SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-KSB A-2
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
(Fee Required)
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File No. 1-10623
Pamet Systems, Inc.
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(Name of small business issuer in its charter)
Massachusetts 04-2985838
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Main Street
Acton, Massachusetts 01720
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (508)_263-2060
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
none none
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
---------------------------------
(Title of Class)
Check whether the issurer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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 pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of the 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 issuers revenues for its most recent fiscal year was $1,094,735
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the average bid and ask prices of the Common Stock on
March 20, 1996 was $1,847,847.
The number of shares outstanding of the Registrant's common stock, as of March
28, 1996 -- 2,018,150 shares.
<PAGE>
NOTE ON THE REASON FOR THE AMENDMENT
This Form 10-KSB A-2 is being submitted to include an amended
auditors report as well as to provide amended information included in part
III.
<PAGE>
PART I
Item 1. Description of Business
Business Development
The Registrant designs and develops computer software and markets
software and turnkey computer systems utilizing such software principally
to public safety agencies serving municipalities with populations under
250,000, as well as campus, public housing and transit police agencies. The
principal product of the Registrant is the PoliceServer(R), a management
information system for police departments, which performs the clerical and
recordkeeping functions necessary for police department operation, from
dispatch and booking to word processing and electronic mail. The
Registrant also markets to fire departments the FireServerR, a management
information system that provides fire Departments with data on structures,
fire suppression plans and hazardous materials. As of December 31, 1995,
the Registrant had installed the PoliceServer in 86 police departments and
the FireServer in eighteen fire departments. Sixty-nine of the Police
Departments, and seventeen of the Fire systems are in Massachusetts. The
Police product has also been marketed and installed in nine additional
states and the Fire product in one other state.
During the past years the Registrant has been seeking to expand
its market beyond Massachusetts, and is adapting and enhancing its products
to fit these additional markets. It has been marketing and expanding in the
Southeastern states and in the lower Midwestern states. A Regional office
has been established for that purpose in Charleston, SC. Revenues have
decreased for the 12 month period ended December 31, 1995 due to the delays
in the awarding of federal grants to local law enforcement agencies. These
grants are associated with the "Violent Crime Control and Law Enforcement
Act of 1994" (the 1994 Crime Bill) which provides automation grants to law
enforcement agencies to enable law enforcement officers to spend more time
"on the street". These grants have been delayed due lack of resolution in
funding at the federal level. In general, the long lead time and
uncertainties of selling to the governmental sector continue to result in a
volatility in sales and cash flow. The Registrant continues to evaluate
mergers, acquisitions and other business combinations, as well as capital
raising alternatives to enhance its working capital.
This Annual Report of Form 10-K contains statements which are not
historical facts. These forward-looking statements reflect management's
current views, are based on many assumptions and factors and may involve
risks and uncertainties. Certain factors and other information contained in
this Annual Report on Form 10-K could cause such views, assumptions and
factors and the Registrant's results of operations to be materially
different.
The Registrant was incorporated in Massachusetts on November 24,
1987 by Dr. Joel B. Searcy, its Chairman of the Board and President.
______________________
PoliceServer and FireServer are registered trademarks of the Registrant.
<PAGE>
Business of the Registrant
Public safety agencies are paper-intensive organizations, which
manage tremendous amounts of information in their day-to-day activities.
These agencies must collect, process, file and retrieve such information
quickly, conveniently and cost effectively. Traditionally, police and
fire departments have performed these tasks manually, resulting in significant
resources and man-hours being spent processing and locating documents in
large, sometimes haphazardly maintained, filing systems. Critical
information can be inadvertently lost or misfiled and information can only
be accessed by one person at a time. In an attempt to more efficiently
manage information and to improve personnel productivity and response time,
some public safety agencies have computerized certain of their internal
operations.
The Registrant believes that the market for computer systems for
public safety agencies continues to be positioned for further growth due to
a number of major factors. The first factor is the passage of the 1994
Crime Bill which will potentially allocate more than $33.0 Billion of
funding for police and prison agencies over the next four years of which
over $1.0 Billion is allocated to the automation of police agencies.
Although the majority of the funding from the 1994 Crime Bill is earmarked
for additional police presence on the street, automation and
computerization of police agencies is encouraged if it can be demonstrated
that this investment will allow additional police resources to be "put back
on the street". The Registrant's products are built and marketed as this
type of a productivity enhancing system. The second factor is that E911
systems that are being established around the country will require 24 hour
dispatch centers for police, fire and EMS departments. It is the opinion
of the Registrant that many smaller communities will not be able to afford
to staff a dispatch center 24 hours a day. This will lead to the
establishment of regional dispatch centers serving a number of communities.
This regionalization will require computer systems to enable the regional
dispatchers to have timely access to the information needed to respond to
the varied situations in a diverse geography. The Registrant's products are
designed and marketed with the option to be used in this type of regional
application. The third factor is the fact that there is a growing trend
toward accreditation of law enforcement agencies by an independent national
commission, the Commission on Accreditation for Law Enforcement Agencies,
Inc. As a practical matter, the Registrant believes that in order to
comply with the numerous requirements of accreditation, a department must
be computerized. The Registrant also believes that in the near future
accreditation will be a significant factor in determining availability of
and premiums for liability insurance for police departments.
Additional factors affecting the market for computer systems for
public safety agencies include the following; the improving economy which
is providing greater availability of funding for public safety
computerization; the general awareness and emphasis that municipalities are
placing on crime prevention; the increasing realization by public safety
officials that computers can increase the effectiveness of public safety
operations; the pressures to control personnel costs, which account for a
major portion of municipal budgets; the need to achieve higher personnel
productivity due to local budgetary constraints; and the availability of
computer hardware that does not require special environmental systems.
Products
General. In an effort to meet the demands of its target market,
which consists of approximately 15,000 police departments and 5,000 fire
departments nationwide, the Registrant has not only developed proprietary
software but also offers its customers complete turnkey computer systems.
The Registrant provides the customer with hardware, software, training,
support, installation and initial maintenance for its products for an
all-inclusive price. The Registrant also sells hardware upgrades and
supplies.
The Registrant has developed and actively markets two software
products to date: the PoliceServer, a management information system for
police departments, and the FireServer, a management information system for
<PAGE>
fire departments. The Registrant owns the full and exclusive rights to both
software products.
The Registrant's software is presently available for Digital
Equipment Corporation's Open VMSR operating system. Consequently, the
Registrant's turnkey computer systems presently employ Digital hardware and
operating system software. The Registrant's turnkey computer systems also
include bundled nonproprietary software for word processing and
spreadsheets, which the Registrant purchases from other companies and sells
to the Registrant's users. Due to the increasing demand for PC-based
systems the Registrant is pursuing ways to redevelop its application to be
operable on an even larger selection of operating systems. No assurance can
be given that the Registrant will be successful in this regard.
PoliceServer. The PoliceServer is a comprehensive package of law
enforcement applications software which performs the clerical and
recordkeeping functions necessary for police department operation. The
PoliceServer includes a computer-aided dispatch and incident reporting
function which assists dispatchers in allocating and controlling resources
and logging and reporting incidents, and performs automatic checks for
outstanding arrest warrants and gun permits. The system's functions
include an arrest booking system which collects, stores and reports data on
arrests from the time of arrest through court appearances. The system also
automatically produces and prints all reports, forms and other documents
needed in connection with a booking. In addition, the system provides
access to the Federal Government's Computer Aided Management of Emergency
Operations Hazardous Materials CAMEOR database. Other functions create and
maintain records with respect to arrest warrants, alarm systems, citations,
licenses, permits, personnel, payroll, property and equipment and vehicle
maintenance, as well as provide word processing, electronic mail,
spreadsheet and personal calendar management capabilities.
The PoliceServer automatically cross references and updates all
appropriate files in the data base. This feature eliminates the need for
repetitive input, saves man-hours, and ensures the timely and consistent
updating of police records. The Registrant estimates that after the first
6 to 20 months of operation, a PoliceServer system typically produces
manpower savings whose dollar value equals the total system price. The
system provides multiple levels of security controls which the Registrant
believes limit the likelihood of tampering with police records.
An important feature of PoliceServer is that customers find the
system easy to learn and operate. The PoliceServer is designed to be used
by any member of the department and rewards users directly by expediting
unpleasant and boring paperwork tasks. The PoliceServer eliminates much of
this manual preparation, replacing it with a series of simple interactive
entry screens. This single step both produces the needed paperwork on a
laser printer and captures the data for storage and analysis.
