SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1996
[ ] TRANSISTION 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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(Exact name of registrant as specified 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
- ---------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 263-2060
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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 issuer's revenues for its most recent fiscal year was $2,468,073
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The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant, based upon the average of the closing bid and
asked prices on March 27, 1996 was $4,204,500.
The number of shares outstanding of the Registrant's common stock, as of March
20, 1996 -- 2,102,250 shares.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting
of Stockholders (if filed pursuant to Regulation 14A within 120 days of the
close of the Registrant's fiscal year ended December 31, 1996) shall be
deemed to be incorporated by reference in Part III.
<PAGE>
PART I
Item 1. Description of Business
Business Development
The Registrant designs, develops, installs and supports computer
software and turnkey computer systems for public safety agencies. The
Registrant's products automate the acquisition, storage, processing,
retrieval and communication of information for these agencies' functions.
The principal product of the Registrant is PoliceServer(R), a
fully integrated information management system developed specifically for
law enforcement agencies. PoliceServer provides law enforcement
departments with computer aided dispatch, records management, electronic
booking and word processing. The Registrant also sells two companion
products, ImageServerTM, an image capture, storage and printing system and
MobileServerTM, a mobile terminal allowing fully integrated communications
with the department's internal system as well as other local, state and
federal databases. The Registrant also markets to fire departments
FireServerR, an information management system that provides fire
departments with data on structures, fire suppression plans and hazardous
materials. As of December 31, 1996, the Registrant had installed
PoliceServer in 99 police departments and FireServer in 29 fire
departments. 84 of the police Departments, and 26 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 three other states.
Over the past five years the Registrant has expanded its markets
beyond Massachusetts, and is constantly adapting and enhancing its products
to fit the needs of these additional markets. Expansion has been
predominantly in the Southeastern and lower Midwestern states. A regional
office has been established in Charleston, SC to support sales activities
in the Southeastern states.
In the 12 month period ended December 31, 1996 (the 1996 period) a
significant portion of sales to police departments has been funded by
federal grants associated with the "Violent Crime Control and Law
Enforcement Act of 1994" (the 1994 Crime Bill) which provides automation
grants to law enforcement agencies. In general, however, the long lead
time and uncertainties of selling to the governmental sector continue and
will 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 some 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.
______________________
PoliceServer and FireServer are registered trademarks of the Registrant.
ImageServer and MobileServer are trademarks of the Registrant
<PAGE>
The Registrant was incorporated in Massachusetts on November 24,
1987 by Dr. Joel B. Searcy, its Chairman of the Board and President.
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,
many public safety agencies have computerized certain of their business
practices.
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 three years of which
over $1.0 billion will be for the automation of police agencies.
Approximately $300M has been allocated for automation thus far. 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 re-deployed or "put
back on the street". The Registrant has designed and implemented a series
of seminars to provide departments with the information necessary to
demonstrate cost effectiveness of the Registrant's products, which provide
a productivity enhancing system. The second factor is E911 systems
currently being established around the country that require 24 hour
dispatch centers for police, fire and EMS departments. Many smaller
communities have not been able to afford to staff a dispatch center 24
hours a day. This has lead to the establishment of regional dispatch
centers serving a number of communities. This regionalization requires
computer systems to enable the regional dispatchers to have timely access
to the information needed to respond to 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. Currently five
regional dispatch centers in Massachusetts and Georgia use the Registrant's
product for this application. The third factor is the growing trend toward
the use of mobile technologies. Given its' existing product base, the
Registrant believes that it is capable of meeting these needs with its
current suite of products.
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 and
can, in fact, be used in a remote location such as a police cruiser.
<PAGE>
Products
General. In an effort to meet the demands of its 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 four software
products: PoliceServer, a management information system for police
departments, FireServer, a management information system for fire
departments, ImageServer, an image capture, storage and printing system and
MobileServer, a mobile terminal allowing fully integrated communications
with the department's internal system as well as other local, state and
federal databases. The Registrant owns the full and exclusive rights to all
software products that it has developed.
The Registrant's PoliceServer and FireServer 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. The ImageServer and the MobileServer products are PC-based
products and the base hardware is readily available from multiple sources
PoliceServer. PoliceServer is part of a comprehensive suite of
law enforcement applications software which performs the clerical and
recordkeeping functions necessary for police department operation.
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 (CAMEO(R)) 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.
