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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
PRO TECH COMMUNICATIONS, INC.
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(Exact name of small business issuer as specified in its charter)
FLORIDA 59-3281593
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
3311 INDUSTRIAL 25TH STREET, FORT PIERCE, FLORIDA 34946
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(Address of principal executive offices)
(561)464-5100
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(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.001 per share
Transitional Small Business Disclosure Format (check One): Yes [ ] No[X]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ]
The registrant's revenues for its most recent fiscal year: $1,090,551
As of January 29, 2000, the aggregate market value of shares of the registrant's
voting stock (based upon the average bid and asked price of such stock as
reported by the NASDAQ System of $0.26) held by non-affiliates of the
registrant was approximately $887,640. For the purposes of this computation,
all executive officers, directors and persons who beneficially own more than
five percent of the registrant's securities are deemed affiliates. Such
determination should not be an admission that such directors, officers or
beneficial owners are, in fact, affiliates of the registrant.
As of January 29, 2000, there were 4,254,000 shares of the registrant's common
stock outstanding.
Documents Incorporated by Reference: None
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TABLE OF CONTENTS
Form 10-K
Item Number
<TABLE>
<S> <C>
PART I
1. Description of Business ..................................................... 1
2. Description of Property ..................................................... 8
3. Legal Proceedings ........................................................... 8
4. Submission of Matters to a Vote of Security Holders ......................... 8
PART II
5. Market for Common Equity and
Related Stockholder Matters ................................................. 9
6. Management's Discussion and
Analysis or Plan of Operation ............................................... 10
7. Financial Statements ........................................................ 11
8. Changes in and Disagreements and Accountants
on Accounting and Financial Disclosure ...................................... 11
PART III
9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section
16(a) of the Exchange Act ................................................... 12
10. Executive Compensation ...................................................... 13
11. Security Ownership of Certain Beneficial Owners
and Management .............................................................. 14
12. Certain Relationships and Related Transactions .............................. 15
13. Exhibits and Reports on Form 8-K ............................................ 16
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Pro Tech Communications, Inc. (the "Company") 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 Treasurer
and Chairman of the Board 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 (the "Common Stock"), 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.
The Company presently designs, develops, manufactures and markets lightweight
telecommunications headsets employing what the Company believes are new concepts
in advanced light weight 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 delayed its product introduction
for one year due to changes made in the final design and consequently will
commence testing on the Trinity. The Company has introduced the APEX in the 1st
quarter of 1999. The Company plans to introduce several versions of these
telephone headsets 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. The Company has also signed a letter of
intent with The NCT Group, Inc.(NCTI:OTCBB) to sell 60% of its stock to The NCT
Group, Inc. in exchange for the rights to The NCT Group's cash investments and
technologies. The actual terms of the agreement are currently being negotiated
and the final terms are expected to be completed in the second quarter of fiscal
year 2000 pending shareholder approval by both corporations. There can be no
assurance that this transaction will be completed. 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 its 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
complimentary engineering patents. The Company projects that this strategy will
greatly increase the product development cycle while offering far superior
products to its
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customers. The Company has continued to make investments in technology and had
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,
Inc.("Plantronics"), a company founded by Keith Larkin, the Company's
Chairman and Treasurer of the Board, 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. See "DIRECTORS, EXECUTIVE OFFICERS,
PROMOTORS AND CONTROL PERSONS." Today, Plantronics is the world's largest
lightweight telephone headset manufacturer, with approximately $260 million of
net sales for the 1999 fiscal year.
The Company estimates that sales of lightweight telephone headsets exceeded $500
million in 1999 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 lessor
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.
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.
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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 $50.00 to $28.00 depending on volumes
purchased.
THE APEX. The Company has 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 first with the
interchangeable version later in the current fiscal year. 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 $28.00 to $49.00 per headset is
being sold by the Company to retailers for $54.00 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. (A patent
application will be filed in the 1st quarter of fiscal year 2000. The A-27 will
be introduced into the call-center market in the 1st 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 is planned for market introduction in the 3rd quarter of fiscal year
2000.
THE ACTIVE SERIES HEADSET. The Active series headset will be 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 is currently in the process of developing the Trinity for manufacture
and sale. The Company anticipates completing the development of the
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product by the first quarter of 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 users' 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 manufactures. 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 average
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.
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 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 has
entered into a non-binding business relationship agreement with McDonald
Corporation ("McDonald") which allows the Company to sell its products on a
non-exclusive basis to McDonald franchises and company-owned restaurants.
Initial test sales to McDonald and its franchisees by the Company and Pro Tech
Systems totaled $424,300 in 1994, which included sales over 8,000 headsets to
more than 3,500 McDonald restaurants. These numbers increased to over 18,600
headset sales to more than 7,000 restaurants during fiscal year 1995 and 29,736
headset sales to more than 8,000 restaurants during fiscal year 1998. The
Company's 1999 sales of headsets decreased in fiscal year 1999, to 27,456 or
7.7% as a result of an increase in competition for the existing fast-food
market. The sale of the Company's products to McDonald-owned restaurants and
franchisee restaurants represented approximately 17% and 12% of the Company's
net sales for the fiscal year 1998 of 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 complimentary
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 8
prototype headsets. While profits from government contracts are anticipated to
be minimal, such
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sales enhance the credibility and reputation of the selected headset and
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.
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MANUFACTURING
In this 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 sourced every component to reduce
the risk in a disruption of the supply-chain. At October 31, 1999 and 1998, the
amount of the Company's inventory was $285,883 and $245,610, 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 and could easily be expanded to accommodate up to $4
million of annual sales of the Company's products. See "DESCRIPTION OF
PROPERTY." 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.
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 headset. The Company estimates Plantronics
share of the market to be 65% in North America and 60% worldwide and reported
net sales from all of its products (including electronic amplifiers and other
headset accessories and services) of approximately $240 million for the fiscal
year 1998. 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. ACS Wireless was founded by Mr.
Larkin and the Company believes ACS Wireless previously retained a market share
of approximately 15%. See "DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL
PERSONS."
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.
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In addition to direct competition from other companies offering lightweight
telephone headsets, the Company may additionally 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.
PROPRIETARY PROTECTION
The Company does not presently own any patents for any of its products or
technologies. In fiscal year 1999, the employment agreement of Keith Larkin, the
Company's Chairman of the Board and Treasurer was eliminated. Mr. Larkin also
resigned as President of the Company but remained the Company's Chairman of the
Board and Treasurer. Mr. Hennessey, the Company's Vice President was immediately
named as his successor as President, Secretary and COO. Mr. Larkin's focus will
continue to be in new product development and Mr. Hennessey now manages the
operation of the business. The Company intends to seek patent protection on its
inventions at the appropriate time in the future. The process of seeking patent
protection can be lengthly and expensive, and there can be no assurance that
patents will issue from any applications filed by the Company or that any patent
issued will be of sufficient scope or strength or provide meaningful protection
or any commercial advantage to the Company. The Company may be subjected to, or
may initiate, litigation or patent office interference proceedings, which may
require significant financial and management resources. The failure to obtain
necessary rights or the advent of litigation arising out of any such claims
could have a material adverse effect on the Company's operations.
Certain of the Company's employees involved in engineering are required to enter
into confidentially agreements as a condition of employment. The Company does
not currently own any registered trademarks, although the Company intends to
file trademark applications in the future with respect to distinguishing marks.
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EMPLOYEES
The Company currently has 11 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.
ITEM 2. 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 both 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this Report to a vote of security holders.
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PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS
The Common stock began trading on the National Association of Securities
Dealers, Inc. Electronic 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 Electronic Bulletin Board for each of the fiscal quarters during the
Company's last two fiscal years.
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
The market quotation reflects inter-dealer prices, without retail mark-up,
markdown, or commission and may not represent an actual transaction.
