic loss per common share $ 0.00 $ (0.05) $ (0.05)
=========== ============ ===========
Weighted average shares
outstanding 4,122,795 4,254,000 4,254,000
=========== ============ ===========
See accompanying notes to financial statements.
<PAGE>
PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended October 31, 1997, 1998 and 1999
AdditionRetained
Additional Retained
Common Paid-in Earnings
Stock Capital (Deficit) Total
---------- ---------- ------------ -----------
Balance, October 31, 1996 $ 3,964 $ 963,953 $ 43,438 $1,011,355
Issuance of 290,000 shares of
common stock (notes 5 and 6)
(net of issue costs of $46,645) 290 118,065 - 118,355
Executive compensation
contributed by an officer
(note 5) - 40,000 - 40,000
Net loss - - (12,241) (12,241)
---------- ---------- ------------ -----------
Balance, October 31, 1997 4,254 1,122,018 31,197 1,157,469
Executive compensation
contributed by an officer
(note 5) - 15,000 - 15,000
Net loss - - (223,416) (223,416)
---------- ---------- ------------ -----------
Balance, October 31, 1998 4,254 1,137,018 (192,219) 949,053
Net loss - - (221,065) (221,065)
---------- ---------- ------------ -----------
Balance, October 31, 1999 $ 4,254 $1,137,018 $ (413,284) $ 727,988
========== ========== ============ ===========
See accompanying notes to financial statements
<PAGE>
PRO TECH COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
Years Ended October 31, 1997, 1998 and 1999
1997 1998 1999
---------- ------------ -------------
Cash flows from operating activities:
Cash received from sale of merchandise $ 907,839 $ 1,219,426 $ 1,081,789
Cash paid to employees and vendors (980,148) (1,340,569) (1,330,828)
Interest received - 24,719 10,202
Interest paid 28,688 - (1,021)
---------- ------------ -------------
Net cash used by operating activities (43,621) (96,424) (239,858)
Cash flows from investing activities:
Purchase of short-term investments (260,764) (523,905) -
Proceeds on maturity of short-term
investments 300,103 527,296 254,545
Purchase of property and equipment (57,176) (64,497) (49,482)
---------- ------------ -------------
Net cash provided (used) by
investing activities (17,837) (61,106) 205,063
Cash flows from financing activities:
Payments of capital lease obligations - - (3,574)
Proceeds from issuance of common stock 118,355 - -
---------- ------------ -------------
Net cash used by financing activities 118,355 - (3,574)
---------- ------------ -------------
Net increase (decrease) in cash
and cash equivalents 56,897 (157,530) (38,369)
Cash and cash equivalents at
beginning of year 299,430 356,327 198,797
---------- ------------ -------------
Cash and cash equivalents at end of year $ 356,327 $ 198,797 $ 160,428
========== ============ =============
Reconciliation of net loss to net
cash used by operating activities:
Net loss (12,241) (223,416) (221,065)
Adjustments to reconcile net loss to
net cash used by Operating activities:
Depreciation and amortization 29,695 38,783 45,222
Allowance for doubtful accounts 2,954 2,773 3,771
Loss on disposal of fixed assets 1,116 - 9,408
Executive compensation contributed
by an officer 40,000 15,000 -
(Increase) decrease in accounts
receivable (78,248) 27,746 (9,459)
Increase in inventory 15,838 (85,001) (40,273)
Increase in receivables from
officers and employees (762) (22,033) (590)
(Increase) decrease in other assets (24,494) 21,553 (17,519)
Increase in accounts payable (30,924) 13,641 63,724
Increase (decrease) in accrued expenes 13,445 114,530 (73,077)
---------- ------------ -------------
Total adjustments (31,380) 126,992 (18,793)
---------- ------------ -------------
Net cash used by operating activities $ (43,621) $ (96,424) $ (239,858)
========== ============ =============
Supplemental schedule of non-cash
investing and financing activities:
During 1999, the Company acquired
$20,471 of equipment through
capital leases
See accompanying notes to financial statements.