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
__________________________
Open VMS is a registered trademark of Digital Equipment Corporation
CAMEO is a registered trademark of the U.S. Government
<PAGE>
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. PoliceServer is designed to be used by
any member of the department and rewards users directly by expediting
unpleasant and boring paperwork tasks. 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.
FireServer. 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. ImageServer 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 can be fully
integrated with the PoliceServer, FireServer and MobileServer 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. In addition ImageServer can be integrated into other
vendors' records and dispatch systems which has the potential of broadening
the market for this product.
MobileServer. MobileServer mobile data terminal (MDT) is a fully
integrated companion product to the Registrant's other products allowing
communications from car to dispatch, car to car, as well as access into the
files in PoliceServer and many government information systems. All
messages are fully encrypted. These systems minimize the need for the
officer to return to the station and have served to increase the police
presence on the street, due to the fact that an officer has full access and
therefore all of the information in the entire PoliceServer system, that he
is authorized to access, in the cruiser. ImageServer is now available as an
option to be integrated with the MDT's. This product like ImageServer is
being marketed to departments using other vendors records and CAD systems.
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,
<PAGE>
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 AlphaServer 300 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. MobileServer pricing begins at $7,000 for a base station.
Pricing is then based on a per cruiser or unit basis at a cost of $7,500
per unit. Image capability can be added to each car for an additional
$1,300 per cruiser.
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. Twenty-two
of the twenty-nine 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, MobileServer and software support fees, the
Registrant generates operating revenues from the sale of additions to its
existing systems, miscellaneous supplies, accessories and training.
Marketing
The Registrant's marketing strategy is designed to attract
potential customers from the existing base of law enforcement and Fire
agencies. 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 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
police department using the integrated PoliceServer, ImageServer, and
MobileServer systems, 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 the entire suite of
products. 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 users
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 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 recommend the Registrant's products to
<PAGE>
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 provides sales and marketing support through
its sales representatives, assisting in the generation of leads for
prospective customers. The Registrant also attends public safety agency
conventions and trade shows as part of its marketing efforts. The
Registrant jointly sponsored COPS MORE seminars with Digital during the
1995 period that generated over $500,000 of revenue in the 1996 period and
there still remains the potential for some additional revenue in 1997. In
late 1996 the Registrant sponsored seminars that focused on the COPS MORE
96 portion of the 1994 Crime Bill for over 100 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 96" 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 do so. The Department
of Justice has indicated that awards associated with COPS MORE 96 will be
granted in the spring of 1997. The Registrant has scheduled and plans to
conduct 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 region. 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 1997, 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 Charleston, South Carolina to support sales
activities in the Southeastern states. Marketing for the Midwest part of
the country is now being coordinated through 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. However, management believes, that the
Registrant is currently one of the only vendors providing an internally
developed integrated suite of public safety products, and, in January of
1997, was named as the market leader in an independent study done by the
State of Massachusetts Executive Office of Public Safety. 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 within a fully
integrated software suite. Based on the January 1997 study performed by the
Massachusetts Executive Office of Public Safety, management believes that
it is currently the largest supplier of integrated police and fire systems
<PAGE
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.
Principal Suppliers
Through an arrangement between the Registrant and Hall-Mark
Computer Products, a Digital Equipment Corporation authorized Distributor,
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 Digital'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, 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 seven systems in the lower Midwest Region
which is composed of the states of Ohio, Indiana, Illinois, Kentucky and
Missouri and has installed twelve 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 1996 no one customer accounted for more than 10% of
sales.
<PAGE>
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 all 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
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 1995 or 1996. The Registrant has continued to enhance its
PoliceServer and FireServer products during these periods, specifically
with the addition of the optional ImageServer and MobileServer systems.
Employees
As of December 31, 1996, the Registrant had eleven full-time
employees, of whom three were engaged in computer programming, four were
engaged in documentation, training and software support and four were
engaged in sales, marketing and administration. In addition the Registrant
has three permanent part-time employees, an accountant, a marketing
specialist, and a support specialist. The Registrant considers its employee
relations to be satisfactory.
<PAGE>
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 $510,330 at
December 31, 1996. The building was designed to be adequate to house the
training, development and other headquarters needs for the foreseeable
future.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
Election of Board Members
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 61 President and Chairman of the Board of
the Registrant since its inception, was
Treasurer until May 1991 and served as
Clerk until September 1990.
Arthur V. Josephson, Jr. 54 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.