As of January 29, 2000, there were 47 record holders of the Common stock.
The Company has not declared a cash dividend on its outstanding Common Stock
since its incorporation in October 1994 and does not anticipate declaring a cash
dividend in the reasonable foreseeable future.
On April 13, 1999, the remaining 1998 Plan options to purchase 200,000 shares
were granted to Company's President, Mr. Hennessey, 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 April 13, 2004.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999 AS 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 competitors 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 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 $36,062.05
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
dept. as a result of a product re-call (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. (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. At the completion of fiscal year 1999, the Company
sold a total of 27,641 headsets, as compared to 29,673 headsets in the previous
year. This difference represents a decrease in sales of 2,032 headsets or 6.8%
less than the comparable 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 has been selected to be a part of
McDonald's International Owner Operator's trade show planned for April of fiscal
year 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 dramatically increase upon the market introduction
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
the current 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.
Net 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 2000 COMPLIANCE
At the date of filing, the Company has had no disruptions of business
from any installed hardware or software device at the company's principal
offices. The company has followed up with all of its principal suppliers and
each has also had no disruption in business from Year 2000 date rollover.
The Company believes the cost of administering its Year 2000 Compliance
program will not have a material adverse impact on future earnings. However,
potential costs and uncertainties associated with any Year 2000 Compliance
program depend on a number of factors, including software, hardware and the
nature of the industry in which the Company and its suppliers operate. In
addition, companies must coordinate with other entities with which they
electronically interact, such as customers, suppliers, financial institutions,
etc. The Company estimates that potential costs will not exceed $25,000.
Although the Company's evaluation of its systems is still in process,
there has been no indication that the Year 2000 Compliance issue, as it relates
to internal systems, will have a material impact on future earnings. After a
survey of its suppliers, the Company has determined that there are no material
Year 2000 Compliance supplier issues. The Company is currently implementing a
survey to its customers to determine if material Year 2000 Compliance issues
exist. Although unlikely, such potential problems remain a possibility and could
have a material adverse impact on the Company's future results. The Company
completed its Y2K compliance plan on July 31, 1999. The total cost to complete
this plan was approximately $25,000.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
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 for the same
comparable 1998 fiscal year. At October 31, 1999, the Company's current assets
exceeded its current liabilities by approximately $494,148.
During the fiscal year ended October 31, 1999 and thereafter, the Company
has funded its working capital requirements with cash flow from operations.
Management does not believe that the Company has sufficient funds to meet the
Company's anticipated working capital requirements for the next 12 months and
therefore 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.
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. It is anticipated that the Company will seek to
raise such additional financing through a private or public offering of equity
and/or through its potential relationship with The NCT Group, Inc. although
there are no agreements, understandings or arrangements with respect to any
additional financing and no assurances can be given that the Company will be
able to obtain such additional financing.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and notes thereto are included herein beginning at
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not Applicable.
11
<PAGE> 14
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Keith Larkin 76 Chairman of the Board, and Treasurer
Rich Hennessey 40 President, Director, and Secretary
</TABLE>
Keith Larkin is the founder, Chairman of the Board 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 1995 of approximately $170 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 which 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, President and Treasurer of
the Company, positions which he has held until the 2nd quarter of this fiscal
year. He resigned as President of the Company and retained his position as
Chairman, CEO and Treasurer.
12
<PAGE> 15
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 to President and COO 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 ("Digital"). From January 1995
until Mr. Hennessey joined the Company, he was engaged in voluntary missionary
work.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than 10% of a registered
class of the Company's equity securities to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership in the Common Stock. Executive officers, directors and
persons who own more than 10% of a registered class of the Company's equity
securities are required by SEC regulation to furnish the Company with copies of
all Section 16(a) forms they file with the SEC.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and representations that no other reports were
required, during the fiscal year ended October 31, 1999, all of such executive
officers, directors and persons who own more than 10% of a registered class of
the Company's equity securities complied with all Section 16(a) filing
requirements.
ITEM 10. EXECUTIVE COMPENSATION
Set forth below is certain information concerning the compensation paid to the
Company's chief executive officer for the fiscal year ended October 31, 1999. No
other executive officer of the Company received compensation in excess of
$100,000 for such fiscal year.
SUMMARY COMPENSATION TABLE
The following table provides the cash and other compensation paid or accrued by
the Company to its chief executive officer for the fiscal years ended October
31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK STOCK LTIP ALL OTHER
NAME/POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATIONS
- ------------- ---- ------ ----- ------------ ---------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
KEITH LARKIN 1999 $25,000 0 0 0 540,000 0 0
1998 $45,000
1997 $42,500
</TABLE>
*For a description of such stock options, see "EXECUTIVE COMPENSATION - Stock
Option Plan."
EMPLOYMENT AGREEMENT
Effective February 2, 1999, Keith Larkin's employment agreement was terminated
with the Company. This decision
13
<PAGE> 16
was mutual and the Company has no set salary obligations to Mr. Larkin for his
services for the current or future fiscal years. Mr. Larkin however will assign
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 company. During the fiscal year ended October 31, 1999, Mr. Larkin
received $25,000 in salary.
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 the directors of the Company.
STOCK OPTION PLAN
On April 15, 1996, the Board of Directors of the Company adopted the Company's
1996 Stock Option Plan (the "Plan"). The 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 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 Plan terminates on April 15, 2002.
Options granted under the 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 ("Ten Percent Shareholder"), must not be less 110% of the fair
market value
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, 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 13, 2001.
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
14
<PAGE> 17
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 Company's President, 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 April 13, 2004.
15
<PAGE> 18
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The financial statements and notes thereto are included herein beginning at
page F-1.
(a) 1. Index to Financial Statements Page
Report of Independent Certified Public Accountants F-1
Balance Sheets for the years
ended October 31, 1999 and 1998 F-2
Statements of Operations for the years
ended October 31, 1999 and 1998 F-3
Statements of Stockholder's Equity for the years
ended October 31, 1999 and 1998 F-4
Statements of Cash Flows for the years
October 31, 1999 and 1998 F-5
Notes to Financial Statements F-6
(a) 2. Exhibit
3.1 Articles of Incorporation of the Company, dated October 5,
1994, and the Amendments thereto, dated January 31, 1995*.
3.2 By-Laws of the Company.*
10.1 Amended and Restated Employment Agreement, dated as of
December 9, 1994, between the Company and Keith Larkin**(1)
10.2 The Company's 1996 Stock Option plan.*(1)
10.3 Stock Option, dated April 15, 1996, issued by the Company to
Keith Larkin.*(1)
10.4 Lease, dated November 1, 1999, between the Company and Karen
Development Co.
10.5 Consulting Agreement, dated March 5, 1999 between the Company
and Union Atlantic LC.
10.6 Letter of Intent with the NCT Group, Inc. dated June 22, 1999.
27 Financial Data Schedule (for SEC use only)
(b) No reports on From 8-k were filed by the Company during the last
quarter of the period covered by this Report.
* Incorporated by reference to the initial filing with the SEC of the
Company's Form 10-SB on July 5, 1996.
** Incorporated by reference to Amendment No. 1 to the Company's Form 10-SB
which was filed with the Commission on October 4, 1996.
(1) Denotes a management contract or compensatory plan or arrangement.
16
<PAGE> 19
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on January 29, 2000.
PRO TECH COMMUNICATIONS, INC.
(Registrant)
By: /s/ Richard Hennessey
----------------------------
Richard Hennessey, President
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Rich Hennessey Director, Secretary January 29, 2000
- ---------------------------- and President
Rich Hennessey
/s/ Keith Larkin Treasurer January 29, 2000
- ---------------------------- and Chairman of the Board
Keith Larkin (Principal Executive, Financial
and Accounting Officer)
</TABLE>
17
<PAGE> 20
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, 1999 and 1998 and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Morgan, Jacoby, Thurn & Associates, P.A.