<PAGE>
PRO TECH COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 1999 and 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Business
Pro Tech Communications, Inc. (the "Company") was organized and incorporated
under the laws of the State of Florida for the purpose of designing, developing,
producing and marketing lightweight telephone headsets. The Company presently
manufactures and markets its headsets primarily for fast food companies and
other large quantity users of headset systems. The Company is in the process of
completing the development of several designs for the telephone user market,
which includes telephone operating companies, government agencies and business
offices. The Company's business strategy is to offer lightweight headsets with
design emphasis on performance and durability at a cost below that of its
competitors.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
(c) Short-Term Investments
Short-term investments as of October 31, 1998 consisted of certificates of
deposit with maturities in excess of three months. In accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, such investments are
classified as held-to-maturity and are recorded at amortized cost, which
approximates fair value.
(d) Inventory
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
(e) Revenue and Cost Recognition
The Company recognizes revenues as products are shipped. Each headset carries a
one to two-year warranty, depending on the model. The Company provides, by a
current charge to income, an amount it estimates will be needed to cover future
warranty obligations for products sold during the year. The accrued liability
for warranty costs is included in accrued expenses in the balance sheet.
(f) Property and Equipment
Property and equipment is carried at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which are
generally 5-10 years. Repair and maintenance costs are charged to expense when
incurred.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method prescribed
by SFAS No. 109. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets or liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(h) Advertising
The costs of advertising, promotion and marketing programs are charged to
operations in the year incurred. Advertising costs were $20,817, $43,143 and
$98,738 for the years ended October 31, 1997, 1998 and 1999, respectively, and
were included in selling, general and administrative expenses in the
accompanying statements of operations.
(i) Research and Development
Research and development costs are expensed when incurred and are included in
selling, general and administrative expenses. The amount charged to expense
during 1997, 1998 and 1999 was $21,400, $40,815 and $70,809, respectively.
(j) Fair Value of Financial Instruments
The estimated fair values of the Company's cash and cash equivalents, short-term
investments, accounts receivable and current liabilities approximate the
carrying amount due to the short-term nature of such financial instruments.
(k) Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and contingent assets and liabilities. Actual results
could differ from those estimates.
(l) Loss per Share
Earnings per share is accounted for by using the basic and diluted earnings per
share method prescribed by SFAS No 128, which became effective for years ending
after December 15, 1997. Basic loss per share is based on the weighted average
number of shares of common stock outstanding during the year. Diluted loss per
share is based on shares of common stock and dilutive potential common stock
(stock options and stock warrants) outstanding during the year. Diluted loss per
share was antidilutive due to the net loss generated by the Company during 1997,
1998 and 1999 and is therefore not reported.
(m) Stock Options
On October 23, 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, Accounting for Stock-Based Compensation (Statement 123). This
Statement applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities where the
payment amounts are based on the entity's common stock price. The Statement
covers transactions with employees and non-employees. Effective November 1,
1996, the Company adopted Statement 123, which permits entities (1) to continue
to use the Accounting Principles Board Opinion No. 25 (APB 25) method, or (2) to
adopt the Statement 123 fair value based method. Once the method is adopted, an
entity cannot change the method and the method selected applies to all of an
entity's compensation plans and transactions. For entities not adopting the
Statement 123 fair value based method, Statement 123 requires pro forma net
income and earnings per share information as if the fair value based method had
been adopted. Management has determined that the Company will account for
stock-based compensation under the APB 25 method and will disclose the pro forma
impact of Statement 123.
(n) Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. There were no such impairments for the years ending October 31,
1997, 1998 and 1999.
(o) New Pronouncements
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
(Statement 130), which establishes standards for reporting and display of
comprehensive income and its components in a financial statement having the same
prominence as other financial statements. Statement 130 is effective for years
beginning after December 15, 1997 (fiscal year 1999 for the Company). As of
October 31, 1999, the Company had no components considered to be other
comprehensive income.
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information(Statement 131), which establishes new
standards for the way enterprises disclose information about operating segments.
Statement 131 is effective for years beginning after December 15, 1997 (fiscal
year 1999 for the Company). The implementation of Statement 131 did not have a
significant effect on the disclosures in the Company's financial statements.
