U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-QSB
Mark one
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition period from _________to _________
Commission File No. 1-10623
Pamet Systems, Inc.
____________________________________________________________________
(exact name of small business issuer as specified in its charter)
Massachusetts 04-2985838
____________________________________________________________________
(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 (978) 263-2060
--------------
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
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the close of the period covered by this report:
Title of each class Number of share outstanding
------------------- ---------------------------
Common stock 2,535,250
($.01 par value)
Transitional Small Business Disclosure Format
YES NO X
------ ------
<PAGE>
PAMET SYSTEMS, INC.
FORM 10-QSB TABLE OF CONTENTS
Part I - Financial Information
Item 1 - Financial Statements
Condensed Balance Sheets
March 31, 1998 and December 31, 1997
Condensed Statements of Operations
for the quarter ended March 31, 1998
and 1997
Condensed Statement of Cash Flows
for the three months ended March 31,
1998 and 1997
Item 2 - Management's Discussion and Analysis of
Financial Condition or Plan of Operations
Part II - Other Information
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of
Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
Signature(s)
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Condensed Balance Sheets March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
CURRENT ASSETS (unaudited)
Cash $38,705 $ 40,522
Accounts receivable, net of allowance for
doubtful accounts of $60,000 735,998 661,260
Inventory 77,309 89,811
Prepaid expenses and other current assets 67,603 39,594
Receivable from Insurance Settlement -- --
TOTAL CURRENT ASSETS 919,615 831,187
PROPERTY AND EQUIPMENT, net 948,137 945,970
OTHER ASSETS 4,190 --
RESTRICTED CASH 28,039 27,860
TOTAL ASSETS $1,899,981 $1,805,017
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 724,012 $ 627,227
Accrued expenses 178,660 144,178
Notes payable-related party 192,439 192,439
Deferred software maintenance revenue 157,234 279,823
Current portion of long-term debt 18,087 17,642
TOTAL CURRENT LIABILITIES 1,270,432 1,261,309
LONG TERM DEBT, less current portion 473,969 478,317
UNEARNED SUPPORT REVENUE 28,962 28,962
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; 2,535,250 issued and outstanding 25,353 24,103
Additional paid-in Capital 5,306,821 4,776,821
Accumulated deficit (5,205,556) (4,764,495)
TOTAL STOCKHOLDERS EQUITY 126,618 36,429
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $1,899,981 $1,805,017
========== ==========
</TABLE>
See accompanying "Notes to Financial Statements (Unaudited)"
<PAGE>
<TABLE>
<CAPTION>
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Statements of Operations
(Unaudited)
Three Months Ended
March 31
------------------
<S> <C> <C>
1998 1997
Net sales $604,163 $607,506
Cost of product 294,131 258,216
-------- --------
310,032 349,290
Operating expenses:
Personnel costs 336,408 206,815
Rent, utilities and telephone 28,717 19,468
Travel and entertainment 53,494 18,803
Professional fees 62,570 19,014
Depreciation 18,042 13,328
Research and Development 179,138 --
Other operating expenses 49,075 41,592
-------- --------
Total operating expenses 727,444 319,020
-------- --------
Income (loss) from operations (417,412) 30,270
Interest Income (expense), Net (23,649) (18,042)
Gain on Insurance Settlement --
Net Income (loss) (441,061) $ 12,228
======== ========
Earnings (loss) per common share $(.17) $ .01
===== =====
Shares used in Computing 2,535,250 2,102,250
Earnings per Share
Earnings (loss) per common share- -- $ .01
assuming dilution ===== =====
Shares used in Computing -- 2,373,745
Earnings Per Share-
assuming dilution
</TABLE>
See accompanying "Notes to Financial Statements (unaudited)"
<PAGE>
<TABLE>
<CAPTION>
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows provided by (used in)
operating activities:
Net income/(loss) $ (441,061) $ 12,228
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 18,042 13,328
Change in assets and liabilities:
(Increase) in accounts receivable ( 74,738) (3,956)
(Increase) Decrease in inventory 12,502 36,447
(Increase) in prepaids and
other current assets (28,009) (1,723)
(Increase) in other assets and restricted
cash (4,369) (174)
Increase (Decrease) in accounts payable 96,785 (56,909)
(Decrease) in deferred software
maintenance revenue (122,589) (93,055)
Increase (Decrease) in accrued expenses
and other current liabilities 34,482 (5,772)
--------- ---------
Total adjustments ( 67,894) (111,814)
Net cash provided by (used
in) operating activities (508,955) (99,586)
Cash flows from investing
activities:
Expenditures for software development -- --
Expenditures for property and equipment (20,209) (9,509)
Proceeds from insurance settlement
for property and equipment -- --
--------- ---------
Net cash used in investing activities ( 20,209) (9,509)
</TABLE>
(continued on following page)
