[Front cover]
[Image: Pamet Systems logo with product names in starburst from logo]
Pamet Systems, Inc.
1998 Annual Report
<PAGE>
[Inside front cover]
Pamet Systems, Inc.
Description of Business
Pamet Systems (the "Company"), designs, develops, installs, and supports
computer software and turnkey computer and data communications systems
for public safety agencies serving municipalities with populations under
250,000, as well as campus, public housing, and transit authority police
agencies. The Company's innovative applications automate the
acquisition, storage, processing, retrieval, and communication of
information for these agencies.
The principal products of the Company comprise an integrated suite
of information management and communications systems, the foundation of
which are the PoliceServer and FireServer products. PoliceServer is an
integrated Computer-Aided Dispatch and records management system, which
includes the clerical and record-keeping functions necessary for police
department operation, from E9-1-1 integrated dispatch and booking to
word processing and electronic mail. FireServer is an information
management system and Computer-Aided Dispatch system that provides fire
departments with data on structures, fire suppression plans, and
hazardous materials management. JailServer is designed to provide cor-
rections facility staff with the ability to capture, track and report a
wide variety of data related to inmates. Companion products include the
ImageServer digital imaging system for management of mug shots and crime
scene photos, the QueryStation system for ad hoc reporting, the Mapping
system for viewing graphic representations of incident related data and
the MobileServer system of mobile computers for field reporting.
The Company's products are currently marketed and installed in the
Northeast, Southeast, and Midwest states. Pamet is headquartered in
Massachusetts and maintains a sales office in Florida.
The Company was incorporated on November 24, 1987 by Dr. Joel B.
Searcy, its Chairman of the Board.
PoliceServer, FireServer, CADServer, JailServer, ImageServer,
QueryStation and MobileServer are trademarks of the Company.
This Annual Report contains statements which are not historical
facts. These statements may constitute "forward-looking statements"
within the meaning of the Securities Act of 1933 and the Securities and
Exchange Act of 1934 as amended. Certain, but not necessarily all, of
such forward looking statements can be identified by the use of such
words as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon of
similar terminology, and/or which include, without limitation,
statements regarding the following: the timing of the development and
release of the NT products, adequacy of the funding for the completion
of the NT development, market expectation for the NT operating
environment, and expected market position and sales of the NT product;
building a sales and marketing initiative; law enforcement trends
regarding E911 and mobile systems; funding and adequacy of the corporate
infrastructure to support operations and anticipated sales growth;
economic, competitive, and technology developments affecting market
growth; year 2000 compliance; and discussions of strategies involving
risk and uncertainties that reflect management's current views. These
statements are based on many assumptions and factors and may involve
risks and uncertainties. The actual results of the Company or industry
results may be materially different from any future results expressed or
implied by such forward looking statements because of factors such as
problems in the development of the NT products; insufficient capital
resources to complete development and operate the Company; inability to
successfully market and sell the NT product; changes in the marketplace
including variations in the demand for public safety software and
development of new technologies; and changes in the economic and
competitive environment. These factors and other information contained
in this Annual Report could cause such views, assumptions and factors
and the Company's results of operations to be materially different.
<PAGE>
Pamet Systems, Inc.
To Our Stockholders:
Nineteen ninety-eight, the second year of our three-year reinvestment
program, was a positioning year for Pamet Systems. We took important
steps to position our product portfolio, our customer support
infrastructure, and our sales capabilities to capture the substantial
opportunities that we see in our markets in the coming years.
Our product portfolio will be among the strongest in the industry
when development of our core applications is complete in 1999. These
core applications, PoliceServer NT, FireServer NT, CADServer NT and
JailServer NT are being constructed "from the ground up" using state-of-
the-art design architectures and standards. They create a firm foun-
dation to support the integration of the imaging, mapping, and wireless
communications, as well as any foreseeable new products useful to our
customers. Demonstrations of our new records and dispatch systems to
knowledgeable customers have confirmed that our design decisions have
been the correct ones. By adding complementary components in 1998,
specifically our mobile product, a mapping system for dispatch, an
enhanced query capability, and a jail management system, we now offer a
full line of quality, integrated products to support the market's needs
in the future.
In 1998 we dramatically improved the skills and effectiveness of
our staff through training and organizational restructuring. By
acquiring additional public safety professional and managerial
experience for our customer support team, we demonstrated our commitment
to our customers and improved their confidence and overall satisfaction
with our products and services. We also implemented advanced tools to
capture and manage customer support calls, and began adopting Internet
technologies to support our customers with new services. These steps
created the basis for a highly productive team capable of supporting
growth in customer installations over the next several years.
In 1998 we succeeded in increasing the revenue from our existing
customer base. We achieved particularly good results with our wireless
mobile product, which represented almost half of our sales. Gross
margins improved significantly. We studied our markets and our
competitors to ensure that our core products will be competitive when
development is complete. We acquired new strategic customers for our NT-
based core products and built relationships with many others that will
pay dividends when our new products are available. This foundation
creates an exciting opportunity for our company.
To help us realize our revenue targets in 1999, we have recruited
a new sales director who joined the Company in April 1999. This seasoned
sales professional is responsible for managing our sales activities
throughout the U.S., and we expect his efforts to accelerate our sales
to new customers.
I wish to thank everyone, including our stockholders, financial
and business partners, Board of Directors, and employees, for their
continued support and confidence during 1998. Please contact me via
telephone or email if you have comments, questions, or suggestions
regarding Pamet. Working together we are creating a strong, profitable
company that provides leading edge technology solutions to the public
safety market.
Sincerely,
[Signed]
David T. McKay
President & CEO
978 263-2060
[email protected]
<PAGE>
Pamet Systems, Inc.
New Product Development
[Image: Pamet Systems logo with product names in starburst from logo]
At Pamet Systems, we developed PoliceServer NT, FireServer NT, CADServer
NT and JailServer NT using the latest techniques in Windows NT
technology to provide the best performance and ease of use. All the
modules in these applications are fully integrated, so that information
entered into one part of the system is available to those who need it
the most -- immediately.
FireServer NT
A functionally robust system that stores and manages records about
incidents, structures, water sources, permits and licenses, property,
inspections, and department resources, while providing NFIRS reporting
capabilities.
JailServer NT
A jail management system that manages information related to
inmates, visitors, medical activities, inmate property, court and
criminal records, and commissary ordering.
Mobile
A mobile data computing system that provides accurate, secure
communications between dispatchers and personnel in the field. MDCs
bring all of the critical information in the department database to the
field personnel.
Query
A query and reporting module that allows police, fire and jail
personnel to create standardized reports, identify patterns, track
trends, and turn operational data into detailed, accurate intelligence.
Imaging
An image management system that simplifies the capture, storage,
and retrieval of mug shots, photographs, lineups and other documents.