Vero Beach, Florida
November 30, 1999,
except for note 11,
as to which the date is
January 10, 2000
F-1
<PAGE> 21
PRO TECH COMMUNICATIONS, INC.
Balance Sheets
October 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 160,428 198,797
Short-term investments -- 254,545
Accounts receivable less allowance for doubtful accounts of $18,661
in 1999 and $14,868 in 1998 205,923 200,235
Inventory (note 2) 285,883 245,610
Due from officers and employees 14,298 14,591
Other current assets 36,916 20,836
----------- -----------
Total current assets 703,448 934,614
Net property and equipment (note 3) 196,747 181,269
Due from officer (note 9) 43,743 42,860
Other assets 1,439 155
----------- -----------
$ 945,377 1,158,898
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations (note 7) 8,808 --
Accounts payable 100,104 36,380
Accrued expenses (note 4) 100,388 173,465
----------- -----------
Total current liabilities 209,300 209,845
Capital lease obligations (note 7) 8,089 --
----------- -----------
Total liabilities 217,389 209,845
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) (413,284) (192,219)
----------- -----------
Total stockholders' equity 727,988 949,053
Commitments (note 7)
----------- -----------
$ 945,377 1,158,898
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 22
PRO TECH COMMUNICATIONS, INC.
Statements of Operations
Years ended October 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 1,090,551 1,142,482
Cost of goods sold 414,931 470,450
----------- -----------
Gross profit 675,620 672,032
Selling, general and administrative expenses 893,384 882,385
Provision for doubtful accounts 3,771 38,835
----------- -----------
Loss from operations (221,535) (249,188)
Other income (expense):
Interest income 10,202 24,719
Interest expense (1,021) --
Miscellaneous income 697 89
Loss on disposal of fixed assets (9,408) --
----------- -----------
Loss before income taxes (221,065) (224,380)
Income tax expense (benefit) (note 8) -- (964)
----------- -----------
Net loss $ (221,065) (223,416)
=========== ===========
Basic loss per common share $ (0.05) (0.05)
=========== ===========
Weighted average shares outstanding 4,254,000 4,254,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 23
PRO TECH COMMUNICATIONS, INC.
Statements of Stockholders' Equity
Years ended October 31, 1999 and 1998
<TABLE>
<CAPTION>
Additional Retained
Common Paid-in Earnings
Stock Capital (Deficit) Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 24
PRO TECH COMMUNICATIONS, INC.
Statements of Cash Flows
Years Ended October 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from sale of merchandise $ 1,081,789 1,219,426
Cash paid to employees and vendors (1,330,828) (1,340,569)
Interest received 10,202 24,719
Interest paid (1,021) --
----------- -----------
Net cash used by operating activities (239,858) (96,424)
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments -- (523,905)
Proceeds on maturity of short-term investments 254,545 527,296
Purchase of property and equipment (49,482) (64,497)
----------- -----------
Net cash provided (used) by investing activities 205,063 (61,106)
----------- -----------
Cash flows from financing activities:
Payments of capital lease obligations (3,574) --
----------- -----------
Net cash used by financing activities (3,574) --
----------- -----------
Net decrease in cash and cash equivalents (38,369) (157,530)
Cash and cash equivalents at beginning of year 198,797 356,327
----------- -----------
Cash and cash equivalents at end of year $ 160,428 198,797
=========== ===========
Reconciliation of net loss to net cash used by operating activities:
Net loss (221,065) (223,416)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 45,222 38,783
Allowance for doubtful accounts 3,771 2,773
Loss on disposal of fixed assets 9,408 --
Executive compensation contributed by an officer -- 15,000
(Increase) decrease in accounts receivable (9,459) 27,746
Increase in inventory (40,273) (85,001)
Increase in receivables from officers and employees (590) (22,033)
(Increase) decrease in other assets (17,519) 21,553
Increase in accounts payable 63,724 13,641
Increase (decrease) in accrued expenses (73,077) 114,530
----------- -----------
Total adjustments (18,793) 126,992
----------- -----------
Net cash used by operating activities $ (239,858) (96,424)
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
During 1999, the Company acquired $20,471 of equipment through
capital leases.
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 25
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.
F-6
<PAGE> 26
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(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 $98,738 and $43,143 for the years ended October 31, 1999
and 1998, 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 1999 and 1998 was $70,809
and $40,815, 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
1999 and 1998 and is therefore not reported.
F-7
<PAGE> 27
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(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, 1999 and 1998.
(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.
F-8
<PAGE> 28
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
October 31, 1999 and 1998
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, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials $ 96,015 150,627
Work in process 70,560 54,133
Finished goods 119,308 40,850
-------- --------
$285,883 245,610
======== ========
</TABLE>
(3) NET PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at October 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Production molds $184,430 176,553
Office equipment 63,957 60,509
Production equipment 35,049 35,049
Leased equipment 20,471 --
Leasehold improvements 14,577 10,174
Vehicles 5,557 5,557
Marketing displays 16,160 5,430
-------- --------
Total cost 340,201 293,272
Less accumulated depreciation and amortization 143,454 112,003
-------- --------
Total $196,747 181,269
======== ========
</TABLE>
Total depreciation and amortization expense was $45,067 and $38,628 for
the years ended October 31, 1999 and 1998, respectively.
F-9
<PAGE> 29
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(4) ACCRUED EXPENSES
Accrued expenses consisted of the following at October 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued warranty expense $ 78,038 152,503
Other accrued expenses 22,350 20,962
-------- --------
$100,388 173,465
======== ========
</TABLE>
(5) CAPITAL STOCK
At October 31, 1999 and 1998, $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
1,000,000 shares of common stock at $1.50 per share. In November 1997,
all outstanding warrants were terminated.
The following table summarizes warrants to purchase common stock during
the year ended October 31, 1998:
<TABLE>
<CAPTION>
1998
-----------------------
Weighted
Average
Exercise
Shares Price
--------- --------
<S> <C> <C>
Warrants outstanding, beginning of
year 1,000,000 $1.50
Warrants granted -- --
Warrants terminated 1,000,000 1.50
--------- -----
Warrants outstanding and
exercisable, end of year -- $ --
========= =====
</TABLE>
During the year ended October 31, 1998, the Company's president was paid
a salary in cash of $30,000. In addition, the Company recorded
compensation expense of $15,000, 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.
F-10
<PAGE> 30
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(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.
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 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>
1999 1998
------------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of year 840,000 $ 0.455 540,000 $ 0.500
Options granted 200,000 0.380 300,000 0.375
Options expired -- -- -- --
---------- -------- -------- --------
Options outstanding, end of
year 1,040,000 $ 0.441 840,000 $ 0.455
========== ======== ======= ========
Options exercisable, end of
year 890,000 $ 0.451 740,000 $ 0.466
========== ======== ======= ========
</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.
F-11
<PAGE> 31
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
October 31, 1999 and 1998
No compensation expense was recorded during 1999 and 1998 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:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Net loss:
As reported $ (221,065) (223,416)
=========== ==========
Pro forma $ (369,295) (278,280)
=========== ==========
Loss per share:
As reported $ (0.05) (0.05)
=========== ==========
Pro forma $ (0.09) (0.06)
=========== ==========
</TABLE>
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 7, to 5 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:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31 CAPITAL LEASES OPERATING LEASES
--------------------- -------------- ----------------
<S> <C> <C>
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
=======
</TABLE>
Rent expense under lease agreements totaled $32,559 and $24,637 for
fiscal year 1999 and 1998, respectively.