In February 1998, the FASB issued Statement No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits(Statement 132), which revises
and standardizes certain disclosures regarding pension and postretirement
benefit plans. Statement 132 does not modify the measurement or recognition of
those plans. Statement 132 is effective for years beginning after December 15,
1997 (fiscal year 1999 for the Company). As of October 31, 1999, the Company had
no such plans.
In June 1999, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (Statement 133), which establishes accounting
and reporting standards for derivative instruments and hedging activities.
Statement 133 requires recognizing derivatives as assets or liabilities at fair
value and defines certain conditions when such derivatives may be considered
hedges. Statement 133 is effective for fiscal years beginning after June 15,
2000 (fiscal year 2001 for the Company), as amended by Statement No. 137. As of
October 31, 1999, the Company had no such derivatives.
The Company does not expect these new pronouncements will have a significant
impact on the reporting of its financial results.
(2) Inventory
Inventory at October 31, 1998 and 1999 consists of the following:
1998 1999
-------- --------
Raw materials $150,627 $ 96,015
Work in process 54,133 70,560
Finished goods 40,850 119,308
-------- ---------
$245,610 $285,883
======== =========
(3) Net Property and Equipment
The following is a summary of property and equipment at October 31, 1998 and
1999:
1998 1999
--------- ---------
Production molds $176,553 $184,430
Office equipment 60,509 63,957
Production equipment 35,049 35,049
Leased equipment -- 20,471
Leasehold improvements 10,174 14,577
Vehicles 5,557 5,557
Marketing displays 5,430 16,160
--------- ---------
Total cost 293,272 340,201
Less accumulated depreciation
and amortization 112,003 143,454
--------- ---------
Total $181,269 $196,747
========= =========
Total depreciation and amortization expense was $29,540, $38,628 and $45,067 for
the years ended October 31, 1997, 1998 and 1999, respectively.
(4) Accrued Expenses
Accrued expenses consisted of the following at October 31, 1998 and 1999:
1998 1999
--------- ---------
Accrued warranty expense $152,503 $ 78,038
Other accrued expenses 20,962 22,350
--------- ---------
$173,465 $100,388
========= =========
(5) Capital Stock
At October 31, 1998 and 1999, $4,000 was held in escrow for the benefit of the
Company pending completion of the subscription agreements by two investors for
4,000 shares each. These receivables are netted against additional paid-in
capital.
Prior to November 1997, the Company had issued warrants to purchase 600,000
shares of common stock at $1.50 per share. In December 1996, the Company issued
warrants to purchase 400,000 shares of common stock at $1.50 per share.
During fiscal year 1997, the Company filed Form SB-2 which allowed the Company
to sell an additional 1,000,000 shares of common stock at $5.25 per share. The
filing also registered the common stock underlying the 1,000,000 outstanding
warrants and 830,000 outstanding stock options (note 6). As of October 31, 1998,
no additional shares were sold as a result of the offering. However, during the
year ended October 31, 1997, 200,000 options were exercised at a price of $0.60
per share and 90,000 options were exercised at a price of $0.50 per share. Total
proceeds generated, net of related issue costs of $46,645, were $118,355. During
November 1997, in accordance with the 1997 registration statement, all
outstanding warrants were terminated.
The following table summarizes warrants to purchase common stock during the
years ended October 31, 1997 and 1998:
1997 1998
------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- -----------
Warrants outstanding,
beginning of year 600,000 $ 1.50 1,000,000 $ 1.50
Warrants granted 400,000 1.50 - -
Warrants terminated - - 1,000,000 1.50
--------- --------- --------- -----------
Warrants outstanding and
exercisable, end of year 1,000,000 $ 1.50 - $ -
========= ========= ========= ===========
During the years ended October 31, 1997 and 1998, the Company's president was
paid a salary in cash of $2,500 and $30,000, respectively. In addition, the
Company recorded compensation expense of $40,000 and $15,000, respectively, with
a corresponding credit to additional paid-in capital, to reflect the estimated
fair value of the unpaid services provided by the president to the Company.