Our imaging product is completely integrated with PoliceServer NT and
FireServer NT.
[Image: "Fire Department Average Response Time Report" bar chart]
<PAGE>
PoliceServer NT
A records management system that stores and manages information
about arrests, incidents, accidents, warrants, evidence, and other
operational data. PoliceServer NT allows agencies to exchange data with
local, state and federal police agencies and court systems, including
Incident Based Reporting and helps maintain department resources.
CADServer NT
A state-of-the-art dispatching system that captures information
about incidents, gives the dispatcher a real-time presentation of the
location and status of available resources, and manages the rapid,
secure dispatching of police and fire agency personnel to the scene.
[Image: CADServer screen]
[Caption: Prioritizing incidents in CADServer NT.]
Mapping
A real-time mapping system that lets dispatchers and field
personnel view incident information displayed on jurisdictional maps.
Users can locate addresses and fire hydrants, and create pin maps to
uncover patterns of crimes, fires, and accidents.
[Image: GIS pin map]
[Caption: Creating a pin map.]
[Image: Mug shot screen]
[Caption: Recording a mug shot in Imaging.]
<PAGE>
Pamet Systems, Inc.
1998 Highlights
[Image: PoliceServer NT booking screen with mug shot]
[Sidebar caption: All critical information available at a glance.]
The New Technology Platform
Pamet's new Windows NT-based product line involves much more than
simply converting to a new operating system. The PoliceServer NT,
FireServer NT, CADServer NT and JailServer NT product families were
completely redesigned and rewritten to take full advantage of the most
advanced Windows and relational database management system (RDMS)
technologies.
Our new products are positioned to support the technologies of the
new millennium, including mapping, imaging, and advanced investigative
tools, all operating from a wireless, mobile platform.
These technologies provide major advances in:
o Ease of use
o Accuracy of data input
o Speed and efficiency
o Communications with other computer systems and databases
o Industry standard computer hardware and interfaces
Windows Power for Maximum Ease of Use
Our new product line uses all of the features of the Windows
Graphical User Interface (GUI) to make the software easy to learn and
use and to ensure that data collection is accurate. Menus, tabs, tool
bars, buttons, and scroll-bars provide rapid access to essential modules
and screens. Drop-down menus and look-up tables not only eliminate much
typing, they also increase accuracy by making sure that only valid
choices are entered into the database. Software "wizards" provide a
streamlined set of screens to guide users through the most complex proc-
esses. Search forms allow users to find critical information quickly
anywhere in the database using whatever search criteria is available.
Open Architecture and Standards
Pamet's new product families are based on an open design that
allow them to run on a variety of networks. Further, the use of standard
interfaces makes it easier to communicate with other public safety
agencies at the local, state, and federal levels. It will also enhance
our ability to integrate additional technologies into the products in
the future.
Leapfrogging the Competition
Other vendors have rushed to market with products that run on
Windows NT servers, but many of these are using old application
architectures, non-native Windows clients and 16-bit technologies.
No other vendor targeting medium-sized public safety agencies has
taken advantage of all the latest Windows and database management
standards and tools.
As a result, Pamet System's customers benefit from the improved
ease-of-use, security, scalability and openness provided by the latest
Windows technologies. The Company, itself, will be able to incorporate
new technologies into its product line far more easily than the
competition.
<PAGE>
Early PoliceServer NT Customers
During 1998 Pamet Systems announced the signing of contracts for
PoliceServer NT with the Cambridge Police Department and the Ashby
Police Department, both in Massachusetts. These represented major wins
for Pamet with customers who had conducted extensive competitive
evaluations prior to their decision.
Key Feature Enhancements
The year 1998 also saw a number of major enhancements to existing
PoliceServer and FireServer modules, as well as the introduction of some
important new product modules.
Enhancements to the existing PoliceServer CAD module included
improved data entry, improved reporting, access to a newly-updated
hazardous materials (HAZMAT) database, and new features for multi-
jurisdiction agencies and agencies where police and fire departments
share a common Emergency 9-1-1 center.
Additions to the existing FireServer CAD module included improved
data entry, improved reporting, access to a hazardous materials (HAZMAT)
database and features to facilitate integrated operations across fire,
Emergency 9-1-1 and police systems.
A new release of the ImageServer product added integration with
PoliceServer NT, improved image enhancement, and improved management
features.
Pamet's successful MobileServer Mobile Data Computer product was
enhanced with the addition of an interface to the Computer-Aided
Dispatch (CAD) portion of PoliceServer. Among other advantages, this
integration enables silent dispatch wherein dispatchers can send secure
transmissions to police officers in the field.
A new release of QueryStation provided an updated, much-improved
data dictionary and a set of standard reports that allow users quick
access to useful information in the PoliceServer and FireServer
databases.
The JailServer system was ported to Windows NT and integrated with
QueryStation to permit better reporting and analysis of information in
the JailServer database.
Finally, a Geographic Information System (GIS) Mapping module was
added to Pamet's product line. This module allows police and fire
dispatchers to view maps of incident locations, as well as to create
digital pin maps to identify patterns of crimes, traffic accidents, and
other events.
Product Quality and Service Excellence
In 1998 Pamet Systems continued to improve product quality and
built systems that ensure excellence in support services. Major efforts
to improve software development and testing methods resulted in a
significant decline in support calls from customers. This trend was
reinforced by upgraded product documentation and a significant
investment in systems to capture, manage, and respond to support
requests in the timeliest fashion.
These efforts produced a net reduction in support costs and lifted
customer satisfaction with both Pamet System's software and with the
responsiveness of its support organization.
Year 2000 Readiness
Pamet Systems is committed to ensuring that its products perform
in the year 2000 just as they do today. The Company's software was
designed and developed to store and manipulate dates in a 4-digit format
so that records dated December 31, 1999 will be followed by records
dated January 1, 2000. Pamet cannot certify the year 2000 compliance of
products from other vendors used in conjunction with our software, but
we are working with customers to notify them of the status of these
products.
<PAGE>
Pamet Systems, Inc.
Management's Discussion and Analysis of Financial Condition
And 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 three major components: PoliceServer, FireServer, and
JailServer. The Company also offers several companion products including
ImageServer, MobileServer, QueryStation, and a GIS/Mapping module. The
Company's revenues consist primarily of sales of these software
applications, the associated hardware and systems integration, and
support and update service fees.
The Company's revenues for the 12 month period ended December 31,
1998 (the 1998 period) increased 31.7% to $2,736,986 from $2,077,896 for
the 12 month period ending December 31, 1997 (the 1997 period). During
the 1998 period, the revenues showed a significant shift to the
MobileServer product, which represented 28.4% of sales in the 1997
period and 44.9% of sales in the 1998 period. The MobileServer product
enables officers to submit reports and access critical law enforcement
databases from their cruisers; thus increasing officer productivity.