F-12
<PAGE> 32
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(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, 1998:
<TABLE>
<CAPTION>
Current Deferred Total
------- ------- -------
<S> <C> <C> <C>
1998:
Federal $(6,264) 3,800 (2,464)
State -- 1,500 1,500
------- ------- -------
$(6,264) 5,300 (964)
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Computed "expected" tax benefit $(75,162) (75,961)
Increase (reduction) in income taxes resulting from:
Net operating loss not currently utilizable 75,016 70,001
Nondeductible expenses 146 4,996
-------- --------
$ -- (964)
======== ========
</TABLE>
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 1999
and 1998.
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.
F-13
<PAGE> 33
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
October 31, 1999 and 1998
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:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Accounts receivable principally due to allowance for doubtful accounts $ 3,700 2,900
Accrued warranty expense 15,400 30,000
Net operating loss carryforwards 70,000 11,800
Contribution carryforwards 400 --
------- -------
89,500 44,700
Less valuation allowance 81,700 35,700
------- -------
Total deferred tax assets 7,800 9,000
Plant and equipment principally due to differences in depreciation 7,800 9,000
Total deferred tax liabilities 7,800 9,000
------- -------
Net deferred taxes $ -- --
======= =======
</TABLE>
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 $43,743 and $42,860
as of October 31, 1999 and 1998, 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.)
F-14
<PAGE> 34
PRO TECH COMMUNICATIONS, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(10) MAJOR CUSTOMERS
During 1999, two customers accounted for approximately 30% of net sales
generated during the year. During 1998, one customer accounted for
approximately 27% 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.
F-15
<PAGE> 1
EXHIBIT 10.4
BUSINESS LEASE
THIS AGREEMENT, entered into this ____ day of _______ 1999 between Karen
Development Co., hereinafter called the lessor, party of the first part, and Pro
Tech Communications of the County of St. Lucie and the State of Florida
hereinafter called the lessee or tenant, party of the second part:
WITNESSETH, that the said lessor does this day lease unto said lessee, and
said lessee does hereby hire and take as tenant _____ under said lessor the
following described premises: (Describe type of property, address, etc.)
4,800 square feet as office and shop
3303 Industrial 25th Street, Fort Pierce, Florida
3309 Industrial 25th Street, Fort Pierce, Florida
3311 Industrial 25th Street, Fort Pierce, Florida
situate in St. Lucie Cty., State of Florida, to be used and occupied by the
lessee as office and assembly work and for no other purposes or uses whatsoever,
for the term of _____________ , subject and conditioned on the provisions of
clause ten of this lease beginning the 1st day of November, 1999, and ending the
31st day of October, 2000, at and for the agreed total rental of _________
Dollars, payable as follows:
$2,450.00 per month for 12 months plus sales tax
First payment due November 1, 1999
all payments to be made to the lessor on the first day of each and every month
in advance without demand at the office of Karen Development Co., 3305
Industrial 25th Street, in the City of Fort Pierce, Florida or at such other
place and to such other person, as the lessor may from time to time designate in
writing.
The following express stipulations and conditions are made a part of this
lease and are hereby assented to by the lessee:
FIRST: The lessee shall not assign this lease, nor sub-let the premises, or
any part thereof nor use the same, or any part thereof, nor permit the same, or
any part thereof, to be used for any other purpose than as above stipulated, nor
make any alterations therein, and all additions thereto, without the written
consent of the lessor, and all additions, fixtures or improvements which may be
made by lessee, except movable office furniture, shall become the property of
the lessor and remain upon the premises as a part thereof, and be surrendered
with the premises at the termination of this lease.
SECOND: All personal property placed or moved in the premises above
described shall be at the risk of the lessee or owner thereof, and lessor shall
not be liable for any damage to said personal property, or to the lessee arising
from the bursting or leaking of water pipes, or from any act of negligence of
any co-tenant or occupants of the building or of any other person whomsoever.
THIRD: That the tenant shall promptly execute and comply with all statutes,
ordinances, rules, orders, regulations and requirements of the Federal, State
and City Government and of any and all their Departments and Bureaus applicable
to said premises, for the correction, prevention, and abatement of nuisances or
other grievances, in, upon, or connected with said premises during said term;
and shall also promptly comply with and execute all rules, orders and
regulations of the applicable fire prevention codes for the prevention of fires
at ________________________ own cost and expense.
FOURTH: In the event the premises shall be destroyed or so damaged or
injured by fire or other casualty during the life of this agreement, whereby the
same shall be rendered untenantable, then the lessor shall have the right to
render said premises tenantable by repairs within ninety days therefrom. If said
premises are not rendered tenantable within said time, it shall be optional with
either party hereto to cancel this lease, and in the event of such cancellation
the rent shall be paid only to the date of such fire or casualty. The
cancellation herein mentioned shall be evidenced in writing.
FIFTH: The prompt payment of the rent for said premises upon the dates
named, and the faithful observance of the rules and regulations printed upon
this lease, and which are hereby made a part of this covenant, and of such other
and further rules or regulations as may be hereafter made by the lessor, are the
conditions upon which the lease in made and accepted and any failure on the part
of the lessee to comply with the terms of said lease, or any of said rules and
regulations now in existence, or which may be hereafter prescribed by the
lessor, shall at the option of the lessor, work a forfeiture of this contract,
and all of the rights of the lessee hereunder.
<PAGE> 2
SIXTH: If the lessee shall abandon or vacate said premises before the end
of the term of this lease, or shall suffer the rent to be in arrears, the lessor
may, at his option, forthwith cancel this lease or he may enter said premises as
the agent of the lessee, without being liable in any way therefor, and relet the
premises with or without any furniture that may be therein, as the agent of the
lessee, at such price and upon such terms and for such duration of time as the
lessor may determine, and receive the rent therefor, applying the same to the
payment of the rent due by these presents, and if the full rental herein
provided shall not be realized by lessor over and above the expenses to lessor
in such re-letting, the said lessee shall pay any deficiency, and if more than
the full rental is realized lessor will pay over to said lessee the excess of
demand.
SEVENTH: Lessee agrees to pay the cost of collection and ten per cent
attorney's fee on any part of said rental that may be collected by suit or by
attorney, after the same is past due.
EIGHTH: The lessee agrees that he will pay all charges for rent, gas,
electricity or other illumination, and for all water used on said premises, and
should said charges for rent, light or water herein provided for at any time
remain due and unpaid for the space of five days after the same shall have
become due, the lessor may at its option consider the said lessee tenant at
sufferance and the entire rent for the rental period then next ensuing shall at
once be due and payable and may forthwith be collected by distress or otherwise.
NINTH: The said lessee hereby pledges and assigns to the lessor all the
furniture, fixtures, goods and chattels of said lessee, which shall or may be
brought or put on said premises as security for the payment of the rent herein
reserved, and the lessee agrees that the said lien may be enforced by distress
foreclosure or otherwise at the election of the said lessor, and does hereby
agree to pay attorney's fees of ten percent of the amount so collected or found
to be due, together with all costs and charges therefore incurred or paid by the
lessor.
TENTH: It is hereby agreed and understood between lessor and lessee that in
the event the lessor decides to remodel, alter or demolish all or any part of
the premises leased hereunder, or in the event of the sale or long term lease of
all or any part of the ___________________________; requiring this space, the
lessee hereby agrees to vacate same upon receipt of sixty (60) days' written
notice and the return of any advance rental paid on account of this lease.
ELEVENTH: The lessor, or any of his agents, shall have the right to enter
said premises during all reasonable hours, to examine the same to make such
repairs, additions or alterations as may be deemed necessary for the safety,
comfort, or preservation thereof, or of said building, or to exhibit said
premises, and to put or keep upon the doors or windows thereof a notice "FOR
RENT" at any time within thirty (30) days before the expiration of this lease.
The right of entry shall likewise exist for the purpose of removing placards,
signs, fixtures, alterations, or additions, which do not conform to this
agreement, or to the rules and regulations of the building.