__________________________
Open VMS is a registered trademark of Digital Equipment Corporation
CAMEO is a registered trademark of the U.S. Government
<PAGE>
FireServer. The FireServer relies on the design approaches taken
with the PoliceServer and performs a number of similar functions. Like
PoliceServer, the FireServer system assists dispatchers in allocating and
controlling resources and logging and reporting incidents, as well as
providing access to the CAMEO Hazardous Materials database. In addition,
FireServer permits a dispatcher to immediately print a fire suppression
plan for use by firefighters at the scene, including incident location
information; orders for first arriving units; emergency contact
information; structure type, size and usage data and identification of any
permits, inspection violations or hazardous material at the site; and
identification of individuals with special needs known to reside at the
incident address. The FireServer system's other functions create and
maintain records with respect to hydrant location and history; permits,
inspections, violations, street box and building alarm systems, and
personnel, payroll, property and equipment and vehicle maintenance, as well
as provide word processing, electronic mail, spreadsheet and personal
calendar management capabilities.
ImageServer The ImageServer product is a complete image capture,
storage and printing system that handles color or monochrome photo images
(mug shots, crime scene etc.), and document imaging. The ImageServer
product operates on a networked Pentium class computer system.
The product is fully integrable with the PoliceServer and
FireServer systems, and supports unlimited numbers of images connected to
Master Name File entries. Photo lineup capability permits either video or
printed lineups in either color or monochrome. Documents relating to
individuals or incidents can also be stored and printed with the document
scan option.
Incident or accident related images can be connected to incident
reports, and can include photo images or document images. Images can also
be associated with property and evidence, and with department personnel
files.
The system has been designed for compatibility with new Federal
standards (NCIC 2000), and will be evolved to maintain such compatibility
as NCIC 2000 specifications evolve.
New Products - The Registrant has developed a Mobile Data Terminal
(MDT) as an option with the PoliceServer. These devices are fully
integrated allowing communications from car to dispatch, car to car, as
well as access into the files in the PoliceServer system. All messages are
fully encrypted. These systems should minimize the requirements for the
officer to return to the station and should serve to increase the police
presence on the street. ImageServer is now available as an option to be
integrated with the MDT's.
Product Pricing. A complete turnkey system including software,
hardware, training, one year's hardware maintenance (provided by the
hardware vendor) and six months of software support and update service,
including a warranty against defects in the software has sold for between
$28,000 and $300,000, with most sales falling within the $50,000 - $100,000
range. As is common in the industry, the Registrant prices its software
packages by the number of simultaneous users allowed. The base price for a
two-user software package designed to run on a Digital AlphaStation 200
4/100 is $18,000. The base price of the software rises with the power of
the processor used, but the cost of additional simultaneous users is $2,000
per user. This pricing strategy allows a small department to justify an
entry-level system, yet permits it to add users in subsequent years at no
cost penalty in most circumstances. Pricing of the ImageServer system
begins at $12,950 for a single PC based capture station. An additional view
station with software is priced at $3,000. A typical system is $16,000 to
$19,000.
<PAGE>
Pricing of the FireServer and PoliceServer software packages is
identical, with a discount offered on the base software license when the
packages are installed together on the same computer hardware. Twelve of
the eighteen FireServer systems in operation utilize the same computer as
the PoliceServer in that municipality.
In addition to revenues generated by sales of the PoliceServer,
FireServer, ImageServer and maintenance and support fees, the Registrant
generates operating revenues from the sale of additions to its existing
systems, miscellaneous supplies, accessories and custom development, and
training.
Marketing
The Registrant's marketing strategy is designed to attract the
Registrant's typical potential police or fire department customer. The
Registrant utilizes live demonstrations of its products, conducted in a way
that emphasizes the operational features of the products rather than the
operational technology. Seminars are held at various facilities selected to
allow potential customer representatives to see the products in a relaxed,
neutral, environment. The available grants associated with the 1994 Crime
Bill also provided another marketing avenue as the Registrant conducted
seminars to assist public safety agencies obtain grants as described below.
The Registrant generally concentrates its marketing efforts on the
PoliceServer system, with approach to the fire department following success
with the municipality's police department. In locations where the police
and fire departments are incorporated in a single Department of Public
Safety, the Registrant's strategy is to sell both packages on a single
system. The expanded use of E911 will add greater focus to the latter
strategy.
The Registrant customizes its software by state, so that each
state's prescribed reporting forms can be printed in accordance with such
state's requirements. In addition, the Registrant's software allows
customers to customize their reporting forms to their particular
specifications.
With the encouragement of the Registrant, active, independent user
groups, consisting of the police departments using PoliceServer and fire
departments using the FireServer, have developed. Any department
participating in the Registrant's annual support and update service may
attend its group's monthly meetings. Currently there are three Police
groups, one in each region and one fire group which is in the Northeast.
Since each department uses identical software, the users are able to
effectively discuss the application and development of the system, to
support each other in identifying training techniques and new applications,
and to discuss concerns encountered in using the system. The groups have
also served as a source of referrals of potential customers and as a source
of satisfied customers willing to testify about the virtues of the
Registrant's products to prospective customers. The Registrant relies on
the groups to determine the direction and development of updates or
enhancements to be made to the software.
In addition, Digital provide sales and marketing support through
their sales representatives, assisting in the generation of leads for
prospective customers. Digital also cooperates with the Registrant in
presenting seminars for public safety agencies. The Registrant also
attends public safety agency conventions and trade shows as part of its
marketing efforts. In late 1994 and 1995 the Registrant, in conjunction
with Digital, sponsored seminars that focused on the 1994 Crime Bill for
over 150 public safety agencies. The seminars were designed to inform these
public safety agencies of what was included in the 1994 Crime Bill and also
how to apply for automation grants under the "Cops More" section of the
bill. These seminars simplified the sometimes complex justifications that
were required as part of the proposals and allowed many small to medium
size agencies to submit proposals who otherwise might not have been able to
<PAGE>
do so. The Registrant has scheduled and plans to conduct established a
series of seminars to assist law enforcement agencies in applying for the
next round of technology grants associated with the 1994 Crime Bill.
The Registrant's strategy is to continue to expand its current
distribution approach by focusing in those states where the Registrant has
established reference sites within the regions. The strategy is structured
so as to permit the techniques and strategies developed in the New England
area to be extended to those states covered by dedicated sales teams.
The Registrant believes that the initial sale of its products in a
state is critical to its marketing efforts and that subsequent sales within
the same state will be easier due to the already-achieved acceptance of its
products and the ability to use the first installation as a reference and
for demonstrations. As of March 1996, the Registrant has customers in
Massachusetts, Connecticut, Rhode Island, Ohio, South Carolina, Georgia,
Indiana, New Hampshire, Tennessee, and Missouri.
The Registrant markets its products in the New England area as
well as in two additional regions of the country. The Registrant
established an office in Cincinnati, Ohio serving the Midwest in March 1991
and another office in Atlanta, Georgia serving the Southeast in July 1991,
which has since been moved to Charleston, South Carolina. As of April 1993
the Midwest office was destaffed and sales activities from this part of the
country are now being called into the Company's headquarters in
Massachusetts.
Competition
The public safety software business is highly competitive. There
are a large number of small local and regional vendors across the country
who offer competing products on personal computers to agencies in the
Registrant's target market. The Registrant expects to encounter future
competition from established companies that are developing new products and
from new companies that may develop comparable products.
The principal competitive factors that exist in the public safety
software business are price, ease of use and sophistication of the system.
Management believes the competitive advantages of the Registrant's products
include sophisticated capabilities and relative ease of use. Management
believes that it is currently the largest supplier of integrated Police and
Fire systems in Massachusetts. Nevertheless, the Registrant believes that
to stay competitive in its target market, it must continue to make its
products available on a greater number of computer platforms using
technology that the Registrant continues to develop.
<PAGE>
Principal Suppliers
Through an arrangement between the Registrant and Digital, the
Registrant purchases Digital hardware at a discount for resale as part of
the Registrant's turnkey computer systems. The Registrant re-sells the
hardware at the Registrant's list price.
The Digital systems and components that the Registrant purchases
are available from many suppliers and distributors.