On June 22, 1999, the Company received a letter of intent to purchase an
undefined portion of its capital stock by a third party in exchange for cash and
certain technology, the terms of which are currently subject to negotiation. In
conjunction with the purchase, the Company has entered into a sales agreement
whereby a sales agent would receive stock equal to 2 percent of the stock sold
under the letter of intent. The ultimate sale of stock and related proceeds
under the letter of intent, if any, is uncertain and as of October 31, 1999, the
Company has not entered into any definitive agreements to sell its capital
stock.
(6) Stock Option Plans
On April 15, 1996, the Board of Directors adopted The 1996 Stock Option Plan
(the 1996 Plan), for the benefit of directors, officers, employees and
consultants to the Company. The Plan authorized the issuance of up to 590,000
shares of common stock. On April 15, 1996, 540,000 and 50,000 shares were
granted to the Company's President and officers, respectively, at an option
price of $.50 per share. The stock option exercise price was the fair value at
the date of the grant. On April 13, 1999, the original expiration date of the
options, the Company extended the options to April 15, 2001.
Prior to November 1, 1997, the Company had issued options to purchase 200,000
shares of the common stock at $0.60 per share.
During 1997, the Company received $25,000 upon issuance of 50,000 shares of
common stock upon the exercise of 50,000 options by the Company's officers and
$140,000 upon the issuance of 240,000 shares of common stock to others.
On March 5, 1998, the Board of Directors adopted the 1998 Stock Option Plan for
the benefit of directors, officers, employees and consultants to the Company.
This plan authorized the issuance of up to 500,000 shares of common stock. On
August 4, 1998, 200,000 and 100,000 shares were granted to the Company's
officers and employees, respectively, at an option price of $.375 per share. The
stock option exercise price was the fair market value of a share of common stock
at the date of the grant. Options to purchase 150,000 shares of common stock
vest and are exercisable 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
were granted to a Company officer, at an option price of $.38 per share. The
stock option exercise price was greater than the fair market value of a share of
common stock at the date of the grant. The options vest and are exercisable as
follows: 100,000 immediately; 50,000 on April 13, 2000; and 50,000 on April 13,
2001. The options expire on April 13, 2004.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
1997 1998 1999
------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 830,000 $ 0.52 540,000 $ 0.500 840,000 $ 0.455
Options granted - - 300,000 0.375 200,000 0.380
Options expired (290,000) (0.57) - - - -
--------- ---------- -------- --------- --------- ---------
Options outstanding, end of year 540,000 $ 0.50 840,000 $ 0.455 1,040,000 $ 0.441
========= ========== ======== ========= ========= =========
Options exercisable, end of year 540,000 $ 0.50 740,000 $ 0.466 890,000 $ 0.451
========= ========== ======== ========= ========= =========
</TABLE>
As of October 31, 1999, the Company's outstanding stock options have exercise
prices ranging from $0.375 to $0.50 and a weighted average remaining contractual
life of approximately 2.3 years.
No compensation expense was recorded during 1998 and 1999 for the options issued
to the Company's officers and employees, in accordance with APB 25. Had
compensation expense been determined on the fair value at the date of grant in
accordance with the provisions of Statement 123, the Company's net loss and loss
per share would have been adjusted to the pro forma amounts indicated below:
1997 1998 1999
--------- ----------- -----------
Net loss:
As reported $(12,241) $(223,416) $(221,065)
========= =========== ===========
Pro forma $(12,241) $(278,280) $(369,295)
========= =========== ===========
Loss per share:
As reported $ (0.00) $ (0.05) $ (0.05)
========= =========== ===========
Pro forma $ (0.00) $ (0.06) $ (0.09)
========= =========== ===========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999: dividend yield of 0%; expected volatility
of 141%; risk-free interest rate of 5.76%; and, expected lives ranging from
three to five years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998: dividend yield of 0%; expected volatility
of 150%; risk-free interest rate of 5.45%; and, expected lives of three years.
(7) Leases
Future minimum lease payments under noncancelable operating leases for buildings
and equipment and the present value of future minimum capital lease payments as
of October 31, 1999 are:
Year Ended October 31 Capital Leases Operating Leases
----------------------- ---------------- ------------------
2000 $ 10,955 $ 36,074
2001 6,791 2,656
2002 2,503 -
--------- ---------
Total minimum lease payments 20,249 $ 38,730
=========
Less amount representing interest 3,352
---------
Present value of net minimum capital
lease payments 16,897
Less current installments 8,808
---------
Obligations under capital leases,
excluding current Installments $ 8,089
=========
Rent expense under lease agreements totaled $21,979, $24,637 and $32,559 for
fiscal year 1997, 1998 and 1999, respectively.