This market shift to mobile products, which became evident in the 1997
period, caused the Company to join forces with Cerulean Technology, Inc.
in November 1997 to offer Cerulean's PacketClusterPatrole wireless
client/server software under a three-year private branding agreement, as
its exclusive mobile information solution. Several factors allowed the
Company to substantially improve margins on the mobile product during
1998. The MobileServer margins during the 1997 period were adversely
affected by one time product development, implementation engineering and
staff training costs in connection with the Cerulean agreement, as well
as the costs of upgrading the installed customer base to the Cerulean
product. In addition, a significant portion of the Company's 1997
MobileServer sales and backlog resulted from the "COPS More 96" federal
grant awards of the 1994 Crime Bill. The pricing on these MobileServer
sales reflected previous commitments made to customers during the grant
application process and prior to the Cerulean agreement. During the 1998
period, the Company was able to renegotiate the pricing on the sales
generated from the "COPS More 96" grant awards as part of the
competitive bidding process. With the startup costs behind the Company
and the renegotiation of the pricing commitments, the MobileServer
margins improved substantially during the 1998 period.
Revenues from the Company's PoliceServer and FireServer products
continued to decline in the 1998 period as a result of market
expectations for a complete Microsoft operating environment, using
Microsoft NT Server and a Windows 95/98 or NT Desktop graphical user
interface. These market expectations caused the Company to begin
rebuilding its products on the NT platform late in 1997 at
considerable expense. The Company spent over $934,000 during the 1998
period on Research and Development of which $745,287 was spent on the
NT-based product, including $195,665 that was capitalized. Significant
progress was made on the NT development program and the first NT server
and PC-based systems were shipped during 1998. The Company plans to
complete the NT versions of their PoliceServer and FireServer products
during 1999. As the modules of the Company's records management system
(RMS) and computer aided dispatch (CAD) operating in the Microsoft NT
environment are released, the Company expects that the product mix may
shift back to the higher margin PoliceServer and FireServer products.
The Company's other products are currently Windows PC-based products.
The Company also expended considerable funds during the 1998 period on
product quality improvements resulting in final releases of its VMS-
based PoliceServer and FireServer products, a new release of its
ImageServer product, and QueryStation enhancements. The Company also
expanded its suite of products in 1998 to include a GIS/Mapping module.
The Company also completed its program to improve product documentation
to address competitive requirements and improve customer satisfaction.
During the second quarter of the 1998 period, another round of
federal grants associated with the 1994 Crime Bill, "COPS More 98," was
announced. The "COPS More 98" grant program was national in scope and
very competitive, with police departments of all sizes and types
competing for a total of $200 million in funds which must be matched by
$66M in local matching share. Prior to the submission of the grant
applications in June 1998, the Company held another round of its
informative grant preparation seminars for current and potential
customers to assist them in preparing their grant proposals. The
seminars reached over 900 attendees at 30 seminars in 27 cities in 15
states and all participants were offered further support in completing
the complex application via phone or fax. The special grant advisory
team at Pamet provided aid to more than 130 agencies. The agencies that
have attended the Company's seminars have generally received grant
awards and the Company began to see revenues related to "COPS More 98"
in the last quarter of the 1998 period.
The Company continues to believe there are significant market
opportunities based on the 1994 Crime Bill funding expected in 1999 and
beyond, the establishment of E911 centers, heightened emphasis on crime
in most communities and the awareness by municipalities that computer
systems can improve the efficiency and effectiveness of their public
safety resources. The Company has also seen increased emphasis on the
coordination of public safety systems between neighboring towns, county,
and state police organizations. The Company's products are designed and
marketed with the option to be used in this type of regional
application.
<PAGE>
Results of Operations
Year Ended December 31, 1998 vs. Year Ended December 31, 1997.
During 1998, the Company's net sales increased 31.7% to $2,736,986
from $2,077,896 in the 1997 period. Although revenues from the Company's
core products increased from $470,432 for the 1997 period to $512,306
for the 1998 period, their contribution to total sales decreased to
18.7% of revenue in 1998 from to 22.6% of revenue in 1997. The number of
new system sales and hardware upgrades decreased from 11 in the 1997
period to 10 in the 1998 period. This decrease, despite the increase in
total revenues, can be attributed to communities delaying purchases of
systems while they awaited more vendors offering products in a Microsoft
operating environment, using Microsoft NT Server and a Windows 95/98 or
NT Desktop graphical user interface. In response to the market trend,
during the 1998 period the Company installed a Beta version of its NT-
based PoliceServer NT records management software (RMS) in the City of
Cambridge, Massachusetts police department as well as a one user NT PC-
based RMS system, in a small community in central Massachusetts. The
Company believes that business was lost or deferred in 1998 as a result
of the Company not offering a PC-based police or fire system further
highlighting the importance of the migration to an NT-based product
line.
Sales of the MobileServer product increased 107.8% to $1,228,168
in the 1998 period from $591,030 in the 1997 period. The mobile product
revenue represented 17 new installations and 10 departments, increasing
the number of both cruiser and portable units. The majority of the
revenue from MobileServer resulted from federal grant funds awarded from
"COPS More 96" of the 1994 Crime Bill. Revenues from the ImageServer
product were relatively flat at $215,796 for the 1998 period as compared
to $217,501 for the 1997 period. The Company has continued to see
increased revenues from support and update service fees resulting from
increases in the installed base and renewal rates approaching 100%.
Support revenues increased $84,772 or 17.7% to $564,270 for the 1998
period from $479,498 for the 1997 period. These service revenues
represented 20.6% of the Company's total revenues in the 1998 period
versus 23.1% in the 1997 period.
Cost of sales increased $113,330 or 10.9% to $1,156,623 for the
1998 period from $1,043,293 for the 1997 period reflecting increased
sales. The Company experienced an improvement in gross margin from 49.8%
in the 1997 period to 57.7% in the 1998 period. Substantial increases in
margin were attained in several product categories including new systems
and MobileServer. The gains in the new systems margin can be attributed
to the high margin JailServer product and software only sales. The
MobileServer margins increased as a result of implementing more
favorable pricing strategies, renegotiation of customer commitments made
prior to the Cerulean agreement, and moving beyond the startup phase of
shipping the Cerulean product under the private branding agreement. The
1997 margins had been negatively impacted by the initial costs
associated with Cerulean agreement including upgrading existing
customers to the Cerulean system and prior pricing commitments for
mobile systems funded by federal grants. In addition, the Company began
shipping GIS/Mapping systems during 1998 that delivered high margins
generally due to the low hardware content of these systems. Software
support and update service revenues delivered traditionally high margins
although they decreased from 96.0% in the 1997 period to 93.3% in the
1998 period. This decrease can be attributed to the increase in
MobileServer installations where support is purchased from Cerulean
rather than being performed by Pamet employees.