Shares of 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 NASDAQ OTC market.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31 COMMON STOCK
High Low
---- ---
<S> <C> <C>
1995
First Quarter 1.75 .75
Second Quarter 1.56 .75
Third Quarter 1.92 .84
Fourth Quarter 1.75 .62
1996
First Quarter 2.12 1.00
Second Quarter 6.50 1.75
Third Quarter 5.75 3.00
Fourth Quarter 4.00 2.50
</TABLE>
The Registrant had 71 holders of record of Common Stock on March
27, 1997. 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
increased 125.4% during the 12 month period ended December 31, 1996 (the
1996 period) from the 12 month period ended December 31, 1995 (the 1995
period). Management believes that the large sales increase and resulting
profitability for the 1996 period were due partially to communities
purchasing systems as a result of the "Cops More 95" grants of the 1994
Crime Bill being released in early 1996. In addition, the Registrant is
experiencing increased demand for its' newer ImageServer and MobileServer
products which enhance the PoliceServer and FireServer products. The
Registrant believes sales will remain strong as a result of its' new
products and will continue when the "Cops More 96" grant awards are
announced. The Registrant continues to believe there are significant market
opportunities based on the Crime bill funding, the establishment of E911
centers, communities heightened emphasis on crime and the awareness by
communities that computer systems can improve the efficiency and
effectiveness of their public safety resources. The Registrant has also
seen increased emphasis on the coordination of public safety systems between
neighboring towns, county, and state police organizations. The Registrant's
products are designed and marketed with the option to be used in this type
of regional application.
Results of Operations
Year Ended December 31, 1996 vs. Year Ended December 31, 1995. Net
sales increased 125.4% to $2,468,073 in the 1996 period from $1,094,735 in
the 1995 period. Sales of turnkey systems and hardware upgrades increased
$1,075,409 or 216.4% to $1,572,402 for the 1996 period from $496,993 for the
1995 period. The number of system sales increased from 7 in the 1995 period
to 27 in the 1996 period. Hardware upgrades increased to 10 in the 1996
period from 9 in the 1995 period. The increase in the total revenue and
total number of systems sold can be partially attributed to the delayed
purchases of systems that were funded through "Cops More 95" grants
associated with the 1994 Crime Bill. The remainder of the sales can be
attributed to increasing availability of funding from communities for public
safety activities, both fire and police. Awards from "COPS MORE 95" portion
of the 1994 crime bill that were included in revenues for the 1996 period
were $574,749 or 23.3% of sales, representing 12 system sales and 3 system
upgrades. A portion of the "COPS MORE 95" grants are in the registrant's
backlog at year end or are yet to be awarded. The software portion of the
systems sales increased 315.9% to $736,937 for the 1996 period from $177,172
for the 1995 period while the hardware portion of system sales increased
161.2% from $319,821 for the 1995 period to $835,465 for the 1996 period.
The disproportional increase in software system sales can be attributed the
significantly larger increase in turnkey systems sales which include a
software component rather than the hardware only upgrades that occurred in
1995. Sales of the ImageServer product increased to $246,737 for the 1996
period from $91,552 in the 1995 period. Sales of the mobile computer systems
(MobileServer) increased from $12,491 for the 1995 period to $78,490 for the
1996 period. Support revenues increased $42,913 or 12.0% to $402,007 for
the 1996 period from $359,094 for the 1995 period. This increase reflects
the increasing customer base.
Cost of sales increased $397,929 or 74.0% to $935,683 for the 1996
period from $537,754 for the 1995 period. The cost of sales increased due to
the overall increase in sales. Gross profit increased 175.1% or $975,409 to
$1,532,390 for the 1996 period from $556,981 for the 1995 period. Gross
margin as a percentage of net sales increased to 62.1% for the 1996 period
from 50.9% for the 1995 period. This increase in margin corresponds to the
<PAGE>
increase in the software component of 1996 sales compared to 1995 sales. In
1995, system software sales represented only 16.2 % of sales, whereas in
1996 system software sales increased to 29.9% of sales.
Operating expenses increased $148,964 or 14.0% to $1,213,196 for
the 1996 period from $1,064,232 for the 1995 period. The most significant
increases were due to increases in payroll, commission costs, Cops More 95
and 96 Grant Seminar expenses, training expenses, and tax penalties.