<PAGE>
<TABLE>
<CAPTION>
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Payment of mortgage ( 3,903) (3,450)
Net change note payable
related party -- 85,000
Issuance of capital stock 531,250 --
--------- ---------
Net cash provided by
financing activities 527,347 81,550
Net increase (decrease) in cash (1,817) (27,545)
Cash and cash equivalents at 40,522 55,353
beginning of period
Cash and cash equivalents at
end of period $38,705 $27,808
======= =======
Supplemental disclosure of cash
flow information:
Cash paid for interest: $16,232 $13,391
Supplemental disclosure of non-cash
operating activities:
Inventory lost on insurance settlement -- --
</TABLE>
See accompanying "Notes to Financial Statements (Unaudited)"
<PAGE>
PAMET SYSTEMS, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note (1) Statement Presentation
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of March
31, 1998 and the results of operations for the three month period and changes
in cash flows for the period then ended. There were no material unusual
charges or credits to operations during the recently completed fiscal
quarter.
The results reported for the three months ended March 31, 1998 are not
necessarily indicative of the results of operations which may be expected for
the entire year.
Note (2) Mortgage on Corporate Training, Development and Headquarters
Facility
On April 21, 1992 the Company consummated an agreement with the
Lexington Savings Bank of Lexington, MA. to mortgage the Company's
development, training and headquarters facility, located at 1000 Main Street,
Acton, Massachusetts. The original principal amount of the mortgage was
$560,000. In October 1997 the note was extended for a one year term through
October 21, 1998 with monthly payments of $5,423.00, determined according to
a twenty-year amortization period including interest at 10.0%. The remaining
balance at March 31, 1998 was $492,056. The bank has required an interest
bearing compensating balance account. On March 31, 1998 this account equaled
$28,039.
<PAGE>
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Overview
Pamet Systems, Inc. (the Company or Pamet Systems), founded in 1987,
designs and implements broad-based information technology solutions for
public safety agencies enabling them to realize cost efficiencies and
provide better service. The company's suite of products is composed of four
major components: PoliceServer, FireServer, MobileServer, and ImageServer.
The Company's revenues consist primarily of sales of these software
applications, the associated hardware and systems integration, and support
and update service fees.
Management believes that revenues for 1998 period were sustained at the
1997 levels by customers spending funds from grant awards under the "COPS
MORE 96" portion of the "Violent Crime Control and Law Enforcement Act of
1994" (the 1994 Crime Bill). The grant applications for "COPS MORE 96" were
submitted in October 1996 and the Company has seen many prospects and
customers receive grant awards and proceed through the procurement process
during 1997 and early in 1998. Also during the 1998 period, the Company has
seen the continuation of a market shift to the MobileServer product. As a
result of this market shift to mobile products, the Company joined forces
with Cerulean Technology, Inc. in November 1997 to offer Cerulean
PacketCluster PatrolTM wireless client/server software under a three-year
private branding agreement as its exclusive mobile information solution.
This MobileServer market shift has also caused the company to experience
substantial one time product development, implementation engineering, and
staff training costs which affected the results of operations in the last
quarter of 1997 and the first quarter of 1998. Since a significant portion
of the Mobileserver sales in the 1998 period were the result of the "COPS
MORE 96" federal grant awards, the pricing on these sales reflected previous
commitments made to customers during the grant application process and prior
to the Cerulean agreement. These pricing commitments and the high hardware
component of MobileServer sales have adversely affected product margins.
Market expectations for a complete Microsoft operating environment using
Microsoft NT Server and a Windows 95 or NT Desktop graphical user interface
have grown substantially during 1997 and 1998, especially in the Southeast
market. The Company has completed substantial levels of development on the
next generation of PoliceServer and Fireserver operating on a Microsoft NT
platform. Phase one of PoliceServer 2 is nearing completion with delivery of
a Beta version to a customer scheduled for June 1998. As the modules of the
Company's records management system (RMS) and computer aided dispatch (CAD)
are released operating in the Microsoft NT environment, the Company expects
that the product mix will shift back to the higher margin PoliceServer and
FireServer products. In addition, the Company incurred $179K of Research and
Development expenditures in the 1998 period, most of which related to the new
NT product.