The Company's operating expenses increased $1,241,751 or 62.7% to
$3,223,290 for the 1998 period from $1,981,539 for the 1997 period. The
Company's commitments in several areas including overall product
quality, customer satisfaction and new product development contributed
significantly to the increases in spending. Of the increases, $420,907
or 33.9% was attributed to research and development spending on NT
product development, the interface between PoliceServer and the Cerulean
mobile product, a network search product (LENS), and enhancements to the
ImageServer product. In addition, $195,665 of development cost on the
NT-based PoliceServer product was capitalized during the 1998 period, as
this part of the NT project reached technical feasibility. The Company
is continuing to use outside resources in the design, development, and
testing of these projects creating minimal impact on the long-term
financial commitments of the Company. NT product development will
continue throughout 1999 until all modules of PoliceServer and
FireServer including Computer-Aided Dispatch (CAD) have been ported to
the NT platform, consistent with market demands. During 1998, virtually
all requests for proposals (RFP's) received by Pamet Systems required
either a functioning NT system or a transition plan to the NT platform.
Personnel costs increased 44.4% or $439,709 to $1,430,606 for the
1998 period from $990,897 for the 1997 period. The major reasons for the
increase in personnel expenditures were a full year of salary and
associated expenses for David McKay, President and Chief Executive
Officer, who was hired in June 1997, and the addition of several new
employees including a Vice President of Technology and Product
Deployment, three employees in conjunction with the acquisition of
Technology Assemblers, Inc. in February 1998, a Manager of Customer
Support, and a salesperson for the Northeast region. The increased
headcount supports ongoing programs including the redevelopment of the
product on the NT platform, expansion of the product line to include a
jail management package, improvement in customer satisfaction, and
improved sales coverage. These strategic additions in head count will
also expand the Company's infrastructure to handle the anticipated
increase in the level of business in the future. In addition, employee
salary increases and incentive plans
<PAGE>
Pamet Systems, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
designed to bring employee compensation in line with market rates were
implemented in the second half of the 1997 period and impacted spending
for the 1998 period. Employee health insurance costs increased 64.9% as
a result of escalating insurance rates and an increase in the number of
insured employees.
Rent, utilities and telephone expenses increased 83.7% or $63,813
to $140,041 for the 1998 period from $76,228 for the 1997 period. The
most substantial portion of the increase resulted from the rent and
telephone costs associated with opening a Southeast regional sales
office in Maitland, FL. In addition, telephone cost increases resulted
from telephone support for the Company's growing client base located
outside of the Northeast.
Travel and entertainment expenses increased $52,097 or 49.3% to
$157,803 for the 1998 period from $105,706 for the 1997 period due to
the increased travel associated with integrating the employees from the
Southeast region into the corporate organization, and the significant
increase in sales and marketing initiatives outside the Northeast,
including attendance at trade shows and "COPS More 98" grant seminars.
Spending on professional fees increased $131,298 or 78.4% to
$298,679 for the 1998 period from $167,381 for the 1997 period.
Consulting fees contributed $93,136 or 70.9% of the increase growing
from $42,834 in the 1997 period to $135,970 in the 1998 period. The most
significant consulting expenditures were the cost of an outside firm
hired to update existing product documentation, the cost of a consultant
hired to advise the Company on its capital raising initiatives, and the
installation of an upgraded financial package. The documentation effort
supported ongoing product quality and customer satisfaction projects.
Legal fees increased 35.1% or $31,756 to $122,306 for the 1998 period
from $90,550 for the 1997 period as a result of the services that were
required to establish a line of credit loan, to support the Company's
capital raising activities, to complete the acquisition of Technology
Assemblers, Inc. and to research additional business partnerships and
acquisitions.
Depreciation expense increased 24.7% or $17,900 to $90,372 for the
1998 period from $72,472 for the 1997 period, reflecting the first full
year of depreciation on the new computer equipment purchased as a result
of the theft of nearly all the corporate computer equipment in June 1997
and the upgrading of the Company's internal systems.
Other operating expenses increased 46.2% or $116,027 to $367,270
for the 1998 period from $251,243 for the 1997 period. The most
significant components of the increase were the upgrade to high speed
Internet access and links to remote corporate locations, marketing
programs, trade shows, and grant seminars, and increases in office,
computer, and training supplies related to increases in headcount and
revenues.
Net interest expense increased to $164,155 for the 1998 period
compared to the net interest expense of $69,027 for the 1997 period.
This change reflects increased usage of working capital loans obtained
from Directors and Officers, the interest and fees associated with the
receivables financing agreement with Silicon Valley Bank, and interest
costs on the convertible promissory notes issued to outside investors as
part of the Company's capital raising program.
The loss for the 1998 period was $(1,807,082) or $(.71) per share
compared to a loss of $(954,314) or $(.42) per share for the 1997
period.
Liquidity and Capital Resources
The Company's working capital was a deficit of $(1,360,973) at
December 31, 1998 compared to a deficit of $(430,122) at December 31,
1997 due to the current level of research and development spending and
the additional expenses associated with the increased corporate
infrastructure. In addition, the mortgage note on the Company's
headquarters building was not renewed as of December 31, 1998 and the
entire loan amount outstanding of $479,743 is included in current
liabilities for the 1998 period. The short-term status of the mortgage
on the Company headquarters was offset in part by short-term working
capital loans from Directors that were converted to long-term
convertible promissory notes. Nevertheless, the Company remains highly
leveraged.
During the first quarter of 1998, the Company completed a private
placement of 125,000 shares of common stock at $4.25 and 31,250 warrants
exercisable at $4.25 per share with an investor affiliated with a
Company Director raising $531,250. During the 1998 period, the Company
also secured $450,000 of additional financing in the form of long-term
convertible debt, converted $600,000 in lines of credit from Directors
to long-term convertible debt, and negotiated a $250,000 vendor line of
credit that has supported the NT development program. In general, the
convertible debt funding secured in the 1998 period or converted from
lines of credit accrues interest at 11%, has a two-year term, carries
the option of conversion of the principal to common stock by the debt
holder or repayment of principal and accrued interest by the Company,
and has 100% warrant coverage attached that allows for purchase of
additional shares of common stock at the conversion price, which ranges
from $1.45 to $2.50. For detailed information on these convertible
promissory notes, refer to Note H of the financial statements. Cash
increased to $54,817 at December 31, 1998 from $40,522 at December 31,
1997. Accounts receivable decreased to $537,405 at December 31, 1998
from $661,260 at December 31, 1997 despite the increase in 1998 sales as
a result of utilizing the receivables financing agreement with Silicon
Valley Bank.