Personnel costs increased 16.2% to $738,221 for the 1996 period
from $635,245 for the 1995 period. The increase expense results from
additional staffing consisting of a new marketing communications
representative, a support specialist and commissions paid on sales. Rent,
utilities and telephone decreased 8.8% to $62,574 for the 1996 period from
$68,585 for the 1995 period reflecting minor decreases in telephone and
rent. Travel and entertainment expenses increased $13,059 or 28.8% to
$58,459 for the 1996 period from $45,400 for the 1995 period due to the
increased travel associated with the remote sales and program management
activities in the Southeast region. Spending on Professional fees was
essentially the same in both 1995 and 1996. Depreciation expense decreased
25.1% to $60,963 for the 1996 period from $81,409 for the 1995 period
reflecting the reduced depreciation on the older computer equipment and
office furnishings. Other operating expenses increased 36.1% or $59,839 to
$225,797 for the 1996 period from $165,958 for the 1995 period. The most
significant components of this increase were the write-off of the Cops More
1995 pre-paid grant seminars which took place during the 1994 period and
were expensed in the 1996 period to coincide with the resulting revenue from
these grants, and tax penalties
Net interest expense increased to $80,138 for the 1996 period
compared to a net expense of $62,092 for the 1995 period. This reflects the
increased interest expense associated with working capital loans obtained
from Directors and Officers required by the significant growth in sales. The
Registrant's mobile demo vehicle, no longer necessary for on site
demonstrations, was sold during 1996 generating a gain of $4,500.
The profit for the 1996 period was $243,681 or $.10 per share
compared to a loss of $569,202 or $(.29) per share for the 1995 period. The
increase can be attributed to the Registrant's increased sales and improved
gross margins as noted above.
Liquidity and Capital Resources
The Registrant's working capital improved to a deficit of $78,293
at December 31, 1996 from a deficit of $322,412 at December 31, 1995. Cash
increased to $55,353 at December 31, 1996 from $28,264 at December 31, 1995.
The improvement in working capital reflects the sustained profitability from
operations for the year. Accounts receivable increased to $602,672 at
December 31, 1996 from $246,161 at December 31, 1995, reflecting the
increased level of sales through the end of the 1996 period. The Registrant
is experiencing an accounts receivable age that averages 60 days sales
outstanding.
The Registrant's backlog exclusive of support revenues is in excess
of $360,000 at March 27, 1997. The awards from the "Cops More 96" grant
submissions which based on discussions with the department of Justice should
be awarded in the first half of 1997 combined with sales of the Registrant's
suite of products should help sustain sales growth in 1997. In addition,
the Registrant is continuing to consider projects to increase its cash
position such as mergers, acquisitions or other business combinations. To
date no agreements in these areas have been signed. Subsequent to year-end,
the Registrant has received a signed letter of intent indicating the
commitment to purchase 200,000 shares of the Company's common stock at $2.75
per share through a private placement. The transaction has not been
completed at this time. The Registrant has also secured a line of credit
for $300,000 from officers and directors to support working capital needs.
<PAGE>
The Registrant believes its existing backlog as well as its current market
position will be sufficient to ensure the continued operations through the
end of the year.
As of December 31, 1996, the Registrant had accumulated
approximately $3,700,000 and $1,900,000 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 1996, the
fiscal year commences July 1. The Registrant bills the majority of its
customers for annual software support 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.
Other Matters
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). SAFS 123 encourages, but does not require, that an entity
account for employee stock compensation under a fair-value based method.
However, SFAS 123 also allows an entity to continue to measure compensation
cost for employee stock-based compensation plans using the intrinsic
value-based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Effective for fiscal
years beginning after December 15, 1995, entities electing to remain with
accounting under APB 25 are required to make pro forma disclosures of net
income and earnings per share as if the fair value-based method of
accounting under SFAS 123 had been applied. The Company will continue to
account for employee stock-based compensation under APB 25 and has made the
pro forma disclosures required under SFAS 123.
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, 1996 . . . . . . . . F-3
Statements of Income -
Years Ended December 31, 1996 and 1995 . . . . F-4
Statements of Stockholders' Equity
Years Ended December 31, 1996 and 1995 . . . . F-5
Statements of Cash Flows -
Years Ended December 31, 1996 and 1995 . . . . 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.
F-1
<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, 1996, and the related statements of income, stockholders'
equity and cash flows for each of the two years in the period ended
December 31, 1996. 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 Pamet Systems, Inc. as
of December 31, 1996, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Carlin, Charron & Rosen LLP
March 20, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET
PAMET SYSTEMS, INC.