TWELFTH: Lessee hereby accepts the premises in the condition they are in at
the beginning of this lease and agrees to maintain said premises in the same
condition, order and repair as they are at the commencement of said term,
excepting only reasonable wear and tear arising from the use thereof under this
agreement, and to make good to said lessor immediately upon demand, any damage
to water apparatus, or electric lights or any fixture, appliances or
appurtenances of said premises, or of the building, caused by any act or neglect
of lessee, or of any person or persons in the employ or under the control of the
lessee.
THIRTEENTH: It is expressly agreed and understood by and between the
parties to this agreement, that the landlord shall not be liable for any damage
or injury by water, which may be sustained by the said tenant or other person or
for any other damage or injury resulting from the carelessness, negligence, or
improper conduct on the part of any other tenant or agents, or employees, or by
reason of the breakage, leakage, or obstruction of the water, sewer or soil
pipes, or other leakage in or about the said building.
FOURTEENTH: If the lessee shall become insolvent or if bankruptcy
proceedings shall be begun by or against the lessee, before the end of said term
the lessor is hereby irrevocably authorized at its option, to forthwith cancel
this lease, as for a default. Lessor may elect to accept rent from such in their
receiver, trustee, or other judicial officer during the term of their occupancy
in their fiduciary capacity without affecting lessor's rights as contained in
this contract, but no receiver, trustee or other judicial officer shall ever
have any right, title or interest in or to the above described property by
virtue of this contract.
FIFTEENTH: Lessee hereby waives and renounces for himself and family any
and all homestead and exemption rights he may have now, or hereafter, under or
by virtue of the constitution and laws of the State of Florida, or of any other
State, or of the United States, as against the payment of said rental or any
portion hereof, or any other obligation or damage that may accrue under the
terms of this agreement.
SIXTEENTH: This contract shall bind the lessor and its assigns or
successors, and the heirs, assigns, personal representatives, or successors as
the case may be, of the lessee.
SEVENTEENTH: It is understood and agreed between the parties hereto that
time is of the essence of this contract and this applies to all terms and
conditions contained herein.
EIGHTEENTH: It is understood and agreed between the parties hereto that
written notice mailed or delivered to the premises leased hereunder shall
constitute sufficient notice to the lessee and written notice mailed or
delivered to the office of the lessor shall constitute sufficient notice to the
Lessor, to comply with the terms of this contract.
NINETEENTH: The rights of the lessor under the foregoing shall be
cumulative, and failure on the part of the lessor to exercise promptly any
rights given hereunder shall not operate to forfeit any of the said rights.
TWENTIETH: It is further understood and agreed between the parties hereto
that any charges against the lessee by the lessor for services or for work done
on the premises by order of the lessee or otherwise accruing under this contract
shall be considered as rent due and shall be included in any lien for rent due
and unpaid.
TWENTY-FIRST: It is hereby understood and agreed that any signs or
advertising to be used, including awnings, in connection with the premises
leased hereunder shall be first submitted to the lessor for approval before
installation of same.
TWENTY-SECOND: RADON GAS NOTIFICATION (the following notification by be
required in some states): Radon is a naturally occurring radioactive gas that,
when it has accumulated in a building in sufficient quantities, may present
health risks to persons who are exposed to it over time. Levels of radon that
exceed federal and state guidelines have been found in buildings. Additional
information regarding radon and radon testing may be obtained from your county
public health unit.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have hereunto executed this
instrument for the purpose herein expressed, the day and year above written.
Signed, sealed and delivered in the presence of:
Renewal /s/ Sidney B. Motel, 1999
- --------------------------------- ---------------------------------
Witness Signature (as to Lessor) Lessor Signature
Karen Development Co. by (Seal
- --------------------------------- ---------------------------------
Printed Name Printed Name
/s/ Sidney B. Motel (Seal
- --------------------------------- ---------------------------------
Witness Signature (as to Lessor) Post Office Address
3305 Industrial 25th Street
Fort Pierce, Florida 34946
David Lloyd Richard Hennessey (Seal
- --------------------------------- ---------------------------------
Witness Signature (as to Lessee) Lessee Signature
David Lloyd /s/ Richard Hennessey
- --------------------------------- ---------------------------------
Printed Name Printed Name
Robert M. Engel
- --------------------------------- ---------------------------------
Witness Signature (as to Lessee) Post Office Address
Robert M. Engel
- ---------------------------------
Printed Name
STATE OF FLORIDA )
)
COUNTY OF ST. LUCIE )
I hereby Certify that on this day, before me, an officer duly authorized to
administered oaths and take acknowledgments, personally appeared Sidney B.
Motel for Karen Development Co., and known to me to be the person ____________
described in and who executed the foregoing instrument, who acknowledged before
me that _______________________ executed the same, and an oath was not taken.
(Check one:) / / Said person(s) is/are personally know to be. / / Said
person(s) provided the following type of identification: ______________________.
- ---------------------------------- Witness my hand and official seal in the
NOTARY RUBBER STAMP SEAL County and State last aforesaid this ____
day of __________, A.D. 19__.
-----------------------------------------
Notary signature
-----------------------------------------
Printed Name
<PAGE> 1
Exhibit 10.5
[GRAPHIC OMITTED]
UNION ATLANTIC LC
CONSULTING AGREEMENT
This Agreement is made and entered into as of March 15, 1999 between Pro Tech
Communications, Inc. with its principal place of business at 3311 Industrial
25th, Ft. Pierce, FL 34946 herein referred to as "Corporation", and Union
Atlantic LC with its principal place of business at 701 Brickell Avenue, Suite
2000, Miami, Florida 33131 herein referred to as "Consultant".
RECITALS
1. Corporation is a developer, manufacturer and distributor of telephone
headsets and other telephony related products, and in the pursuit of such
business, Corporation desires consulting services.
2. Consultant agrees to perform services for Corporation under the terms and
conditions set forth in this Agreement.
In consideration of the mutual promises set forth herein, it is agreed by and
between Corporation and Consultant as follows:
SECTION ONE
STATEMENT OF WORK
Consultant, will on behalf of the Corporation, and on an exclusive basis perform
the following services:
1. EDUCATION. Consultant will work with management to become educated in the
company's markets, services and strategies. As part of this process
Consultant will assist management in formalizing a business plan that
defines how much capital is required to execute the plan and when the
capital is required (special emphasis will be placed on targeting
milestones that once they are achieved will have a significant impact on
valuation).
2. OFFERING MEMORANDUM. Consultant will work with management to prepare an
offering memorandum that reflects both the current and future business of
the Company. This document will detail the Corporation's current financial
and strategic position and define the requirements and terms for funding.
The Memorandum shall describe both current and potential distribution
channels, market potential, marketing strategies, a description of key
technologies, organizational structure, historical financial information
and a three-year projection. In performing its services hereunder,
Consultant shall be entitled to rely without investigation upon all
information that is provided by the Corporation, which information the
Corporation hereby warrants shall be complete and accurate in all material
respects, and not misleading.
3. RESEARCH. Consultant will research those markets where the company's
technology and services are applicable and put together a target list of
institutional investors, strategic corporate investors and venture capital
firms that have a track record in participating in like financings.
<PAGE> 2
4. EXECUTION. Consultant will contact all potential investors on the target
list. Each prospect will be qualified and meetings set to present the
Corporation. The Consultant will, in consultation with management, take the
lead to negotiate and close a transaction. The Consultant will seek to
obtain financing on behalf of the Corporation but can in no way guarantee
that the Corporation will successfully raise capital.
5. COMMUNICATION. Each week, Consultant will provide Corporation a written
report identifying key activities accomplished during the prior week and
objectives for the upcoming week. Bi-weekly meetings will be scheduled to
review progress and/or to make changes to our strategy.