Customers
The Registrant's target market consists of police and fire
departments serving populations under 250,000, including campus police
departments and other non-municipal public safety agencies such as transit
authority police, state police and county sheriff departments. The
Registrant estimates that this target market nationally is comprised of
approximately 15,000 police departments and 5,000 fire departments.
Currently, however, the Registrant is marketing its products to police and
fire departments only in New England, the Midwest and the Southeast, and
the largest portion of its sales to date have been in New England,
particularly Massachusetts. The Registrant has installed six systems in
the Midwest Region which is composed of the states of Ohio, Indiana,
Illinois, Kentucky and Missouri and has installed eight systems in the
Southeast Region, which is composed of Georgia, South Carolina, Alabama,
and Tennessee.
In any given fiscal period, sales to any one purchaser of the
Registrant's products may account for 10% or more of the Registrant's
revenues for that fiscal period. Because such sales usually involve a
one-time purchase for the customer, the existence of such purchase is not
indicative of future sales or the Registrant's dependence on any one
customer. During 1995 no one customer accounted for more than 10% of
sales. During 1994, sales to MARTA (Metropolitan Atlanta Regional Transit
Authority) Police Services were $267,164 or 15.8% of the Registrant's
sales.
Licensing and Support.
The purchase price for the software system includes a perpetual
license to use the software. The Registrant typically enters into a
software license agreement with its customers.
Support and update service is priced at 14% of the cost of the
software package per year after the initial six month warranty period.
Payment of the annual support and update service fee automatically extends
the Registrant's warranty against software defects for an additional year
and entitles the licensee to receive all software upgrades and enhancements
and to participate in the appropriate user group. In addition to providing
licensees with updates and enhancements, the Registrant's annual fee also
includes telephone support for the police and fire applications. Currently
all customers subscribe to this service, primarily to receive software
updates and enhancements which average a minimum of one update per year.
Maintenance charges on the hardware are not included in the Registrant's
annual fee and are currently billed and collected directly by hardware
maintenance suppliers.
The Registrant generally relies upon contract, trade secret and
copyright laws to protect its products. The license agreement under which
a customer uses the Registrant's products restricts the customer's use to
its own operations and prohibits disclosure to third persons.
Notwithstanding these restrictions, it may be possible for other persons to
obtain copies of the Registrant's products. The Registrant believes that
such copying would have limited utility without access to the product's
source code, which the Registrant keeps highly confidential. The
Registrant's products are encoded to run only on designated types and sizes
<PAGE>
of computers. The Registrant incorporates certain technological defenses
into its products. The Registrant believes that because of the rapid pace
of technological change in the computer industry, copyright and patent
protection is of less significance than factors such as the knowledge and
experience of the Registrant's personnel and their ability to develop,
enhance, market and acquire new products.
The Registrant also requires all of its employees to execute
agreements requiring them to maintain the confidentiality of the
Registrant's proprietary information.
Research and Development
The Registrant made no Research and Development expenditures in
either 1994 or 1995. The Registrant has continued to enhance its
PoliceServer and FireServer products during these periods, specifically
with the addition of the optional ImageServer and MDT systems.
Employees
As of December 31, 1995, the Registrant had 9 full-time employees,
of whom three were engaged in computer programming, two were engaged in
documentation, training and software support and four were engaged in
sales, marketing and administration. In addition the Registrant has two
permanent part-time employees, one is an accountant and the other is a
support specialist. The Registrant considers its employee relations to be
satisfactory.
Item 2. Properties
The Registrant's operations are located in Acton, Massachusetts,
where the Registrant owns a 12,000 square foot office building. This
facility contains office, training, conference, development and shipping
space. The acquisition and renovation of the building had been financed
from the Registrant's working capital. In April 1992 the Registrant
mortgaged the facility through a local lending institution with a $560,000
mortgage on the improved facility, the balance of which was $522,495 at
December 31, 1995. The building was designed to be adequate to house the
training, development and other headquarters needs for the foreseeable
future. The Registrant also rents corporate identities at its Cincinnati,
OH and Charleston, SC locations.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>
Item 4A. Executive Officers and Directors
The present executive officers of the Registrant, who are elected
by the Board of Directors on an annual basis at the meeting of the Board of
Directors after each annual meeting of stockholders and serve at the
discretion of the Board of Directors, are as follows;
Name Age Position
Dr. Joel B. Searcy 60 President and Chairman of the Board of
the Registrant since its inception, was
Treasurer until May 1991 and served as
Clerk until September 1990. Dr. Searcy
has served as President and Chairman of
the Board of Compudyne, Inc., a
computer time sharing company, since
1980 through 1995 . However, Dr.
Searcy dedicated his full attention to
the Registrant.
Arthur V. Josephson, Jr. 53 Director of the Registrant since
January 1988 and has served as Clerk
since September 1990. In addition to
his responsibilities to the Registrant,
since 1985 Mr. Josephson has served as
an accounting consultant to a number of
clients in Massachusetts, as well as
Treasurer of Assabet Valley Home Health
Association, Inc., a visiting nurse
agency, from 1977 through October 1994.
Richard C. Becker 50 Director and Treasurer of the
Registrant since May 1991, Vice
President - Chief Operating Officer
since July 1993, Assistant Clerk since
February 1991 and was Vice President -
Finance and Administration from January
1991 until July 1993.
There are no family relationships among any of the executive
officers or directors of the Registrant.
<PAGE>
PART II
Item 5. Market for the Registrants Common Equity and Related
Stockholder Matters.
The Registrant's Common Stock are available for trading in the
over-the-counter market. The Common Stock is quoted under the symbol PAMT.
The following table sets forth the high and low bid prices of the Common
Stock as listed on the Boston Stock Exchange and (after July 1994) in the
over the counter market for the fiscal periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31 COMMON STOCK
High Low
<S> <C> <C>
1994
First Quarter .02 .02
Second Quarter .02 .02
Third Quarter 1.12 .02
Fourth Quarter 2.50 .47
1995
First Quarter 1.75 .75
Second Quarter 1.56 .75
Third Quarter 1.92 .84
Fourth Quarter 1.75 .62
The Registrant had 73 holders of record of Common Stock on March
26, 1996. The Registrant has not paid any dividends to date. For the
foreseeable future, it is anticipated that earnings, if any, will be used to
finance the growth of the Registrant and that cash dividends will not be
paid to stockholders.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The Registrant's net sales consist primarily of sales of software
and turnkey computer systems and support and update service fees. Sales
decreased 35.1% during the 12 month period ended December 31, 1995 (the 1995
period) from the 12 month period ended December 31, 1994 (the 1994 period).
Management believes that the lack of profitability for the 1995 period was
due to communities delaying purchases of systems to take advantage of the
grants that they believe would be released from the 1994 Crime Bill. The
Registrant believes that the delays in purchasing will extend into Q2 1996.
However, in recent weeks the Registrant has learned of many grants finally
being awarded. The Registrant continues to believe that the market has
potential based on the continuing improvements in the economy and the
heightened emphasis on crime and the awareness by communities that computer
systems can improve the efficiency and effectiveness of their public safety
resources, although there can be no assurance in the regard.
Results of Operations
Year Ended December 31, 1995 vs. Year Ended December 31, 1994. Net
sales decreased 35.1% to $1,094,735 in the 1995 period from $1,686,537 in
the 1994 period. Sales of turnkey systems and hardware upgrades decreased
$513,189 or 50.8% to $496,993 for the 1995 period from $1,010,182 for the
1994 period. The number of system sales decreased from 17 in the 1994 period
to 7 in the 1995 period. Hardware upgrades increased to 9 in the 1995 period
from 6 in the 1994 period. The decrease in the total revenue and total
number of systems sold can be directly attributed to the delayed purchases
of systems that would have been funded through grants associated with the
1994 crime bill had the funding been released. The software portion of the
systems sales decreased significantly to $177,172 for the 1995 period from
$558,030 for the 1994 period reflecting the decreased system sales. Sales of
the new ImageServer product increased to $91,552 for the 1995 period from
$21,355 in the 1994 period. Sales of the mobile computer systems (MDT's)
decreased 91.9% to $12,491 for the 1995 period from $153,951 for the 1994
period. Revenue for the 1995 period consisted of sales of the Registrant's
software products sold to third party vendors and finders fees from the same
vendor who sold MDT's directly to the Registrant's customers. During the
1994 period, MDT's had been purchased and resold by the Registrant using the
third party vendor's hardware and software which resulted in higher total
sales but low overall margins. Support revenues increased $73,330 or 25.7%
to $359,094 for the 1995 period from $285,764 for the 1994 period. This
increase reflects the increasing customer base.