Subsequent to the end of the quarter, the next round of federal grants
associated with the 1994 Crime Bill, "COPS MORE 98", were announced. The
grant applications will be submitted in June 1998 and revenues from this
round of grants awards is expected to impact sales in 1999. Prior to the
submission of the grant applications, the Company will hold another round of
grant preparation seminars for current and potential customers to assist them
in preparing their grant proposals. The agencies that have attended the
Company's seminars have generally received grant awards, however, there can
be no assurance, as to when, if at all, these awards will result in sales to
the Company. Until the 1994 Crime Bill grant program expires, a significant
portion of the Company's sales will be reflective of these awards.
Three Months Ended March 31, 1998 vs.
Three Months Ended March 31, 1997
Net sales in the 1998 period remained relatively flat at $604,163, a
.6% decrease from the 1997 period revenues of $607,506. The revenues for the
1998 period showed the continuing trend toward the Mobileserver product and
the slowing of system sales while customers await the release of the
Company's NT-based product as discussed above. However, the delays that were
encountered in the awarding of grants associated with the "COPS MORE 96"
program have resulted in continued sales and backlog associated with these
grant awards in the 1998 period. The revenues for the 1998 period were
comprised of one hardware upgrade, three ImageServer, and eight MobileServer
systems compared to three ImageServer, two MobileServer, two PoliceServer and
one FireServer systems during the 1997 period. The MobileServer sales in the
1998 period represented 74.3% of net hardware and software sales, up from
17.5% of net hardware and software sales in the 1997 period. Support revenues
increased 18.1% to $122,688 for the 1998 period from $103,871 for the 1997
period reflecting the increase in the customer base from the 1997 period.
Cost of product increased 13.9% or $35,915 to $294,131 for the 1998 period
from $258,216 for the 1997 although revenues dropped slightly in the period.
The resulting decrease in gross margin from from 57.5% in the 1997 period to
51.3% in the 1998 period reflects the significant increase in the lower
margin MobileServer sales.
Operating expenses increased $408,424 or 128.0% to $727,444 for the 1998
period compared to $319,020 for the 1997 period primarily due to increased
spending on infrastructure and customer support capabilities, the addition of
Technology Assemblers, Inc. (TAI) and its JailServer product in February
1998, and continued spending on research and product development. Research
and development expenditures on NT product development of PoliceServer 2, a
network search product, and a mobile product interface between PoliceServer
and the new privately branded MobileServer product represented 43.9% or
$179,138 of the increased spending. The Company has used outside resources
to accomplish product development goals to minimize the long term financial
commitments of the Company. The NT product development will continue
throughout 1998 and into 1999 until all modules of PoliceServer and
FireServer have been ported to the NT platform consistent with market
demands.
Personnel costs increased 62.7% to $336,408 for the 1998 period compared
to $206,815 for the 1997 period. The increase is due to the continuing
addition of resources including a new President and CEO in June
1997, a Vice President of Product Integration and Deployment in November 1997
and three former TAI employees in February 1998, and the restructuring of
salary levels for critical resources in line with market salary levels. These
personnel costs were incurred to support increased revenue growth with an
expanded market and the introduction of an NT-based product. Rent, utilities
and telephone increased 47.5% to $28,717 for the 1998 period from $19,468 for
the 1997 period due primarily to the increased phone expense associated with
the telephone support for the Company's growing client base outside the
Northeast and the rent and associated expenses of a new Southeast region
sales office in Maitland, Florida. Travel and entertainment expenses
increased 184.5% to $53,494 for the 1998 period from $18,803 for the 1997
period. This increase primarily reflects the increase in travel associated
with integrating the employees from the Southeast region into the corporate
organization, the expenses associated with increased sales activity outside
the Northeast, and the increased level of marketing activity including trade
shows. Professional fees increased 229.1% to $62,570 for the 1998 period from
$19,014 for the 1997 period, primarily due to the consulting fees associated
with hiring an outside firm to update existing product documentation and the
cost of a consultant to manage the process of securing additional equity
financing to support the current product development. In addition, increased
legal fees resulted from services associated with working capital loan
agreements, the acquisition of the assets of TAI and the equity financing
secured during the 1998 period from Rogow Opportunity Capital. Depreciation
expense increased 35.4% to $18,042 for the 1998 period from $13,328 for the
1997 period due to the upgrading of some of the Company's computer systems.