(8) Income Taxes
There was no provision for income taxes for the year ended October 31, 1999 due
to operating losses incurred. Income tax expense (benefit) consisted of the
following for the year ended October 31, 1997 and 1998:
Current Deferred Total
--------- ------------ -----------
1997:
Federal $ 1,500 $ (1,000) $ 500
State 300 (400) (100)
--------- ------------ -----------
$ 1,800 $ (1,400) $ 400
========= ============ ===========
1998:
Federal $ (6,264) $ 3,800 $ (2,464)
State - 1,500 1,500
--------- ------------ -----------
$ (6,264) $ 5,300 $ (964)
========= ============ ===========
The actual expense (benefit) differs from the "expected" amount computed by
applying the U.S. Federal corporate income tax rate of 34% to loss before income
taxes as follows:
1997 1998 1999
-------- --------- ---------
Computed "expected" tax benefit $(4,030) $(75,961) $(75,162)
Increase (reduction) in income taxes
resulting from:
Net operating loss not currently utilizable - 70,001 75,016
Nondeductible expenses 4,430 4,996 146
-------- --------- ---------
$ 400 $ (964) $ -
======== ========= =========
The exercise of stock options in 1997, which had been granted under the
Company's 1996 Stock Option Plan (see note 6), gave rise to compensation
totaling $225,000 that is includable in the taxable income of the employees and
deductible by the Company for federal and state income tax purposes. Such
compensation resulted from increases in the fair market value of the Company's
common stock subsequent to the date of grant of the applicable exercised stock
options and, accordingly, in accordance with APB 25, such compensation was not
recognized as an expense for financial reporting purposes. The related tax
benefits will be reflected as contributions to additional paid-in capital in the
periods in which the compensation deduction is utilized by the Company and, in
accordance with APB 25 and Statement 109, such compensation deductions are not
considered to be temporary differences. Such deductions have not been utilized
by the Company due to the net operating losses generated in 1998 and 1999.
The Company has a net operating loss carryforward for federal and state income
tax purposes amounting to $558,000 and $639,000, respectively, which expire
through the year 2019.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
1997 1998 1999
-------- -------- --------
Accounts receivable principally due to
allowance for doubtful accounts $ 2,400 $ 2,900 $ 3,700
Accrued warranty expense 10,800 30,000 15,400
Net operating loss carryforwards - 11,800 70,000
Contribution carryforwards - - 400
-------- -------- --------
13,200 44,700 89,500
Less valuation allowance - 35,700 81,700
-------- -------- --------
Total deferred tax assets 13,200 9,000 7,800
Plant and equipment principally due to
differences in depreciation 7,900 9,000 7,800
Total deferred tax liablilities 7,900 9,000 7,800
-------- -------- --------
Net deferred taxes $ 5,300 $ - $ -
======== ======== ========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the period in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
(9) Related Party Transactions
During fiscal year 1996, the Company loaned $28,882 to its Chairman. Outstanding
principal and interest, at 5% per annum, are due August 2, 2003. During fiscal
year 1998, the Company loaned an additional $3,650 to its Chairman, which is due
October 31, 2002, with interest at 5% per annum. Outstanding principal and
interest amounted to $42,860 and $43,743 as of October 31, 1998 and 1999,
respectively.
The Company had an employment agreement with its former President, which was
terminated during 1999. The agreement provided for a maximum annual salary of
$90,000 with additional amounts added using the consumer price index as a
minimum. The President was eligible for the maximum annual salary during a given
year only if the Company generated annual sales of at least $2,000,000 and
pre-tax income equal to at least 20% of the Company's annual sales. Since the
Company had not met the minimum requirements noted above, the Board determined
the President's compensation accordingly. (See note 5.)