ASSETS December 31, 1996
- ------ -----------------
<S> <C>
CURRENT ASSETS
Cash $55,353
Accounts receivable, net of allowance for
doubtful accounts of $25,000 602,672
Inventory, net of reserve of $5,000 85,915
Prepaid expenses and other current assets 20,252
-------
TOTAL CURRENT ASSETS 764,192
PROPERTY AND EQUIPMENT, NET 918,442
RESTRICTED CASH 27,146
-------
TOTAL ASSETS $1,709,780
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $314,729
Accrued expenses 107,134
Notes payable-related party 173,099
Deferred software maintenance revenue 231,918
Current portion of long-term debt 15,605
-------
TOTAL CURRENT LIABILITIES 842,485
LONG TERM DEBT, less current portion 494,725
UNEARNED SUPPORT REVENUE 54,123
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; 2,102,250 issued and outstanding 21,023
Additional paid-in capital 4,107,605
Accumulated deficit (3,810,181)
---------
TOTAL STOCKHOLDERS' EQUITY 318,447
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,709,780
==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
PAMET SYSTEMS, INC.
Year Ended December 31,
1996 1995
--------- --------
<S> <C> <C>
Net hardware and software sales $2,066,066 $735,641
Software support revenues 402,007 359,094
--------- ---------
TOTAL REVENUES 2,468,073 1,094,735
Cost of sales 935,683 537,754
--------- ---------
GROSS PROFITS 1,532,390 556,981
Operating expenses
Personnel costs 738,221 635,245
Rent, utilities and telephone 62,574 68,585
Travel and entertainment 58,459 45,400
Professional fees 67,182 67,635
Depreciation 60,963 81,409
Other operating expenses 225,797 165,958
--------- ---------
TOTAL OPERATING EXPENSES 1,213,196 1,064,232
========= =========
Income (loss) from operations 319,194 (507,251)
Interest income 1,118 3,213
Interest expense (81,256) (65,305)
Gain on sale of property and equipment 4,500 --
Other income 125 141
------- -------
NET INCOME (LOSS) $243,681 $(569,202)
======= =======
Earnings (loss) per common share $.10 $(.29)
==== ====
Shares used in computing earnings 2,395,384 1,971,459
(loss) per common share ========= =========
</TABLE>
See accompanying notes to financial statements.
F-4
<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, 1995 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
NET INCOME 243,681 243,681
CONVERSION OF
STOCK OPTIONS 84,000 840 34,976 -- 35,816
--------- ------ ------- -------- ---------
BALANCE AT
DECEMBER 31, 1996 2,102,250 $21,023 $4,107,605 $(3,810,181) $318,447
========= ======= ========== ========= ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
PAMET SYSTEMS, INC.
Year Ended December 31,
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $243,681 $(569,202)
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Depreciation and amortization 60,963 163,561
Gain on sale of property and equipment (4,500) --
Changes in operating assets and liabilities:
Accounts receivable (356,511) 217,958
Inventory (58,994) 32,333
Prepaid expenses and other current assets 26,392 (3,042)
Other assets 1,025 398
Restricted cash (696) (685)
Accounts payable 69,213 (75,470)
Accrued expenses (33,550) 62,085
Deferred software maintenance and
unearned support revenue 16,724 102,776
------ -------
Net cash used for
operating activities (36,253) (69,288)
-------- --------
INVESTING ACTIVITIES
Expenditures for property
and equipment (56,809) (4,095)
Proceeds from sale of property and equipment 4,500 1,783
----- -------
Net cash used for investing activities (52,309) (2,312)
-------- -------
FINANCING ACTIVITIES
Proceeds from notes payable-related party 243,000 211,899
Payment of notes payable-related party (151,000) (140,800)
Payments of long-term debt (12,165) (11,478)
Issuance of capital stock 35,816 24,140
------ -------
Net cash provided by
financing activities 115,651 83,761
------- ------
NET INCREASE IN CASH 27,089 12,161
Cash at beginning of period 28,264 16,103
------ ------
CASH AT END OF PERIOD $55,353 $28,264
======= =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS -- CONTINUED
PAMET SYSTEMS, INC.
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION
Cash paid for interest $78,000 $65,000
======= =======
</TABLE>
See accompanying notes to financial statements.
F-7
<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's committed backlog at December 31, 1996 was in excess of
$500,000 (unaudited). Management believes that this level of backlog and its
anticipated sales are adequate to sustain operations through the end of
fiscal year 1997.