Other operating expenses increased 18.0% to $49,075 for the 1998 period from
$41,592 for the 1997 period primarily due to increases in internet access and
usage costs to allow the linking of corporate computer systems in remote
locations to corporate headquarters.
Net interest expense for the 1998 period was $23,649 compared to
$18,042 for the 1997 period. This reflects the increased interest associated
with the working capital loans.
The net loss for the 1998 period was $(441,061) or $(.17) per share
compared to net profit of $12,228 or $.01 per share for the 1997 period. The
loss is due primarily to the lower margins associated the MobileServer
product and increased operating expenses resulting from product development
and the increased infrastructure costs which will position the Company for
expected future revenue growth.
Liquidity and Capital Resources
The Company's working capital improved to a deficit of $(350,817) from
a deficit of $(430,122) at December 31, 1997 due to the private placement of
125,000 shares of common stock with Rogow Opportunity Capital, LLC (ROC)
which increased the cash and stockholders' equity by $531,250. Cash decreased
slightly to $38,705 at March 31, 1998 from $40,522 at December 31, 1997.
Accounts receivable increased to $735,998 at March 31, 1998 from $661,260 at
December 31, 1997 reflecting an increase in days sales outstanding
approximately 90 days. All outstanding balances have been investigated and
any customer satisfaction issues delaying payment are being worked.
The Company's backlog was approximately $510,000 at March 31, 1998.
The Company is using the infusion of cash from the private placement with ROC
in the first quarter on developing the NT product, increasing its operational
infrastructure to enable it to execute anticipated increased sales volume and
performing maintenance, adding enhancements, and upgrading the documentation
on its current products. It is management's belief that this next generation
of the Company's products should position the Company to be technologically
compliant with the future public safety marketplace requirements of having a
graphical user interface and being computer platform independent. The
Company is continuing to consider projects to increase its cash position
through business combinations, as well as capital raising alternatives.
Subsequent to the end of the first quarter of 1998, the Company announced
that it is offering $1,000,280 of its securities as the second phase of its
multi-phased private placement program to raise an aggregate of $2 million to
fund the development of the Windows/NT versions of its suite of products.
The Company expects to complete this development effort by the second quarter
of 1999. In addition, the Company also announced subsequent to the 1998
period that it has arranged a one-year receivables financing agreement with a
credit line of up to $1.25 million with Silicon Valley Bank. The funds from
this agreement will be used to fund working capital requirements. The
Company continues to receive short term working capital commitments of up to
$600,000 from Directors and Officers to support operations, if needed. The
Company believes its existing backlog, current loan commitments, anticipated
additional capital infusion and enhanced sales activities will be sufficient
to ensure the continued operations through the year.
As of March 31, 1998, the Company had accumulated approximately
$4,400,000 and $2,600,000 in net operating loss carry forwards for federal
and state income tax purposes respectively. The loss carry forwards 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
carry forward exceed the accumulated loss at the time of the "ownership
change". Thus there is no restriction on its use.
Inflation
Inflation has not had a significant impact on the Registrant's
operations to date.
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations may include forward-looking statements, including
statements regarding revenue expectations and product mix, grant awards, new
product development, capital position and infusion, and ability to continue
operations through the year, that may or may not materialize. These forward
looking statements are subject to certain risks, including further delays in
the grant and funding process which would impact future revenues,
unanticipated development problems relating to new products, the inability to
raise additional capital and the inability to complete and successfully
integrate the TAI acquisition. Additional information of factors that could
potentially affect the Company's financial results may be found in the
Company's filings with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
On March 2, 1998 the Company sold 125,000 shares of Pamet Systems
Common Stock at a price of $4.25 per share and warrants to purchase
31,250 shares of Common Stock at the exercise price of $4.25 for a
total of $531,250 to one entity, which is an accredited investor as
defined in Rule 501(a) under the Securites Act of 1933, as amended
(the "Act"). The issuance was exempt from registration requirements
of the Act pursuant to Section 4(2) thereof. Prior to the sale two
outstanding loans from the same entity for a total of $300,000 were
paid in full.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a vote of Security Holders
None
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
4 Form of Warrant
27 Financial Date Schedule
b. Reports on form 8-K
March 5, 1998 a Form 8-K was filed pursuant to Rule 135C of the
Securities Act of 1934 recording the press release referencing
item 2.