SECTION TWO
PLACE OF WORK
It is understood that Consultant's services will be rendered both on and
off-site of Corporation. Corporation agrees to provide an office, secretarial
support, and time of key employees while Consultant is on-site.
SECTION THREE
TIME DEVOTED TO WORK
In the performance of the services, the services and the hours Consultant is to
work on any given day will be entirely within the Consultant's control and
Corporation will rely upon Consultant to put in such number of hours as is
reasonably necessary to fulfill the spirit and the purpose of this Agreement.
SECTION FOUR
DURATION
The duration of this Agreement (the "Term") shall be from March 15, 1999 to
October 15, 1999. After September 15, 1999, either party shall have the right to
terminate this Agreement subject to providing thirty (30) days prior written
notice. If neither party terminates this Agreement, this Agreement shall
automatically renew for an additional six (6) month period.
SECTION FIVE
PAYMENT
Corporation will pay Consultant a consulting fee of Five Thousand Dollars
($5,000) per calendar month in consideration of services performed. Payment
shall be made on the first day of each month during the Term with the first
payment due on March 15, 1999.
Corporation will pay Consultant a fee of Seven Thousand and Five Hundred Dollars
($7,500) upon delivery of Offering Memorandum to Corporation. Said fee shall not
be subject to the termination provision included in the "Duration" Paragraph
above.
A Capital Transaction shall include any form of financing, public or private
sale of equity, convertible debt, purchase of assets, assumption of liabilities,
joint venture agreements, distribution agreements, employment agreements,
license and/or sale agreements, merger or acquisition of or by the Corporation
or any successor thereof.
Consultant shall receive, in cash, at the closing of any Capital Transaction
during the term of this Agreement (or at the closing of a Capital Transaction
within twenty-four (24) months after the termination of this Agreement with a
party contacted by Consultant during the term of this Agreement) a six percent
(6%) fee. Excluded from the definition of Capital Transaction shall be any
transactions with NCT Group, Inc. or First National Bank, Vero Beach, Florida.
<PAGE> 3
The amount of the consideration received or the value of securities received for
any Capital Transaction shall be multiplied by the above referenced percentage.
These fees shall be payable in cash out of the proceeds of the financing and
Corporation or any successor corporate entity will cause such payment to be made
immediately upon the closing(s) of such transaction.
In addition, upon closing of a Capital Transaction(s), which generates a fee for
Consultant pursuant to this Agreement, in an amount equal to or greater than
Five Hundred Thousand Dollars ($500,000) with respect to which Consultant is
entitled to a fee as described herein above, Corporation or any successor entity
will grant to Consultant a warrant to purchase up to three and one half percent
(3.5%) of the outstanding common stock of the Corporation, as calculated
immediately following the Capital Transaction, at a per-share exercise price
equal to the per-share price paid by the investors in the Capital
Transaction(s).
Warrants shall be issued at the closing of a Capital Transaction, and can be
exercised, at Consultant's option, by tendering cash or as a "cash-less
exercise" by tendering the common stock of the Corporation underlying such
Warrants valued at the closing price of such common stock on the trading day
immediately preceding such exercise. Such Warrants may be exercised at any time
by Consultant in whole or part over 5 years. Corporation or its successor entity
agrees to reserve sufficient amount of common shares to cover the exercise of
warrants. Corporation shall grant Consultant piggyback registration rights for
the common stock underlying the warrants issued pursuant to this paragraph in
accordance with Addendum "A" to this Agreement.
These warrants shall be subject to a proportionate downward adjustment in the
per share exercise price in the event of any (a) stock splits, stock dividends,
recapitalizations or similar events, or (b) issuances of common stock at a per
share price less than the warrant price.
Corporation will reimburse Consultant for all pre-approved business expenses
("Expenses") incurred by the Consultant in the performance of the work defined
herein.
SECTION SIX
STATUS OF CONSULTANT; INDEMNIFICATION
This Agreement calls for the performance of the services as an independent
contractor and Consultant will not be considered an employee of the Corporation
for any purpose.
In the event that Consultant becomes involved in any capacity in any action,
proceeding or investigation in connection with any matter referred to in this
Agreement, the Corporation will reimburse Consultant for its reasonable and
necessary legal and other expenses incurred in connection therewith. The
Corporation will also indemnify Consultant against losses, claims, damages or
liabilities to which Consultant may become subject in connection with any matter
referred to in this Agreement, except to the extent that any such loss, claim,
damage or liability results from the recklessness or bad faith of Consultant
performing the services that are the subject of this Agreement. The foregoing
provisions shall survive any termination of this Agreement.
SECTION SEVEN
SERVICES FOR OTHERS
Consultant may, during the term of this Agreement, perform services for any
other person or firm without Corporation's prior approval.
SECTION EIGHT
OWNERSHIP
Consultant acknowledges that all work developed under this Agreement, will be
the sole property of the Corporation and only Corporation will be free to use
such works without any obligation to remit any payment, other than that which is
agreed to in this Agreement, to Consultant for future and continued usage.
<PAGE> 4
SECTION NINE
GOVERNING LAW
The laws of the State of Florida shall govern this agreement. Any controversy or
claim arising out of, or relating to, this Agreement, to the making,
performance, or interpretation of it, shall be settled by arbitration in Miami,
Florida unless otherwise mutually agreed upon by the parties, under the
commercial arbitration rules of the American Arbitration Association then
existing, and any judgment on the arbitration award may be entered in any court
having jurisdiction over the subject matter of the controversy. If any legal
action or any arbitration or other proceeding is brought for the enforcement of
this Agreement, or because of an alleged dispute, breach, default, or
misrepresentation in connection with any of the provisions of this Agreement,
the successful or prevailing party or parties shall be entitled to recover
reasonable attorney's fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
In the event that Consultant becomes involved in any capacity in any action,
proceeding or investigation in connection with any matter referred to in this
letter, the Corporation will reimburse Consultant for its legal and other
expenses incurred in connection therewith. The Corporation will also indemnify
Consultant against losses, claims, damages or liabilities to which Consultant
may become subject in connection with any matter referred to in this letter,
except to the extent that any such loss, claim, damage or liability results from
the recklessness or bad faith of Consultant performing the services that are the
subject of this letter.
The Governing Law provisions shall survive any termination of this Agreement.
SECTION TEN
INTEGRATION
This Agreement contains the entire Agreement among the parties and supersedes
all prior and contemporaneous oral and written Agreements, understandings, and
representations among the parties. No amendments to this Agreement shall be
binding unless executed in writing by all the parties.
SECTION ELEVEN
NON BINDING EXPECTATIONS
The Corporations non-binding expectations for entering into this Agreement are
for Consultant to use best efforts to conduct the affairs of the Corporation in
a prudent, profitable manner.
IN WITNESS WHEREOF, The parties to this Agreement have duly executed it on the
day and year first above written.
CORPORATION
PRO TECH COMMUNICATIONS, INC.