However, 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. Management believes the
company's current sources of liquidity and funding are adequate to sustain
operations. 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 be 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: Prior to 1995 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. Research and development
costs, which are not material, are charged to expense as incurred. In 1995
all of the Company's capitalized software development costs were determined
to have no net realizable value and were written off. Amortization of
capitalized software costs amounted to $86,152 in 1995, and is included in
cost of sales.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES (continued)
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: The Company generally recognizes product revenue upon
shipment. Revenues for products with extensive installation requirements
under contractual agreements are recognized upon customer acceptance.
Earnings (loss) per Common Share: Earnings per share is computed using the
weighted average number of shares of common stock outstanding and dilutive
common equivalent shares from stock options, using the treasury stock method.
Loss per common share is computed using the average number of common shares
outstanding. Fully diluted earnings per share is the same as, or not
materially different from primary earnings per share and, accordingly, is not
presented.
Stock Based Compensation: The Company measures compensation expense relative
to employee stock based compensation plans using the intrinsic value-based
method of accounting as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees". However, the Company will
disclose the pro forma amounts of net income and earnings per share as if the
fair value-based method of accounting prescribed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" had
been applied. See the Stockholders' Equity footnote for these disclosures.
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 according to 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 and tax laws 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, 1996, which is fully reserved, is net
operating loss carryforwards.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE C--RELATED-PARTY TRANSACTIONS
Director Compensation: The Company paid approximately $14,000 in both 1996
and 1995 to a stockholder and director for financial accounting consulting
services.
<TABLE>
<CAPTION>
Notes Payable - Related party consist of the following:
1996
------
<S> <C>
Notes payable to directors for unsecured advances. $173,099
========
</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
- -------------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Land $231,283 $231,283
Building 758,728 758,728
Furniture & Fixtures 118,049 $4,801 122,850
Computer Equipment 293,960 27,114 $(3,787) 317,287
Automobiles 22,900 24,894 (22,900) 24,894
--------- -------- -------- ----------
TOTALS $1,424,920 $ 56,809 $(26,687) $1,455,042
========= ======== ====== =========
</TABLE>
<TABLE>
<CAPTION>
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>
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE D--PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION (Continued)
<TABLE>
<CAPTION>
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, 1996:
<S> <C> <C> <C> <C>
Building $111,849 $ 24,123 $ 135,972
Furniture and Fixtures 98,689 9,878 108,567
Computer Equipment 268,886 22,241 $(3,787) 287,340
Automobiles 22,900 4,721 (22,900) 4,721
-------- -------- ---------- --------
TOTALS $502,324 $ 60,963 $ (26,687) $536,600
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
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>
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE E--ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses includes the following:
December 31, 1996
-----------------
<S> <C>
Accrued payroll and vacation $ 52,026
Accrued and withheld payroll taxes 20,680
Other 34,428
-------
$107,134
=======
</TABLE>
NOTE F--COMMITMENTS AND CONTINGENCIES
Legal Fees: In May of 1992, the Company entered into an agreement with its
present attorney to pursue different financing arrangements, acquisitions or
mergers. Approximately $15,000 of legal fees associated with this agreement
have not yet been billed to the Company, since they are 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.
F-12
<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
September 21, 1996 the note was extended for a one year term with monthly
payments determined according to a twenty-year amortization period. $5,499,
including interest at 10.25%, is payable monthly. In addition, the note is
subject to several conditions, including:
- Four 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 four 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, 1996, the bank issued a commitment letter that
indicates this mortgage will be renewed for one year, until September 1998.
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, 1997 $ 15,605
December 31, 1998 494,725
-------
$510,330
=======
</TABLE>
NOTE H--STOCKHOLDERS' EQUITY
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 51,000 had been exercised
at December 31, 1996, 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 options are not transferrable except by will or domestic
relations order. The option price per share under the Plan is not less than
the fair market value of the shares on the date of grant.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE H--STOCKHOLDERS' EQUITY (Continued)
Stock-based compensation expense under the fair value-based method of
accounting would have resulted in pro forma net income and earnings (loss)
per common share approximating the following amounts:
<TABLE>
<CAPTION>
1996 1995
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net Income (loss) $243,681 $186,967 $(569,202) $(629,543)
======= ======= ======= =======
Earnings (loss)
per common share $.10 $.08 $(.29) $(.32)
=== === === ===
</TABLE>
The fair value for each option granted during 1996 and 1995, reflecting the
basis for the above pro forma disclosures, was determined on the date of
grant using the Black-Scholes option-pricing model. The following
assumptions were used in determining fair value through the model:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected Life 5-8 years * 2-8 years *
Risk-free interest rate 6.23%-6.74% * 5.98%-6.39% *
Expected Volatility 136% 164%
</TABLE>
*Amounts vary due to graded vesting for options granted to employees and
differences between options granted to employees and granted to directors.