<PAGE>
Subsequent to year-end, the Company received an additional $350,000 from
long-term convertible promissory notes and $300,000 in loan commitments
from Directors, and two related parties agreed to convert $600,000 worth
of promissory notes to equity. While resources necessary to fund the
completion of the NT development program and provide working capital for
operations continue to be a focus of concern for the Company, the
Company believes that the additional funding which has been secured or
committed, the anticipated funds from the sale of the headquarters
building, anticipated awards from the "COPS More 98" grant submissions
combined with sales of the Company's existing and anticipated suite of
products should ensure continued operations through the end of the year.
If additional funds are required, the Board of Directors is willing to
increase its investment or seek additional financing. Backlog at March
30, 1998 was $345,000. The Company is continuing to consider projects to
increase its cash position such as activities to raise capital, mergers,
acquisitions or other business combinations.
As of December 31, 1998, the Company had accumulated approximately
$6,431,000 of federal net operating loss carryforwards that expire
beginning in the year 2004. In addition, the Company has state net
operating losses to carryforward of $3,316,000, which expire between the
years 1999 and 2003. 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 Company'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
The majority of the Company's installed base has a fiscal year
that commences on July 1 and, therefore, the Company bills its customers
for their annual software support and update service on July 1 of each
year. Consequently, cash flow representing software support revenues has
tended to be higher in the second half of the Company's fiscal year,
although software support revenues are recognized ratably throughout the
fiscal year.
Revenue Recognition
Revenues from software license fees are recognized when a contract
has been executed, the product has been delivered, all significant
contractual obligations have been satisfied and collection of the
related receivable is probable. Maintenance revenues, including those
bundled with the initial license fee, are deferred and recognized
ratably over the service period. Consulting and training service
revenues are recognized as the services are performed.
Year 2000
Company engineers have performed extensive testing to insure that
all of the Company's supported software products are compliant with the
year 2000 transition. The Company's software was developed to store and
calculate date related information using 4 digit values, so records
dated December 31, 1999 will be followed by records dated January 1,
2000. Testing has shown that the Company's software successfully manages
the year 2000 rollover while maintaining data and system integrity. For
the turnkey systems that the Company sells, the Company continues to
monitor the progress of other third party suppliers on whom it depends,
such as Microsoft and Compaq. Although the Company cannot certify these
third party products, the Company will continue to monitor the published
status of their compliance and notify its supported customers of any
findings. The Company's customers have been informed that year 2000
compliance may not apply to older computer equipment or non-current
versions of system software.
Internally the Company utilizes some third-party vendor computer
hardware, networking equipment, telecommunication products and software
products that may or may not be year 2000 compliant. However, the
Company has been assured by third party vendors, that the software
products the Company relies on to manage their internal finance,
materials and support activities, are all year 2000 compliant. Internal
testing to verify these assurances will not be completed until July
1999. The Company also relies, directly or indirectly, on the external
systems of suppliers, creditors, financial organizations and
governmental entities for accurate exchange of data. The impact of year
2000 non-compliance by any of these entities is being monitored at this
time.
Inflation
Inflation has not had a significant impact on the Company's
operations to date.
<PAGE>
<TABLE>
<CAPTION>
Pamet Systems, Inc.
Balance Sheet
December 31,
ASSETS 1998
<S> <C>
CURRENT ASSETS
Cash $54,817
Accounts receivable, trade, net of allowance for
doubtful accounts of $60,000 and factored receivables
of $373,024 418,229
Accounts receivable, factored 119,176
Inventory, net of reserve of $15,000 50,254
Prepaid expenses and other current assets 81,421
-------
TOTAL CURRENT ASSETS 723,897
PROPERTY AND EQUIPMENT, NET 947,188
RESTRICTED CASH 28,534
DEPOSIT 4,190
CAPITALIZED SOFTWARE DEVELOPMENT COSTS 195,665
-------
TOTAL ASSETS $1,899,474
=========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C>
CURRENT LIABILITIES
Line of credit (vendor) $169,934
Mortgage note payable 479,743
Due to factor 65,980
Accounts payable, trade 787,764
Account payable, related party 20,513
Accrued expenses 265,267
Deferred software maintenance revenue and unearned
support revenue 295,669
-------
TOTAL CURRENT LIABILITIES 2,084,870
LONG-TERM DEBT 1,050,000
UNEARNED SUPPORT REVENUE 3,802
</TABLE>
<TABLE>
<CAPTION>
COMMITMENTS AND CONTINGENCIES
<S> <C>
STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued
Common stock, $.01 par value, 7,500,000 shares
authorized, 2,545,500 shares issued and outstanding 25,455
Additional paid-in capital 5,306,924
Accumulated deficit (6,571,577)
----------
TOTAL STOCKHOLDERS' DEFICIT (1,239,198)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,899,474
=========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Pamet Systems, Inc.
Statements of Operations
Year Ended December 31,
1998 1997
<S> <C> <C>
Net hardware and software sales $2,172,716 $1,598,398
Support revenues 564,270 479,498
--------- ---------
TOTAL REVENUES 2,736,986 2,077,896
Cost of sales 1,156,623 1,043,293
--------- ---------
GROSS PROFIT 1,580,363 1,034,603
--------- ---------
Operating expenses
Personnel costs 1,430,606 990,897
Rent, utilities and telephone 140,041 76,228
Travel and entertainment 157,803 105,706
Professional fees 298,679 167,381
Depreciation 90,372 72,472
Research and development 738,519 317,612
Other operating expenses 367,270 251,243
--------- ---------
TOTAL OPERATING EXPENSES 3,223,290 1,981,539
--------- ---------
Loss from operations (1,642,927) (946,936)
Interest income 674 1,265
Interest expense (164,829) (70,292)
Gain on insurance settlement -- 61,649
--------- ---------
NET LOSS $(1,807,082) $(954,314)
========= =========
Loss per common share $(.71) $(.42)
=== ===
</TABLE>
See accompanying notes to financial statements.
<TABLE>
Pamet Systems, Inc.
Statements of Stockholders' Equity (Deficit)
Additional Total
Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity(Deficit)
<S> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1,
1997 2,102,250 $21,023 $4,107,605 $(3,810,181) $318,447
NET LOSS (954,314) (954,314)
CONVERSION OF
STOCK OPTIONS 108,000 1,080 121,216 122,296
PRIVATE PLACE-
MENT OF STOCK 200,000 2,000 548,000 550,000
--------- ------ --------- --------- ---------
BALANCE AT
DECEMBER 31,
1997 2,410,250 24,103 4,776,821 (4,764,495) 36,429
NET LOSS (1,807,082) (1,807,082)
CONVERSION OF
STOCK OPTIONS 10,250 102 103 205
PRIVATE PLACE-
MENT OF STOCK 125,000 1,250 530,000 531,250
--------- ------ --------- --------- ---------
BALANCE AT
DECEMBER 31,
1998 2,545,500 $25,455 $5,306,924 $(6,571,577) $(1,239,198)
========= ====== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Pamet Systems, Inc.