Cost of sales decreased $161,757 or 23.1% to $537,754 for the 1995
period from $699,511 for the 1994 period. The cost of sales decreased due to
the overall decrease in sales. One additional factor was the impact of the
change in the contract with the third party vendor that supplies the MDTs.
Costs for the MDT's for the 1995 period, as described above, were $0
compared to $130,363 for the 1994 period. Gross profit decreased 43.6% or
$430,045 to $ 556,981 for the 1995 period from $987,026 for the 1994 period.
Gross margin as a percentage of net sales decreased to 50.9% for the 1995
period from 58.5% for the 1994 period reflecting the lower percentage of
software system sales partially offset by the elimination of the cost of
sales for the low profit margin MDT systems.
Operating expenses increased $15,511 or 1.5% to $1,064,232 for the
1995 period from $1,048,721 for the 1994 period. The slight increase is the
result of some increases in payroll expense offset by reductions in training
expense and advertising.
Personnel costs increased 6.8% to $635,245 for the 1995 period from
$594,524 for the 1994 period. The increase is due to the hiring of one
contractor as an employee in addition to higher health insurance and Federal
<PAGE>
withholding costs. These increases were partially offset by the lower sales
commissions paid during the 1995 period due to the delays in procurements by
our customers.
Rent, utilities and telephone increased 6.7% to $68,585 for the
1995 period from $64,258 for the 1994 period due primarily to increased
phone expense associated with marketing and sales activities. Travel and
entertainment expenses decreased $5,247 or 10.4% to $45,400 for the 1995
period from $50,647 for the 1994 period due to the decreased travel
associated with the program management activities of the MARTA contract.
Professional fees decreased 17.4% to $67,635 for the 1995 period from
$81,835 for the 1994 period. These reductions were due the hiring of an
outside accountant as an employee and the reduced utilization for the
Registrant's legal counsel during the 1995 period. This reduction was
partially offset by the increased usage of a public relations firm.
Depreciation expense decreased 5.2% to $81,409 for the 1995 period from
$85,857 for the 1994 period reflecting the reduced depreciation on the older
computer equipment and office furnishings. Other operating expenses
decreased 3.3% or $5,642 to $165,958 for the 1995 period from $171,600 for
the 1994 period. The most significant components of this decrease were the
decreased cost of the Registrant's annual report.
Net interest expense increased to $62,092 for the 1995 period
compared to a net expense of $53,238 for the 1994 period. This reflects the
increased interest rate on mortgage and the increased interest expense
associated with working capital loans obtained from Directors and
Shareholders. Other income decreased in the 1995 period due to the
elimination of the income associated with the rental of the second floor of
the Registrant's Acton facility.
The loss for the 1995 period was $569,202 $(.29) per share compared
to a loss of $111,224 or $(.06) per share for the 1994 period and is the
result of the reduced sales associated with the delays in the procurements
of the Registrant's products associated with the 1994 Crime Bill.
Liquidity and Capital Resources
The Registrant's working capital decreased to a deficit of $322,412
at December 31, 1995 from a deficit of $6,088 at December 31, 1994. Cash
increased to $28,264 at December 31, 1995 from $16,103 at December 31, 1994.
The decrease in working capital is due to the loss in operations for the
year. Accounts receivable decreased to $246,161 at December 31, 1995 from
$464,119 at December 31, 1994, reflecting the decreased level of sales
throughout the 1995 period. The Registrant is experiencing an accounts
receivable age that averages 60 days sales outstanding.
The Registrant's backlog is $253,987 at March 26, 1996. The
Registrant also is continuing its cost improvement program and continues an
aggressive sales effort. Specifically, sales of the Registrant's ImageServer
product are expected to increase during 1996. The continuing delays in sales
as a result of the delays in awards of grants under the 1994 Crime Bill
continue to have an adverse effect on sales and the Registrant's resulting
cash position. Subsequent to the year-end, however, the Registrant began to
be notified by potential customers who had participated in the Registrant's
grant writing seminars that they had received awards. Many of these
customers will still have to proceed with a competitive bidding process as
required by their respective state laws. In addition, the Registrant is
continuing to consider projects to increase its cash position such as
mergers, acquisitions or other business combinations, as well as capital
raising alternatives. To date there have been no agreements or arrangements.
The Registrant has also received short term financing commitments from
Directors and Officers to support operations, if needed. The Registrant
believes its existing backlog, combined with working capital loans from
directors and shareholders and sales resulting from the grants associated
with the 1994 Crime Bill will be sufficient to ensure the continued
operations through the year.
<PAGE>
As of December 31, 1995, the Registrant had accumulated
approximately $3,900,000 and $3,100,000 in net operating loss carryforwards
for federal and state income tax purposes respectively. The loss
carryforwards expire in the year 2009. Under the Internal Revenue Code of
1986, as amended, the rate at which a corporation may utilize its net
operating losses to offset its income for federal tax purposes is subject to
specified limitations during periods after the corporation has undergone an
"ownership change." It has been determined that an ownership change did
take place at the time of the Registrant's initial public offering. However,
the limitations on the loss carryforward exceed the accumulated loss at the
time of the "ownership change." Thus there is no restriction on its use.
Seasonality
For the majority of the municipalities in the states in which the
Registrant has sold its products through the Registrant's fiscal 1995, the
fiscal year commences July 1. The Registrant bills the majority of its
customers for annual software maintenance charges on July 1 of each year.
Consequently, cash flow representing software support revenues has tended to
be higher in the second half of the Registrant's fiscal year, although
software support revenues are recognized ratably over the fiscal year.
Inflation
Inflation has not had a significant impact on the Registrant's
operations to date.
<PAGE>
Item 7. Financial Statements and Supplementary Data.
PAMET SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors . . . . . . . . . . . . . .F-2
Financial Statements:
Balance Sheet - December 31, 1995 . . . . . . . . . . .F-3
Statements of Operations -
Years Ended December 31, 1995 and 1994 . . . .F-4
Statements of Stockholders' Equity
Years Ended December 31, 1995 and 1994 . . . .F-5
Statements of Cash Flows -
Years Ended December 31, 1995 and 1994 . . . .F-6
Notes to Financial Statements . . . . . . . . . . . . . . . .F-8
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Pamet Systems, Inc.
We have audited the accompanying balance sheet of Pamet Systems, Inc. as
of December 31, 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1995. 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 presentations. 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 Pamet Systems, Inc. as
of December 31, 1995, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Goff, Carlin & Cagan, LLP
Worcester, Massachusetts
March 15, 1996, except as to the information presented in
Note A, for which the date is August 26, 1996
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET
PAMET SYSTEMS, INC.
ASSETS December 31,
1995
<S> <C>
CURRENT ASSETS
Cash $ 28,264
Accounts receivable, net of allowance for
doubtful accounts of $20,000 246,161
Inventory 26,921
Prepaid expenses and other current assets 46,644
TOTAL CURRENT ASSETS 347,990
PROPERTY AND EQUIPMENT, NET 922,596
OTHER ASSETS 1,025
RESTRICTED CASH 26,450
TOTAL OTHER ASSETS 27,475
$1,298,061
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 245,516
Accrued expenses 140,684
Notes payable-related party 81,099
Deferred software maintenance revenue 190,034
Current portion of long-term debt 13,069
----------
TOTAL CURRENT LIABILITIES 670,402
LONG TERM DEBT, less current portion 509,426
UNEARNED SUPPORT REVENUE 79,283
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued
Common stock, $.01 par value, 7,500,000 shares
authorized; 2,018,250 issued and outstanding 20,183
Additional paid-in Capital 4,072,629
Accumulated deficit (4,053,862)
TOTAL STOCKHOLDERS' EQUITY 38,950
$1,298,061
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
PAMET SYSTEMS, INC.