The Company recognizes forfeitures as they occur.
The application of fair value-based accounting in arriving at the pro forma
disclosures above is not an indication of future income statement effects.
The pro forma disclosures do not reflect the effect of fair-value accounting
on stock-based compensation awards granted prior to 1995.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE H--STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Stock option activity for the two year period ended December 31, 1996 is as
follows:
Weighted Average
----------------------------
Number Exercise Price Exercise Fair Value Remain-
Of Options Per Share Price at grant ing Life
---------- -------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Outstanding
January 1, 1995 294,500 $.02 - $5.50 $.37 7 years
Granted to Directors 8,000 $1.00 $1.00 $ .94
Granted to Employees 41,000 $1.44 $1.44 $1.41
Exercised (17,000) $.02 $.02
Cancelled (6,000) $.02 $.02
------ --------- ----- ----- -------
Outstanding
December 31, 1995 320,500 $.02-$5.50 $.55 5.71
years
Granted to Directors 8,000 $1.12 $1.12 $1.00
Granted to Employees 54,500 $3.50 $3.50 $3.27
Exercised (34,000) $.02 - $1.44 $.06
-------- ------------ ----- ----- -------
Outstanding
December 31, 1996 349,000 $.02 - $5.50 $1.07 5.08
years
======= ============ ===== ===== =======
Exercisable at
December 31, 1996 214,800 $.02 - $5.50 $.60
======= ============ =====
Exercisable at
December 31, 1995 207,900 $.02 - $5.50 $.60
======= ============ =====
Available for Grant
At December 31, 1996 0
=======
Available for Grant
At December 31, 1995 64,500
=======
</TABLE>
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE H--STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
In addition, The company also issued the following stock options outside
of any formalized plan as follows;
Weighted Average
----------------------------
Number Exercise Price Exercise Fair Value Remain-
Of Options Per Share Price at grant ing Life
---------- -------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Outstanding
January 1, 1995 50,000 $.80 $.80 10 years
Granted to Directors
and Officers in
consideration for
providing short
term financing 105,000 $.68 $.68 $.67
Exercised (35,000) $.68 $.68
-------- ------- ---- ---- -------
Outstanding
December 31, 1995 120,000 $.68 - $.80 $.73 9.60
years
Exercised (50,000) $.68 $.68
Cancelled (5,000) $.68 $.68
-------- ------- ---- ---- -------
Outstanding
December 31, 1996 65,000 $.68 - $.80 $.77 8.20
years
======= =========== ==== ==== =======
</TABLE>
On January 1, 1997 options representing 8,000 shares were granted to
directors at an exercise price of $2.75 per share.
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE I--INCOME TAXES
There is no current provision for federal or state income taxes due to the
Company's utilization of past operating loss carryforwards to completely
offset taxable income in 1996. During 1995 the Company recorded a deferred
tax asset from the benefit of net operating losses in the amount of $118,000.
The cumulative amount of this deferred tax asset is $710,000 at December 31,
1996. This deferred tax asset is fully reserved due to the company's history
of operating losses prior to 1996. Thus Management has concluded that the
realization of the benefit is not likely. The Company has available for
federal and state income tax purposes net operating loss carryforwards of
approximately $3,700,000 and $1,900,000 respectively, which may be used to
offset future taxable income. If unused, these net operating loss
carryforwards expire in 2009.
<TABLE>
<CAPTION>
The reconciliation of income tax attributable to operations computed at the
U.S. federal statutory tax rates to income tax expense for 1996 is as
follows:
<S> <C> <C>
Tax at U.S. Statutory Rates $82,852 34%
State income taxes, net of
federal tax effect -- --
Other $(15,403) (34)%
Effect of net operating
loss carryforwards $(67,449) (34)%
------- ------
TOTALS $ -- -- %
======= ======
</TABLE>
NOTE J--SIGNIFICANT CUSTOMERS
There were no sales to individual customers that were greater than 10% of
total revenues for the years ended December 31, 1996 and 1995.
NOTE K--ECONOMIC DEPENDENCY
The Company obtained approximately 33% of its merchandise from one source in
1996. Management believes that if this supplier ceased providing
merchandise, the Company could find alternative suppliers without serious
interruption of business.