BY:
---------------------------------------------------------------
Authorized Representative Date
CONSULTANT
UNION ATLANTIC LC
BY:
Leoanrd J. Sokolow /s/ 3/5/99
---------------------------------------------------------------
Leonard J. Sokolow, Partner Date
<PAGE> 5
ADDENDUM "A"
REGISTRATION RIGHTS
(a) PIGGY-BACK REGISTRATION RIGHTS. If at any time ending five
(5) years from, the date of this Agreement (the "Registration Period"),
the Corporation proposes to register any of securities under the 1933
Act (other than registration form relating to a registration of a stock
option, stock purchase or compensation or incentive plan or of stock
issued or issuable pursuant to any such plan, or dividend investment
plan, a registration of stock proposed to be issued in exchange for
securities or assets of, or in connection with the merger or
consolidation with, another corporation, or a registration of stock
proposed to be issued in exchange for other securities of the
Corporation), the Corporation shall give prompt written notice thereof
to the Consultant and, upon the written request made within ten (10)
days after the Consultant and, upon receipt of such notice, the
Corporation shall use its best efforts to effect as part of such
registration the registration under the 1933 Act of that number of the
Shares which the Consultant requests the Corporation to register,
provided that the managing underwriter of the Corporation's public
offering, if any, shall be of the opinion that the inclusion in such
registration of such number of Shares will not interfere with the
successful marketing of all of the Corporation's securities being
registered. If the managing underwriter requests the Consultant to
reduce in whole or in part the number of shares sought or be registered
by the Consultant, the Consultant shall comply with the request of the
managing underwriter. In any underwritten offering, the Consultant
shall sell the Shares registered as part of such underwritten offering
to the underwriters of such offering on the same terms and conditions
as apply to the Corporation. In connection with any registration
pursuant to this Section (a), the Consultant shall provide the
Corporation with such information regarding the Consultant and the
distribution of the Shares as the Corporation and the managing
underwriter shall reasonably request. The Corporation shall pay all
costs and expenses of the Consultant. The Corporation shall not be
obliged to effect registration under the 1933 Act pursuant to this
Section (a) on more than one occasion.
(b) GENERAL CONDITIONS. In connection with each registration effected
pursuant to Section (a), the Corporation and the Consultant
agree as follows:
(i) INDEMNIFICATION OF CONSULTANT. The Corporation
shall indemnify and hold harmless the Consultant against any
and all losses, claims, damages, or liabilities to which he or
she may become subject under the 1933 Act, or any other
statute or common law, including any amount paid in settlement
of any litigation, commenced or threatened, if such settlement
is effected with the written consent of the Corporation, and
to reimburse them for any legal or other expenses incurred by
them in connection with investigating any claims and defending
any action insofar as any such losses, claim, damages,
liabilities or actions arise out of or are based upon 1) any
untrue statement or alleged untrue statement of a material
fact, contained in the registration statement relating to the
sale of the Shares, or any post-effective amendment thereof,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, 2) any untrue
statement or alleged untrue statement of a material fact,
contained in a preliminary prospectus, if used prior to the
effective date of such registration statement, or contained in
the prospectus (as amended or supplemented, if the Corporation
shall have filed with the SEC any amendment thereof or
supplement thereto), if used within the period during which
the Corporation is required to keep the registration statement
to which the prospectus relates current pursuant to the terms
hereof, or the omission or alleged omission to state therein
(if so used) the material fact necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading. The indemnification Agreement
contained in this Agreement, however, shall not: 1) apply to
such losses, claims, damages, liabilities, or actions arising
<PAGE> 6
out of, or based upon, any such untrue statement or alleged
omission, if such statement or omission was in reliance upon
and in conformity with the information furnished in writing to
the Corporation by the Consultant in connection with the
preparation of the registration statement or any preliminary
prospectus or prospectus contained in the registration
statement or any amendment thereof or supplement thereto, or
2) inure to the benefit of any underwriter from whom the
person asserting any such losses, claims, damages, expenses or
liabilities purchased the securities which are the subject
thereof (or to the benefit of any person controlling such
underwriter), if such underwriter failed to send or give a
copy of the prospectus to such person at or prior to the
written confirmation of the sale of such securities to such
person.
(ii) INDEMNIFICATION OF THE CORPORATION. The
Consultant and each underwriter of the Shares to be registered
(such party and such underwriters being referred to severally
in this subparagraph as the "Indemnifying Party") shall agree,
in the same manner and to the same extent as set forth in the
preceding paragraph, to indemnify and hold harmless the
Corporation and each person, if any, who controls the
Corporation within the meaning of Section 15 of the 1933 Act,
its directors and those officers of the Corporation who shall
have signed such registration statement, with respect to any
statement in or omission from such registration statement or
any post-effective amendment thereof or any preliminary
prospectus (as amended or supplemented, if amended or
supplemented as aforesaid) contained in such registration
statement, if such statement or omission was made in reliance
upon and in conformity with information furnished in writing
to the Corporation by such Indemnifying Party for use in
connection with the preparation of such registration statement
or any preliminary prospectus or prospectus contained in such
registration statement or any amendment thereof or supplement
thereto.
(iii) NOTICE OF INDEMNIFIABLE ACTION. Each indemnified party will,
promptly after the receipt of notice or the commencement of any
action against such indemnified party in respect of which indemnity
may be sought from a party hereto on account of an indemnity
Agreement contained in this Section, notify the indemnifying party
in writing of the commencement thereof. The omission of any
indemnified party so to notify an indemnifying party of any such
action shall relieve the indemnifying party from any liability in
respect of such action which it may have to such indemnified party
on account of the indemnity Agreement contained in this Section,
but shall not relieve the indemnifying party from any other
liability which it may have to such indemnified party.
<PAGE> 7
AMENDMENT NO. 1 TO
CONSULTING AGREEMENT
This Agreement is made and entered into as of June 1, 1999 between Pro Tech
Communications, Inc.
with its principal place of business at 3311 Industrial 25th, Ft. Pierce, FL
34946 herein referred to as "Corporation", and Union Atlantic LC with its
principal place of business at 701 Brickell Avenue, Suite 2000, Miami, Florida
33131 herein referred to as "Consultant".
RECITALS
1. Corporation is a developer, manufacturer and distributor of telephone
headsets and other telephony related products, and in the pursuit of such
business, Corporation desires consulting services.
2. Consultant agrees to perform services for Corporation under the terms and
conditions set forth in this Agreement.
3. Consultant and Corporation desired to amend the Consulting Agreement by and
between Corporation and Consultant dated March 15, 1999 ("Consulting
Agreement").
In consideration of the mutual promises set forth herein, it is agreed by and
between Corporation and Consultant as follows that the Consulting Agreement
shall be amended as follows:
1. The fourth paragraph of Section 5 shall be deleted in its entirety and
replaced with the following paragraph:
"Consultant shall receive, in cash, at the closing of any Capital Transaction
during the term of this Agreement (or at the closing of a Capital Transaction
within twenty-four (24) months after the termination of this Agreement with a
party contacted by Consultant during the term of this Agreement) a six percent
(6%) fee. IN THE EVENT THE CAPITAL TRANSACTION IS A MERGER OR SALE OF CONTROL OF
CORPORATION OR SUBSTANTIALLY ALL OF ITS ASSETS, SUCH FEE SHALL BE REDUCED BY ANY
CONSULTING FEES PAID TO CONSULTANT BY CORPORATION PURSUANT TO THIS AGREEMENT
PRIOR TO SUCH CAPITAL TRANSACTION. EXCLUDED FROM THE DEFINITION OF CAPITAL
TRANSACTION SHALL BE ANY TRANSACTION WITH FIRST NATIONAL BANK, VERO BEACH,
FLORIDA. "
2. All other terms and conditions of the Consulting Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties to this Agreement have duly executed it on the
day and year first above written.
CORPORATION
PRO TECH COMMUNICATIONS, INC.
BY:
-------------------------------------------------------------
Authorized Representative Date
CONSULTANT
UNION ATLANTIC LC
BY:
Leonard J. Sokolow /s/ 6/1/99
-------------------------------------------------------------
Leonard J. Sokolow, Partner Date
<PAGE> 1
nct ____________________________________________________________ NCT GROUP, INC.
June 22, 1999
Mr. Richard Hennessey
President
Pro Tech Communications, Inc.