(10) Major Customers
During 1997, one customer accounted for approximately 21% of net sales generated
during the year. During 1998, one customer accounted for approximately 27% of
net sales generated during the year. During 1999, two customers accounted for
approximately 30% of net sales generated during the year.
(11) Subsequent Events
On December 22, 1999, the Company entered into a short-term factoring
arrangement providing for advances of up to $300,000, based on 80% of selected
accounts receivable factored under the agreement on a recourse basis. The
Company is charged a factoring fee of 1% on each advance, plus 2% per month on
advances outstanding. In addition, the minimum fee charged per month is 1% of
the total factoring plan, or $3,000, during the life of the agreement, which is
for six months and automatically renewable for additional six month terms,
unless terminated by the Company with 30 days notice. The Company's obligations
are collateralized by all of the Company's account receivable, inventory, and
equipment. On January 10, 2000, the Company obtained a net advance of $20,688
under the agreement.
<PAGE>
PRO TECH COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
July 31, 1999 and July 31, 2000
(unaudited)
1999 2000
-------------- -----------
Current Assets:
Cash and cash equivalents $ 49,513 $ 136,503
Short-term Investments 147,652 -
Deposits being held - 12,810
Accounts receivable less allowance
for doubtful accounts of $14,686 and
$18,661 in 1999 and 2000, respectively 150,716 403,316
Inventory (note 2) 378,715 523,762
Other current assets 64,474 91,682
-------------- -----------
Total current assets $ 791,070 $1,168,073
Net property and equipment 202,771 262,735
Due from officer 42,860 43,743
-------------- -----------
$1,036,701 $1,474,551
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current short-term borrowings (note 4) $ - $ 183,500
Current portion of capital lease obligations - 8,808
Notes Payable (note 5) - 449,975
Accounts Payable 72,155 109,334
Accrued Expenses (note 3) 201,904 135,418
-------------- -----------
Total current liabilities $ 274,059 $ 887,035
Capital Lease Obligations - 1,945
-------------- -----------
Total liabilities $ 274,059 $ 888,980
Stockholders' Equity:
Common Stock, $.001 par value, authorized
10,000,000 shares, issued and outstanding
4,266,000 in the current fiscal year and
4,254,000 for the comparable period 4,254 4,266
Additional Paid in Capital 1,137,018 1,141,566
Retained Earnings(deficit) (378,630) (560,261)
-------------- -----------
Total Stockholders' Equity $ 762,642 $ 585,571
-------------- -----------
$1,036,701 $1,474,551
============== ===========
See accompanying notes to condensed financial statements
<PAGE>
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS Three months
ended July 31, 1999 and July 31, 2000
(unaudited)
1999 2000
------------- -------------
Net Sales $ 269,379 $ 506,826
Cost of Goods Sold 95,345 163,909
------------- -------------
Gross Profit 174,034 342,917
Selling, general and administrative expenses 240,364 351,174
------------- -------------
(Loss) from operations (66,330) (8,257)
Other income (expense):
Interest income 1,699 114
Interest expense - (10,990)
------------- -------------
(Loss) before income taxes (64,631) (19,133)
Income taxes - -
------------- -------------
Net (Loss) $ (64,631) $ (19,133)
============= =============
Income (loss) per common share:
Basic $ (0.02) $ (0.00)
============= =============
Average common shares outstanding 4,254,000 4,266,000
============= =============
See accompanying notes to condensed financial statements
<PAGE>
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS Nine months
ended July 31, 1999 and July 31, 2000
(unaudited)
1999 2000
--------------- -------------
Net Sales $ 769,624 $1,025,164
Cost of Goods Sold 288,420 288,210
--------------- -------------
Gross Profit 481,204 736,954
Selling, general and administrative expenses 676,383 861,521
--------------- -------------
(Loss) from operations (195,179) (124,567)
Other income (expense):
Interest income 8,768 1,512
Interest expense - (23,922)
--------------- -------------
(Loss) before income taxes (186,411) (146,977)
Income taxes - -
--------------- -------------
Net (Loss) $ (186,411) $ (146,977)
=============== =============
Loss per common share:
Basic $ (0.04) $ (0.03)
=============== ============
Average common shares outstanding 4,254,000 4,266,000
=============== ============
See accompanying notes to condensed financial statements