Statements of Cash Flows
Year Ended December 31,
1998 1997
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(1,807,082) $(954,314)
Adjustments to reconcile netloss to net
cash used for operating activities:
Depreciation and amortization 90,372 72,472
Interest payable 4,635 --
Gain on insurance settlement -- (61,649)
Capitalized software development costs (195,665) --
Changes in operating assets and liabilities:
Accounts receivable, trade 243,031 (58,588)
Accounts receivable, factored (119,176) --
Inventory 39,557 (21,121)
Prepaid expenses and other current assets (41,827) (19,341)
Restricted cash (674) (714)
Deposit (4,190) --
Due to factor 65,980 --
Accounts payable, trade 160,537 312,498
Accounts payable related party 20,513 --
Accrued expenses 121,089 37,044
Deferred software maintenance revenue and
unearned support revenue (9,314) 22,744
------- -------
Net cash used for operating activities (1,432,214) (670,969)
INVESTING ACTIVITIES
Expenditures for property
and equipment (91,590) (129,835)
Proceeds from insurance settlement -- 108,708
------- -------
Net cash used for investing activities (91,590) (21,127)
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS - CONTINUED
PAMET SYSTEMS, INC
Year Ended December 3l,
1998 1997
<S> <C> <C>
FINANCING ACTIVITIES
Net proceeds from line of credit (vendor) 169,934 --
Proceeds from long term debt-convertible
promissory notes 750,000 --
Proceeds from related party notes 407,561 375,000
Payment of related party notes -- (355,660)
Payments on mortgage note (16,216) (14,371)
Issuance of capital stock 226,820 672,296
--------- ---------
Net cash provided by
financing activities 1,538,099 677,265
--------- ---------
NET INCREASE (DECREASE) IN CASH 14,295 (14,831)
Cash at beginning of period 40,522 55,353
CASH AT END OF PERIOD $54,817 $40,522
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION
Cash paid for interest $127,000 $74,000
========= =========
SUMMARY OF NON-CASH FINANCING ACTIVITIES
Note payable-related party converted to long
term debt-convertible promissory note 300,000 --
========= =========
Note payable-related party and accrued interest
repaid by issuance of capital stock 304,635 --
========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE>
Pamet Systems, Inc.
Notes to Financial Statements
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 March 30, 1999 was in excess of
$345,000 (unaudited). Management believes that this level of backlog and its
anticipated sales, as well as the funding described below, are adequate to
sustain operations through the end of fiscal year 1999.
However, the ultimate success of the Company is still dependent upon its
ability to secure financing adequate to meet its working capital and
product development needs and the successful development of a Microsoft
Windows NT computing platform for the Company's current applications that
can be effectively marketed to expand the Company's operations. Subsequent
to year end, two related parties have agreed to convert $600,000 worth of
promissory notes to an equity position. See Note H. In addition, the
Company has executed a signed purchase and sales agreement to sell its
facility for approximately $1,200,000, part of which will be used to repay
the mortgage note. See Note G. (In conjunction with this sale, the Company
has executed a seven year lease on the facility at approximately $175,000
per year, plus real estate taxes and expenses.) If additional funds are
required, the current Board members are willing to increase their
investment or seek additional equity financing, as needed. Certain members
of the Board have also agreed to offer the Company a revolving line of
credit up to $300,000 beginning April l, 1999 through June 1, 2000, at an
11% interest rate. One thousand (1,000) warrants will accompany each
$10,000 pledged under the line of credit, at the market price as of March
28, 1999. 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, that adequate
sources of financing will be available at all, when needed or on
commercially acceptable terms, or that the Company's product development
efforts will be successful.
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 mortgagee.
Withdrawals from the account are restricted to the payment of mortgage note
principal and 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.
Inventory: Inventory consists primarily of computer-related supplies
and is stated at the lower of cost (first-in, first-out) or market value.
Accounts receivable, factored: The Company factors part of its accounts
receivable with recourse, which means that the Company bears the risk of
uncollectible accounts over 120 days old. Accounts receivable, factored in
the accompanying balance sheet represents the portion of each account held
back by the factor. The balance will be remitted to the Company when the
respective accounts have been collected.
Due to factor: The balance represents the Company's estimated liability
for its factored accounts that will become greater than 120 days old or
uncollectible, based on historical collections.
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.
Loss per common share: In 1998 and 1997, loss per common share is
computed using the weighted average number of shares of common stock
outstanding during the period. Diluted per share computations are not
presented since the effect would be antidilutive.
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 though 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
note for these disclosures.
<PAGE>
Capitalized software development costs: Pursuant to Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed,"the Company capitalizes
certain software development costs once technological feasibility of the
related products, as defined in the statement, has been achieved. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors, including
but not limited to, anticipated future gross revenues, estimated economic
life and changes in software and hardware technology. Software development
costs incurred prior to achieving technological feasibility as well as
certain licensing and other research and development costs are charged to
research and development expense as incurred.
Capitalized software development costs are reported at the lower of
unamortized cost or net realizable value, which is periodically reviewed
based upon current and anticipated product revenue. Commencing with the
initial product release, these costs are amortized to cost of sales on the
straight-line method over the estimated life of the product, generally
three to five years. The Company has not amortized any capitalized software
costs pending initial product release, presently intended for the third
quarter of 1999.
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. 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, 1998, which is fully reserved, is net operating loss
carryforwards.
NOTE C--RELATED-PARTY TRANSACTIONS
Director Compensation: The Company paid approximately $22,000 in 1998
and $15,000 in 1997 to a stockholder and director for financial accounting
consulting services.
Accounts payable, related party represents non-interest bearing amounts
owed to employees and directors for services performed or expense
reimbursements.
In addition, during 1998 two stockholders and directors of the company
acquired convertible promissory notes with five year warrants attached. The
terms and maturity dates of the promissory notes and warrants are disclosed
in Note H-LONG TERM DEBT.
NOTE D--PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
Property and equipment at December 31, 1998 is as follows:
Balance at
Beginning Balance at
of Additions End of
Period at Cost Retirements Period
Classification ---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Land $231,283 $231,283
Building 758,728 758,728
Furniture and Fixtures 122,850 $10,477 133,327
Computer Equipment 370,512 81,113 451,625
Automobiles 24,894 24,894
--------- --------- --------- ---------
TOTALS $1,508,267 $91,590 $1,599,857
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated depreciation at December 31, 1998 is as follows:
Balance at Additions Balance at
Beginning Charged End of
of Period to Expense Retirements Period
Classification ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Building $160,089 $24,105 $184,194
Furniture and Fixtures 116,669 6,493 123,162
Computer Equipment 273,262 55,231 328,493
Automobiles 12,277 4,543 16,820
--------- --------- --------- ---------
TOTALS $562,297 $90,372 $652,669
========= ========= ========= =========
</TABLE>
<PAGE>
NOTE E-LINE OF CREDIT (VENDOR)
A line of credit facility up to $250,000 is available to the Company
from one of its vendors. The facility is restricted in that it may only be
used to purchase certain research and development services from this vendor.