Year Ended December 31,
1995 1994
-------- --------
<S> <C> <C>
Net hardware and software sales $ 735,641 $1,400,773
Software support revenues 359,094 285,764
__________ __________
NET REVENUES 1,094,735 1,686,537
Cost of sales 537,754 699,511
_______ _______
556,981 987,026
Operating expenses
Personnel costs 635,245 594,524
Rent, utilities and telephone 68,585 64,258
Travel and entertainment 45,400 50,647
Professional fees 67,635 81,835
Depreciation 81,409 85,857
Other operating expenses 165,958 171,600
TOTAL OPERATING EXPENSES 1,064,232 1,048,721
Loss from operations (507,251) (61,695)
Interest income 3,213 4,584
Interest expense (65,305) (57,822)
Other income 141 3,709
-------- --------
NET LOSS $(569,202) $(111,224)
========== ==========
Net loss per common share $(.29) $(.06)
====== ======
Weighted average common shares outstanding 1,971,459 1,966,250
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
PAMET SYSTEMS, INC.
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT
January 1, 1994 1,996,250 $19,663 $4,039,009 $(3,373,436) $685,236
NET LOSS (111,224) (111,224)
ISSUANCE OF STOCK
OPTIONS ________ ______ $10,000 __________ $10,000
BALANCE AT
DECEMBER 31, 1994 1,966,250 $19,663 $4,049,009 $(3,484,660) $584,012
NET LOSS (569,202) (569,202)
CONVERSION OF
STOCK OPTIONS 52,000 520 23,620 -- 24,140
_________ ______ _______ _________ ________
BALANCE AT
DECEMBER 31, 1995 2,018,250 $20,183 $4,072,629 $(4,053,862) $38,950
========= ======= ========== ============ =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
PAMET SYSTEMS, INC.
Year Ended December 31,
1995 1994
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(569,202) $(111,224)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 163,561 142,057
Issuance of stock options -- 10,000
Changes in operating assets and liabilities:
Accounts receivable 217,958 (159,562)
Inventory 32,333 (8,582)
Prepaid expenses and other current assets (3,042) (5,209)
Other assets 398 25,844
Restricted cash (685) (661)
Accounts payable (75,470) 122,584
Accrued expenses 62,085 (15,494)
Deferred software maintenance and
unearned support revenue 102,776 49,576
Net cash provided by
(used for) operating activities (69,288) 49,329
INVESTING ACTIVITIES
Expenditures for property
and equipment (4,095) (26,263)
Proceeds from sale of equipment 1,783 3,352
------- -------
Net cash used for investing activities (2,312) (22,911)
------- --------
FINANCING ACTIVITIES
Proceeds from notes payable-related party 211,899 78,000
Payment of notes payable-related party (140,800) (83,144)
Payments of long-term debt (11,478) (10,842)
Issuance of capital stock 24,140 --
-------- -------
Net cash provided by (used for)
financing activities 83,761 (15,986)
NET INCREASE IN CASH 12,161 10,432
Cash at beginning of period 16,103 5,671
CASH AT END OF PERIOD $28,264 $16,103
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS -- CONTINUED
PAMET SYSTEMS, INC.
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION
Cash paid for interest $65,000 $57,798
======= =======
SUMMARY OF NON-CASH TRANSACTIONS
Stock options issued to a consultant
for the production of an advertising
video -- $10,000
==== =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PAMET SYSTEMS, INC.
NOTE A--NATURE OF OPERATIONS
Pamet Systems, Inc. (the Company), a Massachusetts corporation, was formed in
November 1987 to engage in the business of designing, developing, installing
and servicing computer software systems for the municipal market throughout
the Eastern United States, principally in the area of public safety. Credit
is granted to certain customers, most of which are municipalities. The
Company generally does not require collateral.
The Company continues to suffer recurring losses from operations. However,
through June of 1996, the Company's net sales were approximately $998,000
(unaudited) and net income was approximately $92,000 (unaudited). In
addition, the Company's committed backlog was in excess of $700,000
(unaudited). Management believes that this level of sales and backlog are
adequate to sustain operations through the end of fiscal year 1996. In
addition, the above sales and backlog numbers do not include any estimates of
potential sales with the Company's customers and prospective customers who
have been notified by the Department of Justice that they have received
awards under the 1994 crime bill. Once this Federal funding is released,
these potential customers will proceed with the competitive bidding process
required by State laws. The Company expects to see the results of at least
some of these successful bids in fiscal year 1996.
The ultimate success of the Company is still dependent upon its ability to
secure adequate interim and permanent funding to meet its working capital
needs and the successful marketing of its products and services through
expansion of the Company's operations. Some directors and officers of the
Company, under certain circumstances, have agreed to provide short term
financing on a temporary basis as needed. As a result, management believes
the company's current sources of liquidity and funding are adequate to
sustain operations through the end of fiscal year 1996. Management is also
trying to enhance its financial position by obtaining permanent additional
financing. There can be no assurance, however, that the Company's operations
will be sustained or prove profitable in the future or that adequate sources
of financing will be available at all, when needed or on commercially
acceptable terms.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
Restricted Cash: In connection with its mortgage agreement, the Company is
required to maintain an interest reserve account with the mortgagor.
Withdrawals from the account are restricted to the payment of mortgage
principal or interest.
Property and Equipment: Property and equipment are stated at cost and are
depreciated on the straight line or accelerated methods over their estimated
useful lives, which range from 3 to 31.5 years.
Capitalized Software Development Costs: The Company capitalized certain
software development costs in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Cost of Computer Software to
be Sold, Leased, or Otherwise Marketed." Software development costs were
capitalized at the lower of cost or net realizable value beginning with the
establishment of the technological feasibility of the related products as
defined in the statement, and include costs of porting the Company's products
to the UNIX operating systems, as well as costs associated with purchasing
software used in the Company's products. Other research and development
costs, which are not material, are charged to expense as incurred. In the
current year
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES (continued)
all of the Company's capitalized software development costs have been
determined to have no net realizable value and have been written off.
Amortization of capitalized software costs amounted to $86,152 and $56,200 in
1995 and 1994, respectively, and is included in cost of sales.
Inventory: Inventory, which consists primarily of computer-related supplies,
is stated at the lower of cost (first-in, first-out) or market value.
Deferred Software Maintenance Revenue and Unearned Support Revenue: Deferred
software maintenance revenue and unearned support revenue represent revenue
relating to software support, updates and warranties which the Company has
not yet earned. Software maintenance fees are recognized ratably over the
period of the service contract. The portion of the maintenance fee
associated with the sale of a first time system or software that relates to
the initial maintenance period is also recognized ratably over the period of
the extended service.
Revenue Recognition: Revenues from the sale of products are recognized when
the product is installed. Revenues from the distribution agreement are
recognized upon shipment.
Net Loss Per Common Share: The net loss per common share is computed using
the weighted average number of shares of common stock outstanding during the
period. Fully diluted earnings per common share, assuming conversion of
outstanding stock options and redeemable stock warrants, are not presented
since the effect would be antidilutive.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income Taxes: The Company accounts for income taxes following the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", which prescribes the use of the liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and income tax
bases of assets and liabilities and are measured using enacted tax rates that
will be in effect when the differences are expected to reverse. The primary
component of the Company's deferred tax asset as of December 31, 1995, which
is fully reserved, is net operating loss carryforwards.
NOTE C--RELATED-PARTY TRANSACTIONS
Director Compensation: The Company paid approximately $14,000 and $17,000 in
1995 and 1994 respectively, to a stockholder and director for financial
accounting consulting services.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
<TABLE>
<CAPTION>
PAMET SYSTEMS, INC.
NOTE C--RELATED-PARTY TRANSACTIONS - (Continued)
Notes Payable - Related party consist of the following:
1995 1994
------- -------
<S> <C> <C>
Notes payable to directors for unsecured advances. $81,099 $10,000
======= =======
</TABLE>
NOTE D--PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
Property and equipment at December 31 is as follows:
Balance at
Beginning Balance at
of Additions End of
Classification Period at Cost Retirements Period
Year Ended December 31, 1995:
<S> <C> <C> <C> <C>
Land $ 231,283 $ 231,283
Building 758,728 758,728
Furniture and Fixtures 116,700 $ 1,349 118,049
Computer Equipment 323,982 2,746 $ (32,768) 293,960
Automobiles 22,900 22,900
---------- ----- ------ --------
TOTALS $1,453,593 $ 4,095 $ (32,768) $1,424,920
========== ======== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994:
<S> <C> <C> <C> <C>
Land $ 231,283 $ 231,283
Building 758,728 758,728
Furniture and Fixtures 113,803 $ 2,897 116,700
Computer Equipment 307,891 23,366 $ (7,275) 323,982
Automobiles 44,698 (21,798) 22,900
------- ------ -------- -------
TOTALS $1,456,403 $ 26,263 $ (29,073) $1,453,593
========== ======== ======== ==========
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
<TABLE>
<CAPTION>
PAMET SYSTEMS, INC.