SIGNATURES
Pursuant to the requirements 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)
May 14, 1998 Richard C. Becker
_______________________________ ______________________
Date Richard C. Becker
Vice President
Principal Financial Officer
Exhibit 4
FORM OF WARRANT
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND
NEITHER THIS WARRANT NOR SUCH SHARES MAY BE SOLD, ENCUMBERED OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION
SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY (WHICH ACCEPTANCE SHALL NOT BE UNREASONABLY
WITHHELD) THAT SUCH REGISTRATION IS NOT REQUIRED.
Void after 5:00 p.m. Eastern Standard Time, on March 2, 2003.
WARRANT TO PURCHASE COMMON STOCK
OF
PAMET SYSTEMS, INC.
FOR VALUE RECEIVED, PAMET SYSTEMS, INC. (the "Company"), a Massachusetts
corporation, hereby certifies that Rogow Opportunity Capital LLC, a
Massachusetts company, or its permitted assigns, is entitled to purchase from
the Company, at any time or from time to time commencing March 2, 1998, and
prior to 5:00 P.M., Eastern Standard Time, on March 2, 2003, a total of
thirty-one thousand two hundred fifty (31,250) fully paid and nonassessable
shares of Common Stock, par value $.01 per share, of the Company for an
aggregate purchase price of $132,812.50 (computed on the basis of $4.25 per
share). (Hereinafter, (i) said Common Stock, together with any other equity
securities which may be issued by the Company with respect thereto or in
substitution therefor, is referred to as the "Common Stock," (ii) the shares
of the Common Stock purchasable hereunder are referred to as the "Warrant
Shares," (iii) the aggregate purchase price payable hereunder for the Warrant
Shares is referred to as the "Aggregate Warrant Price," (iv) the price
payable hereunder for each of the Warrant Shares is referred to as the "Per
Share Warrant Price," (v) this Warrant, and all warrants hereafter issued in
exchange or substitution for this Warrant are referred to as the "Warrant"
and (vi) the holder of this Warrant is referred to as the "Holder.") The
number of Warrant Shares for which this Warrant is exercisable is subject to
adjustment as hereinafter provided. In the event of any such adjustment, the
Per Share Warrant Price shall be adjusted by multiplying the Per Share
Warrant Price in effect immediately prior to such adjustment by a fraction
the numerator of which is the aggregate number of Warrant Shares for which
this Warrant may be exercised immediately prior to such adjustment and the
denominator of which is the aggregate number of Warrant Shares for which this
Warrant may be exercised immediately after such adjustment.
1. Exercise of Warrant. This Warrant may be exercised, in whole at any
time or in part from time to time, commencing March 2, 1998, and prior to
5:00 P.M., Eastern Standard Time, on March 2, 2003, by the Holder of this
Warrant by the surrender of this Warrant (with the subscription form at the
end hereof duly executed) at the address set forth in Subsection 9(a) hereof,
together with proper payment of the Aggregate Warrant Price, or the
proportionate part thereof if this Warrant is exercised in part.
The Aggregate Warrant Price or Per Share Warrant Price may be paid: (a) in
cash, (b) by surrender to the Company of shares of its Common Stock with a
fair value, on the date of exercise that is equal to the Aggregate Warrant
Price or Per Share Warrant Price, as the case may be, in respect of the
number of Warrants exercised, (c) by surrender to the Company of Warrants (as
provided below) or (d) by a combination of (a), (b) or (c) hereof. The
Holder shall have the right to convert Warrants or any portion thereof (the
"Conversion Right") into Warrant Shares as provided in this paragraph, but
only if, at the time of such conversion, the Per Share Warrant Price shall be
less than the current market price per share of Common Stock and the Warrants
shall otherwise be exercisable under the provisions of this Warrant. Upon
exercise of the Conversion Right with respect to a particular number of
Warrants (the "Converted Warrants"), the Company shall deliver to the Holder
(without payment by the Holder of any cash or other consideration) that
number of Warrant Shares equal to the quotient obtained by dividing (a) the
difference between (i) the product of the fair value per share of Common
Stock as of the date the Conversion Right is exercised (the "Conversion
Date") and the number of Warrant Shares into which the Converted Warrants
could have been exercised hereunder and (ii) the aggregate Per Share Warrant
Price that would have been payable upon such exercise of the Converted
Warrants as of the Conversion Date, by (b) the fair value per share of Common
Stock as of the Conversion Date. For purposes of this paragraph, the fair
value per share of Common Stock shall mean the average Closing Price of the
Common Stock for the ten Trading Days immediately preceding the Conversion
Date.