<PAGE>
PRO TECH COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS For the Nine
months ended July 31, 1999 and July 31, 2000
(unaudited)
1999 2000
------------ ------------
Cash Flows from operating activities:
Cash received from the sale of merchandise $ 830,714 $ 810,359
Cash paid to vendors and employees (1,045,982) (1,370,566)
Interest received 8,768 1,512
Interest paid - (944)
------------ ------------
Net cash used by operating activities (206,500) (559,639)
------------ ------------
Cash flows from investing activities
Proceeds on maturity of short-term investments 106,993 -
Purchase of property and equipment (49,677) (96,866)
------------ ------------
Net cash provided (used) in investing
activities 57,316 (96,866)
------------ ------------
Cash flows from financing activities:
Proceeds of short-term borrowings - 636,109
Proceeds from exercised stock options - 4,560
Payments of capital lease obligations - (8,089)
------------ ------------
Net cash provided by financing activities - 632,580
------------ ------------
Net (decrease) in cash and cash equivalents (149,184) (23,925)
Cash and cash equivalents at the beginning of period 198,797 160,428
------------ ------------
Cash and cash equivalents at the end of period $ 49,513 $ 136,503
============ ============
Reconciliation of net income(loss) to net cash
used by operating activities:
Net income(loss) $ (186,411) $ (146,977)
------------ ------------
Adjustments to reconcile net income(loss) to net
cash used by operating Activities:
Depreciation and amortization 28,175 30,878
Decrease(increase) in accounts receivable 64,110 (197,393)
Increase in inventory (133,105) (237,879)
Increase in accounts payable 35,775 6,596
Increase in accrued expenses 28,439 36,975
Increase in other assets (43,483) (51,839)
------------ ------------
Total adjustments (20,089) (412,662)
------------ ------------
Net cash used by operating activities $ (206,500) $ (559,639)
============ ============
See accompanying notes to condensed financial statements
<PAGE>
PRO TECH COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JULY 31, 1999 AND 2000
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS
Pro Tech Communications, Inc. (the Company) was organized and
incorporated under the laws of the State of Florida for the
purpose of designing, developing, producing and marketing
lightweight telephone headsets. The Company presently
manufactures and markets its headsets primarily for fast food
companies and other large quantity users of headset systems. The
Company is in the process of completing the development of a
second design for the telephone user market, which includes
telephone operating companies, government agencies and business
offices. The Company's business strategy is to offer lightweight
headsets with design emphasis on performance and durability at a
cost below that of its competitors.
(B) ACCOUNTING POLICIES
In the opinion of management, the unaudited financial statements
contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's financial
position as of July 31, 2000 and the results of operations and
cashflows for the three months ended and nine months ended July
31, 2000. The accompanying interim financial statements should be
read in conjunction with the Company's Form 10-KSB filing for the
year ended October 31, 1999.
(C) LOSS PER SHARE
Earnings per share is accounted for by using the basic and
diluted earnings per share method perscribed by SFAS No. 128,
which became effective for years ending after December 15,1997.
Basic loss per share is based on the weighted average number of
shares of common stock outstanding during the year. Diluted loss
per share is based on shares of common stock and dilutive
potential common stock (stock Options and Stock Warrants)
outstanding during the year. Diluted loss per share was
antidilutive due to the net loss generated by the Company during
the 1999 and 2000 and is therefore not reported.
(D) COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, reporting
comprehensive income (Statement 130), which establishes standards
for reporting and display of comprehensive income and its
components in a financial statement having the same prominence as
other financial statements. Statement 130 is effective for years
beginning after December 15, 1997 (Fiscal Year 1999 for the
Company). During the nine months ended July 31, 1999 and 2000,
the Company had no components considered to be other
comprehensive income.