NOTE D--PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION (Continued)
Accumulated depreciation at December 31 is as follows:
Balance at
Beginning Additions Balance at
of Charged End of
Classification Period To Expense Retirements Period
Year Ended December 31, 1995:
<S> <C> <C> <C> <C>
Building $ 87,699 $ 24,150 $ 111,849
Furniture and Fixtures 86,664 12,025 98,689
Computer Equipment 254,636 45,235 $ (30,985) 268,886
Automobiles 22,900 22,900
------- ------ ------ -------
TOTALS $451,899 $ 81,410 $ (30,985) $502,324
======== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994:
<S> <C> <C> <C> <C>
Building $ 63,536 $ 24,163 $ 87,699
Furniture and Fixtures 72,353 14,311 86,664
Computer Equipment 216,966 44,945 $ (7,275) 254,636
Automobiles 38,906 2,437 (18,443) 22,900
-------- ------- ---------- -------
TOTALS $391,761 $85,856 $ (25,718) $451,899
======== ======= ======= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE E--ACCRUED EXPENSES
Accrued expenses includes the following:
December 31,
1995 1994
--------- ---------
<S> <C> <C>
Accrued payroll and vacation $ 44,823 $ 34,122
Accrued and withheld payroll taxes 59,516 8,827
Other 36,345 35,650
-------- --------
$140,684 $ 78,599
======== ========
</TABLE>
NOTE F--COMMITMENTS AND CONTINGENCIES
Lease Obligations: The Company rents office space and office equipment under
operating leases. Rents for its field offices are generally on a
month-to-month basis or with leases having noncancelable terms not longer
than one year. Expenses incurred under operating leases were $4,640 and
$5,430 in 1995 and 1994, respectively.
Financial Advisor Commitments: In November 1990, the Company entered into an
agreement to pay a financial advisor $2,000 per month through October 1993 in
return for assisting the Company in financial matters. At December 31, 1995
and 1994, $28,000 remained unpaid in connection with this agreement and was
included in accounts payable.
Legal Fees: In May of 1992, the Company entered into an agreement with its
present attorney to pursue different financing arrangements, acquisitions or
mergers. Legal work associated with this agreement, which has not yet been
billed to the Company, was to be paid principally out of the proceeds of any
resulting transaction.
The amount, if any, that will be ultimately paid by the Company, and under
what conditions, in connection with this legal work is uncertain at this
time. If the Company never enters into any of the above transactions, the
ultimate billings associated with this legal work will not exceed $15,000;
accordingly this amount is included in accounts payable at December 31, 1995
($8,000 at December 31, 1994).
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE G--LONG TERM DEBT
In March 1992, the Company secured a $560,000 mortgage on its facility. On
June 21, 1995 the note was extended for a one year term with monthly payments
determined according to a twenty-year amortization period. $5,741, including
interest at 11%, is payable monthly. In addition, the note is subject to
several conditions, including:
- Five officers, directors and/or stockholders of the Company
are limited guarantors of the note to the extent of $50,000
each. In connection with these guarantees these five officers,
directors and/or shareholders were paid $1,500 each in the
current year.
- Payment of dividends is restricted, requiring approval of the
mortgagor.
- Salary increases for officers are restricted, requiring
approval of the mortgagor.
Subsequent to December 31, 1995, the bank issued a committment letter that
indicates this mortgage will be renewed for one year, until June 1997.
Payment terms and interest rates, although not finalized, are expected to
remain consistent with current terms and rates. Maturities reflect these
terms and rates.
<TABLE>
<CAPTION>
Annual principal maturities of long-term debt are as follows:
<S> <C>
Year ending December 31, 1996 $ 13,069
December 31, 1997 509,426
--------
$522,495
========
</TABLE>
NOTE H--STOCKHOLDERS' EQUITY
In conjunction with the Company's initial public offering in November 1990,
the Company issued 920,000 redeemable warrants for $5 per unit. Each
redeemable warrant entitled the holder to purchase one share of the Company's
$.01 par value common stock at a price of $6.50 per share and expired October
31, 1994. The Company also issued additional rights to purchase up to 80,000
units at a price of $6.75 until October 31, 1995.
Stock Option Plans: In 1990, the Company adopted a Stock Option Plan under
which the Board of Directors may grant incentive or non-qualified stock
options to employees, directors and consultants of the Company. The maximum
number of shares of stock subject to issuance under option arrangements is
400,000 shares. These options, of which a total of 17,000 had been exercised
at December 31, 1995, are exercisable within a ten-year period from the date
of the grant, generally fully exercisable when issued to directors and
exercisable 20% per year and continuing over five years for employees and
consultants. The option price per share under the Plan is not less than the
fair market value of the shares on the date of grant. For the year ended
December 31, 1994.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE H--STOCKHOLDERS' EQUITY (Continued)
167,500 options outstanding under the Company's Stock Option Plan ranging in
option price from $3.00 to $5.50 per share, were repriced to $.02 per share
(the average bid price at the time of repricing). All other terms of these
options including the vesting period and the number of shares associated with
each option remained the same. No directors were subject to this option
repricing.
<TABLE>
<CAPTION>
Stock option activity for the two year period ended December 31, 1995 is as
follows:
Number Option Price
Of Options Per Share
__________ ____________
<S> <C> <C>
Outstanding January 1, 1994 197,500 $.02 - $5.50
Granted to Directors 33,000 $.02 - $.50
Granted to Employees 62,000 $.02
__________ ____________
Outstanding December 31, 1994 292,500 $.02 - $5.50
Granted to Directors 8,000 $1.00
Granted to Employees 41,000 $1.44
Exercised (17,000) $.02
Cancelled (6,000) $.02
__________ ____________
Outstanding December 31, 1995 318,500 $.02 - $5.50
======= ============
Exercisable at December 31, 1995 207,900 $.02 - $5.50
======= ============
Exercisable at December 31, 1994 190,500 $.02 - $5.50
======= ============
Available for Grant
At December 31, 1995 64,500
=======
Available for Grant
At December 31, 1994 107,500
=======
<PAGE>
In addition, The company also issued the following stock options outside
of any formalized plan as follows;
Number Option Price
Of Options Per Share
__________ ____________
Outstanding January 1, 1994 -- --
Granted to a Vendor in
return for services 50,000 $.80
__________ ____________
Outstanding December 31, 1994 50,000 $.80
Granted to Directors
in consideration for
providing short term financing 105,000 $.68
Exercised (35,000) $.68
__________ ____________
Outstanding December 31, 1995 120,000 $.68 - $.80
======= ===========
On January 1, 1996 options representing 8,000 shares were granted to
directors at an exercise price of $1.12 per share.
NOTE I--INCOME TAXES
There is no current provision for federal income tax due to the Company's net
operating losses to date. During 1995 and 1994, the Company recorded
deferred tax assets from the benefit of net operating losses in the amount of
$118,000 and $16,000, respectively. The cumulative amount of these assets,
which is $959,000 at December 31, 1995, has been fully reserved due to the
Company's history of operating losses. Thus, management has concluded that
realization of the benefit is not likely. The Company has available for
federal and state income tax purposes net operating loss carryforwards of
approximately $3,900,000 and $3,100,000 respectively, which may be used to
offset future taxable income. These net operating loss carryforwards, if
unused, expire in 2009.
NOTE J--SIGNIFICANT CUSTOMERS
There were no sales to individual customers that were greater than 10% of
total revenues for the year ended December 31, 1995.
For the period ended December 31, 1994, sales to one customer totaled
approximately $267,000 or 15.8% of total sales.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE K--ECONOMIC DEPENDENCY
The Company obtains approximately 70% of its merchandise from one source.
Management believes that if this supplier ceased providing merchandise, the
Company could find alternative suppliers without serious interruption of
business.