As used in this Section 1, Trading Day means, in the event that the Common
Stock is listed or admitted to trading on the New York Stock Exchange (or any
successor to such exchange), a day on which the New York Stock Exchange (or
such successor) is open for the transaction of business, or, if the Common
Stock is not listed or admitted to trading on such exchange, a day on which
the principal national securities exchange on which the Common Stock is
listed is open for the transaction of business, or, if the Common Stock is
not listed or admitted to trading on any national securities exchange, a day
on which any New York Stock Exchange member firm is open for the transaction
of business.
As used in this Section 1, the Closing Price of the Company's Common Stock
shall be the last reported sale price as shown on the Composite Tape of the
New York Stock Exchange, or, in case no such reported sale price is quoted on
such day, the average of the reported closing bid and asked prices on the New
York Stock Exchange, or, if the Common Stock is not listed or admitted to
trading on such exchange, the last reported sales price, or in case no such
reported sales price is quoted on such day, the average of the reported
closing bid and asked prices, on the principal national securities exchange
(including, for purposes hereof, the National Association of Securities
Dealers, Inc. National Market System) on which the Common Stock is listed or
admitted to trading, or, if it is not listed or admitted to trading on any
national securities exchange, the average of the high closing bid price and
the low closing asked price as reported on an inter-dealer quotation system.
In the absence of any available public quotations for the Common Stock, the
Board of Directors of the Company shall determine in good faith the fair
value of the Common Stock, which determination shall be set forth in a
certificate by the Secretary of the Company.
Payment for Warrant Shares if made by cash shall be made by certified or
official bank check payable to the order of the Company. If this Warrant is
exercised in part, the Holder shall be entitled to receive a new Warrant
covering the number of Warrant Shares in respect of which this Warrant has
not been exercised and setting forth the proportionate part of the Aggregate
Warrant Price applicable to such Warrant Shares. Upon such surrender of this
Warrant, the Company will (a) issue a certificate or certificates in the name
of the Holder for the shares of the Common Stock to which the Holder shall be
entitled, and (b) deliver the proportionate part thereof if this Warrant is
exercised in part, pursuant to the provisions of the Warrant.
No fractional shares or scrip representing fractional shares shall be issued
upon the exercise of this Warrant. With respect to any fraction of a share
called for upon any exercise hereof, the Company shall pay to the Holder an
amount in cash equal to such fraction multiplied by the fair value of a
share.
2. Reservation of Warrant Shares. The Company agrees that, prior to the
expiration of this Warrant, the Company will at all times have authorized and
in reserve, and will keep available, solely for issuance or delivery upon the
exercise of this Warrant, the shares of the Common Stock as from time to time
shall be receivable upon the exercise of this Warrant.
3. Anti-Dilution Provisions.
(a) In case the Company shall hereafter (i) pay a dividend or make a
distribution on its capital stock in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock into a greater number of shares, (iii)
combine its outstanding shares of Common Stock into a smaller number of
shares or (iv) issue by reclassification of its Common Stock any shares of
capital stock of the Company, the number of Warrant Shares for which this
Warrant may be exercised shall be adjusted so that if the Holder surrendered
this Warrant for exercise after such action the Holder would be entitled to
receive the number of shares of Common Stock or other capital stock of the
Company which he would have been entitled to receive had such Warrant been
exercised immediately prior to such action. An adjustment made pursuant to
this subsection (a) shall become effective immediately after the record date
in the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision,
combination or reclassification. If, as a result of an adjustment made
pursuant to this subsection (a), the Holder of this Warrant shall become
entitled to receive shares of two or more classes of capital stock or shares
of Common Stock and other capital stock of the Company, the Board of
Directors (whose determination shall be conclusive and shall be described in
a written notice to the Holder of this Warrant promptly after such
adjustment) shall determine the allocation of the adjusted Per Share Warrant
Price between or among shares of such classes of capital stock or shares of
Common Stock and other capital stock.