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE L--SUBSEQUENT EVENT
On February 24, 1997, the Company obtained a signed letter of intent from a
potential investor indicating a desire to purchase 200,000 shares of the
Company's common stock at a price of $2.75 per share.
NOTE M--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Summarized quarterly financial data for 1996 and 1995 is as follows:
Quarter Ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 238,204 $ 759,321 $788,402 $ 682,146
Gross Profits 164,413 496,540 468,604 402,833
Operating Income
(loss) (86,133) 215,006 120,233 70,088
Net Income
(loss) (101,280) 193,073 97,403 54,485
Income (loss)
per share $ (.05) $ .08 $ .04 $ .03
</TABLE>
<TABLE>
<CAPTION>
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>
F-18
<PAGE>
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
During the Registrant's fiscal years ended December 31, 1995 and 1994 there
were no disagreements with it's auditing firm, Goff, Carlin & Cagan, LLP on any
matters. Effective January 1, 1997 Goff, Carlin & Cagan LLP became Carlin,
Charron & Rosen LLP.
PART III
Item 9. Directors and Executive Officers of the Registrant.
Item 10. Executive Compensation.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Item 12. Certain Relationships and Related Transactions.
If the Registrant's definitive proxy statement is filed within 120 days of the
close of the Registrant's fiscal year ended December 31, 1996, the information
called for by Items 9, 10, 11, and 12 (except to the extent set forth in Item
4A above) shall be deemed incorporated herein by reference to the Registrant's
definitive proxy statement relating to the Annual Meeting of Stockholders.
F-19
<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)
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)
10.5 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 1996 (Filed by
reference to Exhibit 10.12 to the Registrant's Quarterly
Report of Form 10-Q for the Quarter Ended June 30, 1996.
10.12 Mortgage guaranty for five Pamet Systems, Inc. Directors and
Officers, Dated June 21, 1996 (Filed by reference to Exhibit
10.12 to the Registrant's Quarterly Report of Form 10-Q for
the Quarter Ended June 30, 1996.
11 None
12 None
13 None
16 None
18 None
19 None
22 None
23 Consent of Carlin, Charron & Rosen LLP
24 None
25 None
29 None
______________________
(b) Reports on Form 8-K - none
F-20
<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 JOEL B. SEARCY
------------------
Dr. Joel B. Searcy
President
Date March 31, 1997
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Name Capacity Date
JOEL B. SEARCY
- ------------------------
Dr. Joel B. Searcy Chairman of the Board, March 31, 1997
President (Principal
Executive Officer)
RICHARD C. BECKER
- ------------------------
Richard C. Becker Vice President, Chief March 31, 1997
Operating Officer,
Treasurer, Director
(Principal Financial and
Accounting Officer)
LAURENCE B. BERGER
- ------------------------
Laurence B. Berger Director March 31, 1997
ARTHUR V. JOSEPHSON, JR.
- ------------------------
Arthur V. Josephson, Jr. Director March 31, 1997
STANLEY J. ROBBOY, M.D.
- ------------------------
Stanley J. Robboy, M.D. Director March 31, 1997
LEE SPELKE
- ------------------------
Lee Spelke Director March 31, 1997
F-21
<PAGE>
INDEX OF EXHIBITS
Exhibit Page
23 Consent of Carlin, Charron & Rosen LLP
Financial Data Sheet
F-22
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No.33-41029) pertaining to the Pamet Systems, Inc. 1990 Stock
Option Plan of our report dated March 20, 1997, with respect to the
financial statements of Pamet Systems, Inc. included in its Annual Report
(Form 10-KSB) for the year ended December 31, 1996 filed with the
securities and Exchange Commission.
Carlin Charron & Rosen LLP
Worcester, Massachusetts
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 55,353
<SECURITIES> 0
<RECEIVABLES> 602,672
<ALLOWANCES> 25,000
<INVENTORY> 85,915
<CURRENT-ASSETS> 764,192
<PP&E> 1,455,041
<DEPRECIATION> 536,599
<TOTAL-ASSETS> 1,709,780
<CURRENT-LIABILITIES> 842,485
<BONDS> 0
<COMMON> 21,023
0
0
<OTHER-SE> 318,447
<TOTAL-LIABILITY-AND-EQUITY> 1,709,780
<SALES> 2,468,073
<TOTAL-REVENUES> 2,468,073
<CGS> 935,683
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,213,196
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,138
<INCOME-PRETAX> 243,681
<INCOME-TAX> 0
<INCOME-CONTINUING> 243,681
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 243,681
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.10
</TABLE>