NOTE L--QUARTERLY FINANCIAL DATA (UNAUDITED)
</TABLE>
<TABLE>
<CAPTION>
Summarized quarterly financial data for 1995 and 1994 is as follows:
Quarter Ended
-------------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
---------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 180,127 $ 335,780 $267,427 $ 311,401
Gross Profits 82,206 220,145 161,058 93,572
Operating Income
(loss) (176,993) (27,528) (131,256) (171,474)
Net Income
(loss) (189,459) (43,208) (148,323) (188,212)
Income (loss)
per share $ (.10) $ (.02) $ (.07) $ (.10)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------
March 31, June 30, September 30, December 31,
1994 1994 1994 1994
---------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 393,257 $ 412,145 $473,180 $ 407,955
Gross Profits 206,197 297,419 282,617 200,793
Operating Income
(loss) (25,193) 53,479 18,075 (108,056)
Net Income
(loss) (38,123) 39,739 2,989 (115,829)
Income (loss)
per share $ (.02) $ .02 $ .00 $ (.06)
</TABLE>
<PAGE>
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
On February 14, 1994 the Registrant, based on the recommendation of its Audit
Committee, selected Goff Carlin & Cagan of Worcester, Massachusetts as it
auditors to examine the books and accounts of the Registrant for the fiscal
year ended December 31, 1993.
Ernst & Young had been the Registrant's auditors since November 1990.
During the Registrant's's fiscal years ended December 31, 1994 and 1995 there
were no disagreements with Goff, Carlin & Cagan on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
A Form 8-K was filed with the Commission relative to the change of auditors on
February 18, 1994.
PART III
Item 9. Directors and Executive Officers of the Registrant.
INFORMATION AS TO DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as to the ages and principal
occupations of the members of the Board of Directors and executive officers and
has been furnished to the Registrant by such directors and executive officers.
NOMINEES WHOSE TERMS EXPIRE IN 1999
(Class III)
Name Age Principal Occupation Director
Since
Dr. Joel B. Searcy 60 Dr. Searcy has been Chairman of the 1987
Board of Directors and President
of the Company since the Company's
inception in 1987, was Treasurer
until May 1991 and served as Clerk
until September 1990. Dr. Searcy
served as President and Chairman of
the Board of Directors of
Compudyne, Inc., a computer
timesharing company from 1980
through 1995.
Lee Spelke 64 Mr. Spelke is a financial consultant 1990
who served as President of Spelke
Financial Services, Inc., a
financial consulting firm, for more
than five years, through 1994.
<PAGE>
DIRECTORS WHOSE TERMS EXPIRE IN 1997
(Class I)
Name Age Principal Occupation Director
Since
Richard C. Becker 50 Mr. Becker has been Vice President 1991
and Chief Operating Officer since
July 1993, Assistant Clerk since
February 1991 and Treasurer since
May 1991. He was Vice President -
Finance and Administration of the
Company from January 1991 through
June 1993. From January 1986
through December 1990, Mr. Becker
was Manager of the Government
Manufacturing Group of Digital
Equipment Corporation, a computer
manufacturer.
Arthur V. Josephson, Jr 54 Mr. Josephson has served as Clerk 1988
for the Company since September
1990. In addition to his responsibilities
to the Company, since 1985 Mr.
Josephson has served as an
accounting consultant to a number
of clients in Massachusetts. Mr.
Josephson also served as the
Treasurer of Assabet Valley Home
Health Association, Inc.,a visiting
nurse agency, from 1977 through
October 1994.
DIRECTORS WHOSE TERMS EXPIRE IN 1998
(Class II)
Name Age Principal Occupation Director
Since
Dr. Stanley J. Robboy 55 Since April 1993, Dr. Robboy has been 1990
Professor of Pathology, Obstetrics
and Gynecology and Head of the Division
of Gynecologic Pathology of the
Department of Pathology at Duke
University Medical Center. From
January 1992 through April 1993,
Dr. Robboy was Professor of
Pathology and Chief of the Division
of Surgical Pathology of the
Department of Pathology at Duke
University Medical Center. For more
than five years prior thereto, Dr.
Robboy had been a Professor of
Pathology in the Department of
Pathology at the University of
Medicine and Dentistry of New
Jersey.
Laurence B. Berger 61 Since November 1990 Mr. Berger has 1988
served as a private consultant to
various commercial and governmental
clients. From October 1993 through
September 1994 Mr. Berger served as
a Special Project Team Member at
the Jewish Community Center of the
<PAGE>
North Shore, a social services
agency. From September 1988
through November 1990, Mr. Berger
was Information Systems Manager at
EG&G, Inc., a diversified
electronics manufacturer and
service contractor.
<PAGE>
THE BOARD OF DIRECTORS AND ITS COMMITTEES
During the fiscal year ended December 31, 1995 the Board of Directors
of the Company held four meetings. During such period, each of the current
directors of the Company attended 75% or more of the aggregate of (1) the
total number of meetings of the Board of Directors and (2) the total number
of meetings held by all committees of the Board on which such director
served.
The Board of Directors has two committees, an Audit Committee and a
Compensation Committee. The Board of Directors does not have a nominating
committee.
The Audit Committee consists of Lee Spelke, Laurence B. Berger and
Stanley J. Robboy. The Audit Committee acts as a liaison between the
Company and its independent auditors and reports on matters pertaining to
the Company's independent audit and the Company's accounting policies. The
Audit Committee met once during fiscal 1995.
The Compensation Committee consists of Laurence B. Berger and Lee
Spelke. The Compensation Committee was formed to make recommendations to
the Board of Directors with respect to the compensation of the officers of
the Company for each year and to administer the Company's employee benefit
plans. The Compensation Committee met once during fiscal 1995.
Directors who are not officers of the Company are entitled to receive
an annual stipend of $1,000 for serving on the Board and its committees and
reimbursement for out-of-pocket expenses in connection with their
attendance at directors' meetings. Additionally, under the Company's 1990
Stock Option Plan, each non-employee director who is a director of the
Company on the last day of a calendar year or has ceased to be a director
during the calendar year due to his or her death or attainment of an age
greater than 65 is automatically granted a nonqualified stock option to
purchase 2,000 shares of Common Stock on January 1 of the succeeding
calendar year at the fair market value per share on the date of grant.
COMPLIANCE WITH THE SECURITIES EXCHANGE ACT
The Company's executive officers and directors are required under
Section 16(a), Beneficial Ownership Reporting Compliance of the Securities
Exchange Act of 1934, as amended, to file reports of ownership and changes
in ownership with the Securities and Exchange Commission. Copies of those
reports must also be furnished to the Company. A Form 4 with respect to a
transfer of stock to the children of Dr. Joel B. Searcy, President and
Chairman of the Board was filed beyond the timely reporting time. Based
solely on the Company's review of the copies of such reports it has
received, the Company believes that all of its other executive officers and
directors, and greater than ten percent beneficial owners complied with all
filing requirements applicable to them.
Item 10. Executive Compensation.
The following table sets forth the compensation paid by the Company
during the three fiscal years ended December 31, 1995 to the chief
executive officer and the executive officers whose total cash
compensation exceeded $100,000 during the fiscal year ended December
31, 1995. The table excludes perquisites and other personal benefits
which are less than 10% of the total annual salary and bonus for named
executive.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Name and Principal Position Year Salary
<S> <C> <C>
Dr. Joel B. Searcy 1995 $ 121,340
Chairman and President 1994 122,500
1993 95,659
Employment Agreements
Dr. Joel B. Searcy had an employment agreement, which commenced on
November 8, 1991 and terminated on December 31, 1993. The contract
was renewed on April 30, 1994, for a three year period terminating on
April 30, 1997. While the agreement provided for a base salary of
$120,000 per annum, the use of an automobile and certain other
benefits during the term of the agreement, Dr. Searcy voluntarily
reduced his compensation thereunder in both fiscal years 1992 and
1993. In the event of his termination of employment for any reason
other than cause or voluntary termination (as defined in the
agreement), Dr. Searcy will be entitled to receive salary and bonus
amounts with respect to the remaining term of the agreement, or, if
longer, a period of twelve months following such termination. He will
be entitled to receive the same payment if his employment terminates
(or constructively terminates, as defined in the agreement) for any
reason within 120 days of a "change of control" of the Company. A
"change of control" is defined in the agreement to include (a) the
delivery to the Company's stockholders of a notice announcing a
stockholders meeting to consider a proposed acquisition of the Company
by merger or other combination or a proposed sale of substantially all
of the Company's assets or a similar reorganization of the Company,
(b) the acquisition of beneficial ownership of 25% or more of the
Company's voting securities by a person other than the Company and (c)
the commencement of a tender offer for the Company's stock. If Dr.