(b) In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another entity of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Company), the holder shall have the right thereafter to
exercise this Warrant for the kind and amount of securities, cash or other
property which he would have owned or have been entitled to receive
immediately after such consolidation, merger, statutory exchange, sale or
conveyance had such Warrant been exercised immediately prior to the effective
date of such consolidation, merger, statutory exchange, sale or conveyance
and in any such case, if necessary, appropriate adjustment shall be made in
the application of the provisions set forth in this Section 3 with respect to
the rights and interests thereafter of the Holder to the end that the
provisions set forth in this Section 3 shall thereafter correspondingly be
made applicable, as nearly as may reasonably be, in relation to any shares of
stock or other securities or property thereafter deliverable on the
conversion of this Warrant. The above provisions of this subsection (b)
shall similarly apply to successive consolidations, mergers, statutory
exchanges, sales or conveyances. Notice of any such consolidation, merger,
statutory exchange, sale or conveyance and of said provisions so proposed to
be made, shall be mailed to the Holder not less than 30 days prior to such
event. A sale of all or substantially all of the assets of the Company for a
consideration consisting primarily of securities shall be deemed a
consolidation or merger for the foregoing purposes.
(c) Whenever the Per Share Warrant Price is adjusted as provided in this
Warrant and upon any modification of the rights of the Holder of this Warrant
in accordance with this Section 3, the Company shall promptly prepare a
certificate of an officer of the Company, setting forth the Per Share Warrant
Price and the number of Warrant Shares after such adjustment or modification,
a brief statement of the facts requiring such adjustment or modification and
the manner of computing the same and cause a copy of such certificate to be
mailed to the Holder.
4. Fully Paid Stock; Taxes. The Company agrees that the shares of the
Common Stock represented by each and every certificate for Warrant Shares
delivered on the proper exercise of this Warrant shall, at the time of such
delivery, be validly issued and outstanding, fully paid and nonassessable,
and not subject to preemptive rights, and the Company will take all such
actions as may be necessary to assure that the par value or stated value, if
any, per share of the Common Stock is at all times equal to or less than the
then Per Share Warrant Price. Subject to Section 5(e) hereof, the Company
further covenants and agrees that it will pay, when due and payable, any and
all Federal and state stamp, original issue or similar taxes that may be
payable in respect of the issuance of any Warrant Shares or certificates
therefor. The Holder covenants and agrees that it shall pay, when due and
payable, any and all federal, state and local income or similar taxes that
may be payable in respect of the issuance of any Warrant Shares or
certificates therefor.
5. Transfer
(a) Securities Laws. Neither this Warrant nor the Warrant Shares issuable
upon the exercise hereof have been registered under the Securities Act of
1933, as amended (the "Securities Act"), or under any state securities laws
and unless so registered may not be transferred, sold, pledged, hypothecated
or otherwise disposed of unless an exemption from such registration is
available. In the event the Holder desires to transfer this Warrant or any
of the Warrant Shares issued, the Holder must give the Company prior written
notice of such proposed transfer including the name and address of the
proposed transferee. Such transfer may be made only either (i) upon
publication by the Securities and Exchange Commission (the "Commission") of a
ruling, interpretation, opinion or "no action letter" based upon facts
presented to said Commission, or (ii) upon receipt by the Company of an
opinion of counsel acceptable to the Company to the effect that the proposed
transfer will not violate the provisions of the Securities Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the
rules and regulations promulgated under either such act, or to the effect
that the Warrant or Warrant Shares to be sold or transferred have been
registered under the Securities Act of 1933, as amended, and that there is in
effect a current prospectus meeting the requirements of Subsection 10(a) of
the Securities Act, which is being or will be delivered to the purchaser or
transferee at or prior to the time of delivery of the certificates evidencing
the Warrant or Warrant Shares to be sold or transferred.
(b) Conditions to Transfer. Prior to any such proposed transfer (including,
without limitation, a transfer by will or pursuant to the laws of descent and
distribution), and as a condition thereto, if such transfer is not made
pursuant to an effective registration statement under the Securities Act, the
Holder will, if requested by the Company, deliver to the Company (i) an
investment covenant, in form and substance equivalent to that signed by the
original Holder of this Warrant, signed by the proposed transferee, (ii) an
agreement by such transferee to the restrictive investment legend set forth
herein on the certificate or certificates representing the securities
acquired by such transferee, (iii) an agreement by such transferee that the
Company may place a "stop transfer order" with its transfer agent or
registrar, and (iv) an agreement by the transferee to indemnify the Company
to the same extent as set forth in the next succeeding paragraph.