Interest is to be applied at 12% per annum and the agreement expires on
June 1, 1999. At the expiration date, there is an option available for the
lender to convert the unpaid line of credit and accrued interest to stock
at $2.50 per share and receive an equal number of five year warrants to
allow the purchase of additional shares of common stock at $2.50 per share.
NOTE F-MORTGAGE NOTE PAYABLE
Mortgage note payable represents a note secured by a mortgage on the
Company's facility. The note expired on October 21, 1998 and has not been
renewed by the Bank. $5,423, including interest at 10.00%, is payable
monthly and is current at March 30, 1999. In addition, the note is subject
to several conditions, including:
o 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 stockholders received $1,500 in 1997.
o Payment of dividends is restricted, requiring approval of the
mortgagee.
o Salary increases for officers above base levels are restricted,
requiring approval of the mortgagee.
Subsequent to year end, the Company has executed a signed purchase and
sale agreement to sell its facility for approximately $1,200,000, part of
which will be used to repay the mortgage note.
NOTE G--ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses consist of the following at December 31, 1998:
<S> <C>
Accrued payroll and vacation $157,069
Accrued and withheld payroll taxes 41,927
Other 66,271
-------
$265,267
=======
</TABLE>
NOTE H-LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt represents convertible promissory notes
with five year warrants attached. The promissory notes may
be converted to common stock no more frequently than four
times per year at an amount of not less than $25,000. No
interest shall be deemed to have accrued or be payable on
any portion of a note converted prior to maturity. The
conversion price, maturity dates and the warrants available
on each note are as follows:
<S> <C>
Convertible promissory note to a related party with five
year warrants attached, which allows the noteholder to
purchase up to 120,000 shares of common stock at $2.50
per share. No warrants have been exercised at December 31,
1998. The principal amount of the note may be converted
to common stock at $1.45 per share, at the noteholder's
option as described above. No principal has been converted
to common stock at December 31, 1998. The interest rate
on the note is 11% per year and interest expense in fiscal
year 1998 was $5,063 and is included in accrued expenses
at December 31, 1998. Both the principal balance of the
note and unpaid accrued interest are due on June 1, 2001. $300,000
Convertible promissory note to a related party with five
year warrants attached which allows the noteholder to
purchase up to 30,000 shares of common stock at $2.75
per share. No warrants have been exercised at December 31,
1998. The principal amount of the note may be converted to
common stock at $2.75 per share, at the noteholder's option
as described above. No principal has been converted to
common stock at December 31, 1998. The interest rate on
the note is 11% per year and interest expense in fiscal
year 1998 was $5,063 and is included in accrued expenses
at December 31, 1998. Both the principal balance of the
note and unpaid accrued interest are due on February 28, 2001. 300,000
Convertible promissory note with five year warrants attached,
which allows the noteholder to purchase up to 20,000 shares of
common stock at $2.50 per share. No warrants have been
exercised at December 31, 1998. The principal amount of the
note may be converted to common stock at $2.50 per share, at
the noteholder's option as described above. No principal has
been converted to common stock at December 31, 1998. The
interest rate on the note is 11% per year and interest expense
in fiscal year 1998 was $271 and is included in accrued expenses
at December 31, 1998. Both the principal balance of the note and
unpaid accrued interest are due on December 13, 2000 50,000
Convertible promissory note with five year warrants attached,
which allows the noteholder to purchase up to 172,413 shares
of common stock at $1.45 per share. No warrants have been
exercised at December 31, 1998. The principal amount of the
note may be converted to common stock at $1.45 per share, at
the noteholder's option as described above. No principal has
been converted to common stock at December 31, 1998. The
interest rate on the note is 11% per year and interest expense
in fiscal year 1998 was $3,692 and is included in accrued
expenses at December 31, 1998. Both the principal balance of
the note and unpaid accrued interest are due on
November 12, 2000. 250,000
Convertible promissory note with five year warrants attached,
which allows the noteholder to purchase up to 40,000 shares of
common stock at $2.50 per share No warrants have been exercised
at December 31, 1998. The principal amount of the note may be
converted to common stock at $2.50 per share, at the
noteholder's option as described above. No principal has been
converted to common stock at December 31, 1998. The interest
rate on the note is 11% per year and interest expense in fiscal
year 1998 was $663 and is included in accrued expenses at
December 31, 1998. Both the principal balance of the note and
unpaid accrued interest are due on December 9, 2000. 100,000
Convertible promissory note with five year warrants attached,
which allows the noteholder to purchase up to 20,000 shares of
common stock at $2.50 per share. No warrants have been exercised
at December 31, 1998. The principal amount of the note may be
converted to common stock at $2.50 per share, at the
noteholder's option as described above. No principal has been
converted to common stock at December 31, 1998. The interest rate
on the note is 11% per year and interest expense in fiscal year
1998 was $362 and is included in accrued expenses at December 31,
1998. Both the principal balance of the note and unpaid accrued
interest are due on December 7, 2000. 50,000
---------
$1,050,000
=========
</TABLE>
<PAGE>
Pamet Systems, Inc.
Notes to Financial Statements (continued)
The notes are shown at face value because the value attributed to the
warrants was considered not material. Subsequent to year end noteholders
have committed to convert $100,000 of the above principal to the Company's
common stock.
<TABLE>
<CAPTION>
Annual principal maturities of long-term debt are as follows:
<S> <C>
Year ending December 31, 1999 $ --
December 31, 2000 450,000
December 31, 2001 600,000
---------
TOTAL $l,050,000
=========
</TABLE>
NOTE I--STOCKHOLDERS' EQUITY
Stock-based compensation expense under the fair value-based method of
accounting would have resulted in pro forma net loss and loss per common
share approximating the following amounts:
<TABLE>
<CAPTION>
1998 1997
As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C>
Net loss $(1,807,082) $(2,077,835) $(954,314) $(1,364,185)
========= ========= ======== =========
Loss per common share $(.71) $(.82) $(.42) $(.60)
=== === === ===
</TABLE>
The fair value for each option granted during 1998 and 1997, 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>
1998 1997
<S> <C> <C>
Expected Life 5-8 years* 5-8 years*
Risk-free interest rate 4.10%-5.93%* 5.80%-6.68%*
Expected Volatility 119% 128%
</TABLE>
*Amounts vary due to graded vesting for options granted to employees and
differences between options granted to employees and options 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, if
any.