311 Industrial 25th Street
Ft. Pierce, Florida 34946
Dear Mr. Hennessey:
The purpose of this letter is to set forth the basic terms by which Pro
Tech communications, Inc. or an entity succeeding to its assets and liabilities
(collectively, the "Seller") would be willing to sell to NCT Hearing Products,
Inc. ("NCT") or an entity created by it (collectively, such entity and NCT are
herein referred to as the "Buyer") all of the ownership interests in Seller. We
are writing to you in order to seek you approval of the following basic terms
around which we would proceed to develop terms and conditions of a definitive
agreement (the "Definitive Agreement") under which the acquisition would be
consummated. Except as specifically set forth herein, this Letter of Intent
shall be non-binding and in the event that the parties are unable to reach a
Definitive Agreement, neither party shall have any claims against the other
except for breach of the parties' respective obligations in the confidentiality
agreement referred to in paragraph 11 hereof.
1. PURCHASED INTERESTS. Buyer will acquire the majority ownership interest
in Seller, via a purchase by Buyer from Seller of stock of Seller (the
"Purchased Interest"). Pursuant to such purchase, Buyer will succeed to
the indirect ownership of Seller's assets and shall assume Seller's
liabilities.
2. PURCHASE PRICE. In consideration for the Purchased Interests to be
acquired by Buyer, Buyer shall license to Seller its technology for use
with Products in the Market as defined in Schedule B for shares of the
Seller's common stock having a value of $0.31 per share, or an aggregate
value of Six Million One Hundred Thirty Six Thousand Dollars ($6,136,000)
(the "Purchase Price"). The Buyer also agrees to raise Two Million dollars
($2,000,000) of additional equity. Schedule A outlines the structure of the
ownership after the transaction is completed.
One Dock Street, Suite 300, Stamford, CT 06902 * Tel 203-961-0500,
Fax 203-348-4106 * www.nct-active.com
<PAGE> 2
3. SELLER'S EMPLOYEES. Buyers shall provide employment opportunities to
Seller's management employees listed on Exhibit A attached hereto upon
terms and conditions no less favorable than those in existence as of the
date hereof. In addition, Buyer shall employ sufficient numbers of
Seller's non-management employees after Closing to ensure that Seller is
not in violation of the worker Adjustment and Retaining Notification Act
and/or any similar state law.
4. DIRECTORSHIP. The Buyer and Seller agree that pursuant to an agreed
upon Shareholder Agreement the Seller and Buyer will each have three
Directors on the BOD.
5. RESTRICTIVE COVENANT. At the Closing, the management of Seller shall
deliver to Buyer non-competition agreements prohibiting management of
Seller from competing with Buyer, the terms of which shall be mutually
agreed upon by Buyer and Seller.
6. DUE DILIGENCE. The parties hereto acknowledge that Buyer has not had
ample opportunity to engage in due diligence review of Seller, and,
consequently, additional due diligence period shall be available to Buyer,
and the Definitive Agreement shall be conditional to Closing based on
Buyer's investigation of Seller. Seller will make available to Buyer and
its representatives all information and records relating to the Seller and
the Purchased Interests and shall provide access to management personnel
to discuss such information. Buyer shall conduct its due diligence as
expeditiously as possible after execution of this letter and in a manner
so as not to interfere with the Seller or its business. The Buyer will
bear primary responsibility for drafting the Definitive Agreement.
7. CONDUCT OF BUSINESS. From the date hereof until August 23, 1999, the
Seller shall continue to conduct its business in the ordinary course and
shall not engage in any sale of its assets or shares of its capital stock,
enter into any transaction, contact or commitment, incur any liability or
obligation, or make any disbursement not in the ordinary course of
business. Buyer shall not be obligated to close if there is nay material
adverse change in the financial or operational condition of the Seller
after the date executed hereof. The Seller and the Buyer will agree to
limitations on the occurrence prior to closing of any new indebtedness,
the issuance of any new securities, debt or equity, and similar status quo
limitations as are customary for an acquisition of this nature.
8. BROKERAGE. Seller has not and will not retain any broker, finder,
placement agent or other party who would be entitled to any fee,
commission or other compensation, except for Union Atlantic LC, whose fee
of two percent (2%) of the total number of the Seller's shares of common
stock issued and outstanding at the completion of the transaction will be
paid equally by Seller and Buyer at the Closing. It is understood and
agreed by the parties hereto that with respect to such shares, Union
Atlantic LC shall have the piggyback registration rights as set forth in
Addendum "A" to the Consulting Agreement between the Seller and
2
<PAGE> 3
Union Atlantic LC. This paragraph shall not apply to any parties
furnishing legal services or accounting services to Buyer or Seller in
connection with the acquisition nor shall it apply to the Buyer's
obligation to raise $2,000,000 of additional equity.
9. EXCLUSIVITY. Neither the Seller nor its board of directors or
shareholders shall solicit, discuss, negotiate or provide information to
any party in connection with, or consider ay other proposal for, the
purchase or sale of any capital stock or assets of Seller. This
restriction shall remain in effect for a period commencing on the date of
execution hereof and shall continue until such time as (i) the Definitive
Agreement is signed by the parties, or (ii) sixty days from the date of
execution hereof.
10. EXPENSES. Each of the Buyer and Seller shall pay all of its own
expenses incidental to the negotiation and preparation of this document
and of all other documentation, including financial statements relating
to the acquisition, regardless of whether the acquisition is consummated.
11. CONFIDENTIALITY. In order to provide for the confidentiality and
non-disclosure of information exchanged by the parties in connection with
the negotiation and closing of the acquisition, the parties shall execute
a mutually-binding confidentiality agreement.
12. CONDITIONS PRECEDENT TO CLOSING. The consummation of the acquisition
of the Purchased Interests is subject to the following conditions:
a. The execution by the parties, on or before August 22, 1999, of
the Definitive Agreement containing customary terms and
provisions applicable to transaction similar to that discussed
herein, unless such terms and provisions are limited herein.
b. The entering into of the non-competition agreements described
in Section 5 hereto.
c. The Buyer shall have raised the Two Million Dollars ($2,000,000)
of equity referred to in Section 2 hereof.
d. The Seller shall have received an opinion from Union Atlantic LC
that the transactions referred to herein are fair, from a
financial point of review, to the Seller and its shareholders.
e. The Closing shall have taken place on or before August 22, 1999.
If the closing has not occurred by such date, the Seller shall
have the right to pursue alternative transactions with other
parties and shall have no further obligations to the Buyer,
except for the
3
<PAGE> 4
obligations in the confidentiality agreement referred to in
paragraph 11 hereof.
If the proposal described in this Letter is acceptable, please indicate by
signing and dating the duplicate copies in the space provided below and return
all but two (2) originally executed copies to the undersigned. Closing will be
held as soon as possible after execution of the Definitive Agreement and the
fulfillment of the other conditions precedent, but in no event later than
August 22, 1999.
Sincerely,,
NCT Hearing Products, Inc.
/s/ Irene Lebovics
- -----------------------------------
Irene Lebovics
President
Agreed and accepted this 22nd day of June, 1999
Pro Tech Communications, Inc.
By: Richard Hennessey
- -----------------------------------
Richard Hennessey, President
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRO TECH COMMUNICATIONS, INC. FOR THE YEAR ENDED OCTOBER
31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 160,428
<SECURITIES> 0
<RECEIVABLES> 205,923
<ALLOWANCES> 18,661
<INVENTORY> 285,883
<CURRENT-ASSETS> 703,448
<PP&E> 196,747
<DEPRECIATION> 0
<TOTAL-ASSETS> 945,377
<CURRENT-LIABILITIES> 217,389
<BONDS> 0
0
0
<COMMON> 4,254
<OTHER-SE> 723,734
<TOTAL-LIABILITY-AND-EQUITY> 945,377
<SALES> 1,090,551
<TOTAL-REVENUES> 1,101,450
<CGS> 414,931
<TOTAL-COSTS> 1,322,515
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,771
<INTEREST-EXPENSE> 0
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