Searcy's employment is terminated voluntarily or for cause, he will be
entitled only to salary and other benefits accrued to the date of such
termination. The agreement contains non-competition provisions which
prohibit Dr. Searcy from accepting employment with a competitor of the
Company and from soliciting Company's employees and customers during
and for one year following his employment with the Company.
Option Plan
The Company maintains the Pamet Systems, Inc. 1990 Stock Option Plan
(the "Plan"), which was adopted by the Board and approved by the
stockholders of the Company in September 1990. The Plan, which has a
maximum of 400,000 shares of Common Stock reserved for issuance,
provides for the discretionary grant of options intended to qualify as
"incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") to key
employees of the Company and of nonqualified stock options to key
employees and consultants (but not non-employee directors) of the
Company, and for the automatic grant of nonqualified options to
non-employee directors of the Company. See "The Board of Directors
and its Committees."
Stock Options
Dr. Searcy was granted 7,500 options on December 20, 1995 to buy Pamet
Common Stock in return for his guarantee of a directors working
capital loan to the Company. The option price was set at $.68 per
share which was the market price on the date of the grant.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The following table provides information regarding ownership of the
<PAGE>
Company's Common Stock as to each nominee and director of the Company,
and as to each person who is known to the Company to be the beneficial
owner of more than 5% of the Company's voting securities. The
information set forth below as to nominees and directors has been
furnished to the Company by such nominee or director.
</TABLE>
<TABLE>
<CAPTION>
Percent of Common
Name and Address of Amount and Nature of Stock (if over 1%)
Beneficial Owner Beneficial Ownership Owned Beneficially
as of August 14,
1996
<S> <C> <C>
Dr. Joel B. Searcy 487,502 (1) 23.5%
1000 Main Street
Acton, MA 01720
Lee Spelke 12,000 (2) __
1000 Main Street
Acton, MA 01720
Richard C. Becker 109,500 (3) 5.0%
1000 Main Street
Acton, MA 01720
Arthur V. Josephson, Jr. 48,250 (4) 2.3%
1000 Main Street
Acton, MA 01720
Dr. Stanley J. Robboy 139,500 (5) 6.6%
1000 Main Street
Acton, MA 01720
Laurence Berger 80,000 (6) 3.8%
1000 Main Street
Acton, MA 01720
Henry Mehlman 161,698 (7) 7.8%
40 Bartlett Street
Marblehead, MA 01945
Calvin Hori 145,000 (8) 7.0%
35 Norwich Road
Wellesley, MA 02181
All nominees, directors and 876,752 (9) 38.7%
officers as a group (6 people)
</TABLE>
(1) Includes 7,500 shares issuable upon the exercise of currently
exercisable options granted to Dr. Searcy in return for his
guarantee of a working capital loan to the Company. See
"Executive Compensation - Stock Options."
(2) Includes 10,000 shares issuable upon the exercise of currently
exercisable options.
(3) Includes 106,500 shares issuable upon the exercise of currently
exercisable options, which options include 7,500 options granted
to Mr. Becker in return for his guarantee of a working capital
loan to the Company.
(4) Includes 22,000 shares issuable upon the exercise of currently
exercisable options.
(5) Includes 37,000 shares issuable upon the exercise of currently
exercisable options.
(6) Includes 12,000 shares issuable upon the exercise of currently
exercisable options.
<PAGE>
(7) As reported on Schedule 13D filed with the Securities and Exchange
Commission on June 5, 1995.
(8) As reported on Schedule 13D filed with the Securities and Exchange
Commission on August 11, 1995.
(9) Includes 195,000 shares issuable upon the exercise of currently
exercisable options held by all directors and officers of the
Company as a group.
Item 12. Certain Relationships and Related Transactions.
During 1995 the Company paid approximately $14,000 to Arthur V.
Josephson Jr., a stockholder and director for financial accounting
services.
During 1995 the Company entered in to a loan agreement with Dr.
Stanley J. Robboy a stockholder and director. The agreement
provided for a $150,000 line of credit and a $150,000 loan against
contracts for the Company. The agreement states that Dr. Robboy
will receive 12% interest on the outstanding balance and options
for up to 90,000 shares of common stock at a price of $.68 per
share. The number of shares will be dependent upon the Companys
utilization of these loans. At December 31, 1995, the loan
balance was $81,099 and interest paid during 1995 was $6,669. At
August 14, 1996, the balance of the loans was $300,099 and the
year to date interest accrued was $13,580.
<PAGE>
Item 13. Exhibits. Financial Statement Schedules, and Reports on
Form 8-K
(a) Exhibits
3.1 Restated and Amended Articles of Organization (filed by
reference to Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990)
3.2 By-Laws, as amended (filed by reference to Exhibit 3.2 to
Registration Statement No. 33-36989)
4.2 Specimen Common Stock Certificate (filed by reference to
Exhibit 4.2 to Registration Statement No. 33-36989)
4.4 Underwriter's Warrant Agreement dated as of November 1, 1990
between the Registrant and A.S. Goldmen & Co., Inc. (filed by
reference to Exhibit 4.4 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990)
10.1 Form of Employment agreement between the Registrant and Dr.
Joel B. Searcy (filed by reference to Exhibit 10.1 to
Registration Statement No. 33-36989)
10.3 Stock Option Plan (filed by reference to Exhibit 10.3 to
Registration Statement No. 33-36989)
10.4 Financial Consulting and Advisory Agreement dated as of
November 1, 1990 between the Registrant and A.S. Goldmen &
Co., Inc. (filed by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990)
10.5 Form of License Agreement (filed by reference to Exhibit 10.5
to Registration Statement No. 33-42819)
10.8 Commercial real estate promissory note to Lexington Savings
Bank dated April 21, 1992 (filed by reference to Exhibit 28.1
to the Registrant's Quarterly Report of Form 10-Q for the
Quarter Ended June 30, 1992)
10.9 Mortgage security agreement, and assignment granted to
Lexington Savings Bank, dated April 21, 1992 (filed by
reference to Exhibit 28.2 to the Registrant's Quarterly
Report of Form 10-Q for the Quarter Ended June 30, 1992)
10.10 Mortgage guaranty by six Pamet Systems, Inc. Directors and
Officers, dated April 21, 1992 (filed by reference to Exhibit
28.3 to the Registrant's Quarterly Report of Form 10-Q for
the Quarter Ended June 30, 1992)
10.11 Mortgage security extension (one year) Agreement granted to
Lexington Savings Bank, dated 21 June 1995 (Filed by
reference to Exhibit 10.12 to the Registrant's Quarterly
Report of Form 10-Q for the Quarter Ended June 30, 1995.
10.12 Mortgage guaranty for five Pamet Systems, Inc. Directors and
Officers, Dated June 21, 1995 (Filed by reference to Exhibit
10.12 to the Registrant's Quarterly Report of Form 10-Q for
the Quarter Ended June 30, 1995.
11 None
12 None
13 None
16 None
18 None
19 None
22 None
23 Consent of Goff, Carlin & Cagan
24 None
25 None
29 None
______________________
(b) Reports on Form 8-K - none
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PAMET SYSTEMS, INC.
(Registrant)
By Richard C. Becker
----------------------------
Richard C. Becker
Vice President, Chief
Operating Officer,
Treasurer, Director
(Principal Financial and
Accounting Officer)
Date September 13, 1996
----------------------------
<PAGE>
INDEX OF EXHIBITS
Exhibit Page
23 Consent of Goff, Carlin & Cagan
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 28,264
<SECURITIES> 0
<RECEIVABLES> 246,161
<ALLOWANCES> 0
<INVENTORY> 26,921
<CURRENT-ASSETS> 347,990
<PP&E> 1,424,920
<DEPRECIATION> 502,324
<TOTAL-ASSETS> 1,298,061
<CURRENT-LIABILITIES> 670,402
<BONDS> 0
<COMMON> 20,183
0
0
<OTHER-SE> 38,950
<TOTAL-LIABILITY-AND-EQUITY> 1,298,061
<SALES> 1,094,735
<TOTAL-REVENUES> 1,094,735
<CGS> 537,754
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,064,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,092
<INCOME-PRETAX> (569,202)
<INCOME-TAX> 0
<INCOME-CONTINUING> (592,202)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (592,202)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