<PAGE>
(2) INVENTORY
Inventory at July 31, 1999 and 2000 consists of the following:
1999 2000
---------- ----------
Raw materials $ 131,358 $ 127,687
Work in process 116,313 99,508
Finished goods 131,044 296,567
---------- ----------
$ 378,715 $ 523,762
========== ==========
(3) ACCRUED EXPENSES
Accrued expenses consisted of the following at July 31, 1999 and 2000:
1999 2000
---------- ----------
Accrued warranty expense $ 174,246 $ 78,038
Other accrued expenses . 27,658 57,380
---------- ----------
$ 201,904 $ 135,418
========== ==========
(4) SHORT-TERM BORROWINGS
On December 22, 1999, the Company entered into a short-term factoring
arrangement providing for advances of up to $300,000 based on 80% of
selected accounts receivable factored under the agreement on a recourse
basis. The Company is charged a factoring fee of 1% on each advance, plus
2% per month on advances outstanding. In addition, the minimum fee charged
per month is 1% of the factoring plan, or $3,000, during the life of the
agreement, which is for six months and automatically renewable for
additional six month terms, unless terminated by the Company with a 30-day
notice. The Company's obligations are collateralized by all of the
Company's accounts receivable, inventory, and equipment.
(5) NOTES PAYABLE
On March 27, 2000, Pro Tech Communications, Inc. received a loan of
$150,000 from Westek Communications. The loan has an 8.5% interest rate
payable when the loan is due. The term of this loan is for one year and due
March 27, 2001.
On June 6, 2000, Pro Tech Communications, Inc. received a loan of $100,000
from Balmore, S.A. The maturity of the loan is ninety days, or due
September 1, 2000. The loan has a 10% interest rate from the maturity date
until the loan is paid in full.
On June 7, 2000, Pro Tech Communications, Inc. received a loan of $100,000
from Austost Anstalt Schaan. The maturity of the loan is ninety days, or
due September 1, 2000. The loan has a 10% interest rate from the maturity
date until the loan is paid in full.
On July 6, 2000, Pro Tech Communications, Inc. received a loan of $99,975
from Zakeni Limited. The maturity of the loan is ninety days, or due
October 1, 2000. The loan has a 10% interest rate from the maturity date
until the loan is paid in full.
(6) SUBSEQUENT EVENT
Subject to the completion of certain closing conditions, on September 13, 2000,
Pro Tech Communications, Inc., and NCT Hearing Products, Inc. ("NCT") entered
into a stock purchase agreement and a license agreement, pursuant to which Pro
Tech Communications, Inc. has agreed to issue to NCT approximately 22.5 million
shares of the common stock of Pro Tech Communications, Inc., representing 60% of
its outstanding common stock on a fully diluted basis. As consideration for the
issuance of such shares, NCT granted Pro Tech Communications, Inc. an exclusive
license to use certain intellectual property of NCT in connection with the
telephone headset products of Pro Tech Communications, Inc. As part of the
transaction, three representatives of NCT will be appointed to the Board of
Directors of Pro Tech Communications, Inc., thereby giving NCT control of the
five-person Board of Directors of Pro Tech Communications, Inc.
<PAGE>
UNDERTAKINGS
(a) Rule 415 Offering. Registrant hereby undertakes:
(1) To file, during any period in which offers securities or sales
are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or together, represent a fundamental
change in the information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) adopted under the Securities Act if, in the
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for determining liability under the Securities Act, each
post-effective amendment shall be deemed to be a new registration statement of
the securities offered herein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities being registered that remain unsold at the end of the
offering.
(h) Request for acceleration of effective date. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of competent jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on this 3rd day of November, 2000.
PRO TECH COMMUNICATIONS, INC.
-----------------------------
(REGISTRANT)
BY: /s/ RICHARD HENNESSEY
-------------------------------
RICHARD HENNESSEY, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Capacity Date
----------------------------------------------------------------------
/s/ RICHARD HENNESSEY Director, Secretary and November 3, 2000
----------------------- President
Richard Hennessey
/s/ KEITH LARKIN Chief Executive Officer, November 3, 2000
----------------------- Treasurer and Chairman of
Keith Larkin the Board (Principal
Executive, Financial and
Accounting Officer)
/s/ MICHAEL J. PARRELLA Director November 3, 2000
-----------------------
Michael J. Parrella
/s/ CY E. HAMMOND Director November 3, 2000
------------------------
Cy E. Hammond
/s/ IRENE LEBOVICS Director November 3, 2000
------------------------
Irene Lebovics