(c) Indemnity. The Holder acknowledges that the Holder understands the
meaning and legal consequences of this Section 5, and the Holder hereby
agrees to indemnify and hold harmless the Company, its representatives and
each officer and director thereof from and against any and all loss, damage
or liability (including all attorneys' fees and costs incurred in enforcing
this indemnity provision) due to or arising out of (a) the inaccuracy of any
representation or the breach of any warranty of the Holder contained in, or
any other breach by the Holder of, this Warrant, (b) any transfer of the
Warrant or (c) any untrue statement or omission to state any material fact in
connection with the investment representations or with respect to the facts
and representations supplied by the Holder to counsel to the Company upon
which its opinion as to a proposed transfer shall have been based.
(d) Transfer. Upon surrender of this Warrant to the Company or at the office
of its stock transfer agent, if any, with assignment documentation duly
executed and funds sufficient to pay any transfer tax, and upon compliance
with the foregoing provisions, the Company shall, without charge, execute and
deliver a new Warrant in the name of the assignee named in such instrument of
assignment, and this Warrant shall promptly be canceled. Any assignment,
transfer, pledge, hypothecation or other disposition of this Warrant
attempted contrary to the provisions of this Warrant, or any levy of
execution, attachment or other process attempted upon the Warrant, shall be
null and void and without effect.
(e) Legend and Stop Transfer Orders. Unless the Warrant Shares have been
registered under the Securities Act, upon exercise of any part of the Warrant
and the issuance of any of the Warrant Shares, the Company shall instruct its
transfer agent to enter stop transfer orders with respect to such shares, and
all certificates representing Warrant Shares shall bear on the face thereof
substantially the following legend, insofar as is consistent with
Massachusetts law:
"The shares of common stock represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not be sold,
offered for sale, assigned, transferred or otherwise disposed of unless
registered pursuant to the provisions of that Act or an opinion of counsel to
the Company is obtained stating that such disposition is in compliance with
an available exemption from such registration."
6. Loss, etc. of Warrant. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company, if lost, stolen or
destroyed, and upon surrender and cancellation of this Warrant if mutilated,
the Company shall execute and deliver to the Holder a new Warrant of like
date, tenor and denomination.
7. Warrant Holder Not Shareholder. Except as otherwise provided herein, this
Warrant does not confer upon the Holder any right to vote or to consent to or
receive notice as a shareholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a shareholder,
prior to the exercise hereof.
8. Communication. No notice or other communication under this Warrant shall
be effective unless the same is in writing and is mailed by first-class mail,
postage prepaid, addressed to:
(a) the Company at 1000 Main Street, Acton, Massachusetts 01720, or such
other address as the Company has designated in writing to the Holder, or
(b) the Holder at 220 Ocean Avenue, Marblehead, Massachusetts 01945, or such
other address as the Holder has designated in writing to the Company.
9. Headings. The headings of this Warrant have been inserted as a matter of
convenience and shall not affect the construction hereof.
10. Applicable Law. This Warrant shall be governed by and construed in
accordance with the law of the State of New York without giving effect to the
principles of conflict of laws thereof.
IN WITNESS WHEREOF, PAMET SYSTEMS, INC., has caused this Warrant to be signed
by a duly authorized officer as of this ______ day of ____________, 1998.
ATTEST: PAMET SYSTEMS, INC.
_______________________ By:___________________________________
Name:
Title:
SUBSCRIPTION
The undersigned, __________________________________________, pursuant to the
provisions of the foregoing Warrant, hereby agrees to subscribe for the
purchase of _________________________ shares of the Common Stock of PAMET
SYSTEMS, INC. covered by said Warrant, and makes payment therefor in full at
the price per share provided by said Warrant.
Dated __________________ Signature__________________________
Address____________________________
____________________________
ASSIGNMENT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _________________________ the foregoing Warrant and all rights
evidenced thereby, and does irrevocably constitute and appoint
_________________________, attorney, to transfer said Warrant on the books of
PAMET SYSTEMS, INC.
Dated __________________ Signature_________________________
Address___________________________
___________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED _________________________ hereby assigns and transfers
unto _________________________ the right to purchase
_________________________ shares of the Common Stock of PAMET SYSTEMS, INC.
by the foregoing Warrant, and a proportionate part of said Warrant and the
rights evidenced hereby, and does irrevocably constitute and appoint
_________________________, attorney, to transfer that part of said Warrant on
the books of PAMET SYSTEMS, INC.
Dated ___________________ Signature__________________________
Address____________________________
____________________________
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0
0
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