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 the 1990 Stock Option
Plan is 400,000 shares. These options, of which a total of 119,250 had been
exercised at December 31, 1998, 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.
Stock option activity for the 1990 Stock Option Plan for the two year
period ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted Average
--------------------
Number Exercise Price Exercise Remain-
Of Options Per Share Price ing Life
---------- -------------- -------- --------
<S> <C> <C> <C> <C>
Outstanding
January 1, 1997 349,000 $.02-$5.50 $1.07 5.08 years
Exercised (58,000) $.02-$3.50 $.38
------- ---------- ----- ----------
Outstanding
December 31, 1997 291,000 $.02-$5.50 $1.21 3.49 years
Cancelled (13,000) $1.44-$3.50
Exercised (10,250) $.02 $.02
------- ---------- ----- ----------
Outstanding
December 31, 1998 267,750 $.02-$5.50 $1.20 2.55 years
======= ========== ===== ==========
Exercisable at
December 31, 1998 203,950 $.02-$5.50 $.95
======= ========== =====
Exercisable at
December 31, 1997 191,000 $.02-$5.50 $.83
======= ========== =====
Available for
Grant At
December 31, 1998 13,000
=======
Available for
Grant At
December 31, 1997 --
=======
</TABLE>
<PAGE>
Stock Option Plans: In 1998, 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 the 1998 Stock
Option Plan is 200,000 shares. These options, of which none had been
exercised at December 31, 1998, are exercisable within a ten-year period
from the date of the grant, and are generally fully exercisable when issued
to directors and exercisable 25% per year and continuing over four years
for employees and consultants. The options are not transferable 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.
Stock option activity for the 1998 Stock Option Plan for the one year
period ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
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, 1998 -- -- --
Granted to Directors 15,000* $1.37 $1.37 $1.14
Granted to Officer 50,000 $1.37 $1.37 $1.14
Granted to Employees 27,500 $1.87 $1.87 $1.56
------- ------ ----- ----- -------
Outstanding
December 31, 1998 92,500 $1.37-$1.87 $1.52 5.54 years
======= =========== ===== ==========
Exercisable at
December 31, 1998 --
=======
Available for Grant
At December 31, 1998 107,500
=======
</TABLE>
*Exercisable 33% per year.
Subsequent to December 31, 1998, options representing 36,000 shares were
granted to directors at an exercise price of $1.56.
In addition, the Company also issued stock options and warrants outside
of any formalized plan. The stock options are exercisable within a ten-year
period from the date of grant and are generally fully exercisable when
issued to directors and exercisable 25% per year and continuing over four
years for employees and consultants. The warrants are exercisable within a
five year period from the date of grant and are generally fully exercisable
when issued. The options and warrants are not transferable except by will
or domestic relations order. The option or warrant price per share is not
less than the fair market value of the shares on the date of grant.
Stock option and warrant activity for stock options and warrants issued
outside a formalized plan for the two year period ended December 31, 1998
follows:
<TABLE>
<CAPTION>
Weighted Average
----------------------------
Number of Exercise Price Exercise Fair Value Remain-
Options/Warrants Per Share Price at grant ing
Life
<S> <C> <C> <C> <C> <C>
Outstanding January
1, 1997 65,000 $.68-$.80 $.77 8.20 yrs
Granted to Directors
and officers in
consideration of
providing short-term
financing 120,000 $2.00 $2.00 $1.51
Granted to Directors 8,000 $2.75 $2.75 $2.39
Granted to Employees 230,000 $2.75-$4.25 $3.07 $3.02
Exercised (50,000) $2.00 $2.00
------- ----------- ----- -----
Outstanding December
31, 1997 373,000 $.68-$4.25 $2.10 5.94 yrs
Options granted to
Directors 10,000 $4.00 $4.00 $3.36
Options granted to
Employees 40,000 $3.25-$4.75 $4.38 $2.73
Warrants granted to
Directors 181,250 $2.50-$4.25 $2.84 $2.09-$3.57
Warrants granted to
Convertible Debt
Holders 252,413 $1.45-$2.50 $1.78 $2.09-$1.21
Options cancelled (7,500) $2.75
------- ----------- ----- -----------
Outstanding December
31, 1998 849,163 $.68-$4.75 $2.45 4.80 yrs
======= ========== ===== =========== ========
Exercisable at
December 31, 1998 306,625 $.68-$4.75 $2.60
======= ========== =====
Exercisable at
December 31, 1997 193,000 $.68-$2.75 $1.81
======= ========== =====
</TABLE>
<PAGE>
<PAGE>
Pamet Systems, Inc.
Notes to Financial Statements
NOTE J-EARNINGS PER SHARE DISCLOSURE
<TABLE>
<CAPTION>
Earnings per share disclosures for the two year period ended December
31, 1998 are as follows:
For the Year Ended December 31, 1998
------------------------------------
Weighted-
Average Per Share
Income Shares Amount
------ ------- ---------
<S> <C> <C> <C>
Basic loss per common share
Income available to common
stockholders $(1,807,082) 2,529,408 $(.71)
========= ========= ====
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------
Weighted-
Average Per Share
Income Shares Amount
------ --------- ---------
<S> <C> <C> <C>
Basic loss per common share
Income available to common
stockholders $(954,314) 2,265,321 $(.42)
======= ========= ====
</TABLE>
NOTE K--INCOME TAXES
During 1998, the Company recorded deferred tax assets for the benefit of
net operating losses in the amount of $295,000. The cumulative amount of
these assets, which is $1,232,000 at December 31, 1998 is fully reserved.
Due to the Company's history of operating losses, management has concluded
that realization of the benefit is not likely.
At December 31, 1998, the Company has federal net operating loss
carryforwards of $6,431,000 that expire beginning in the year 2004.
Additionally, the Company has Massachusetts state net operating losses to
carryforward which expire as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1999 $83,000
2000 514,000
2001 --
2002 980,000
2003 1,739,000
---------
$3,316,000
=========
</TABLE>
NOTE L--SIGNIFICANT CUSTOMERS
There were no sales to individual customers that were greater than 10%
of total revenues for the years ended December 31, 1998 and 1997.
NOTE M--ECONOMIC DEPENDENCY
The Company obtained approximately 26% of its merchandise from one
source in 1998. Management believes that if this supplier ceased providing
software, the Company could find alternative suppliers, although there
would be a short interruption of business as the new software was
integrated with the company's products. An additional 19% of its
merchandise was obtained from a second supplier. Management believes that
if this supplier ceased providing merchandise, the Company could find
alternative suppliers without serious interruption of business.
NOTE N--PROFIT SHARING PLAN
The Company has a qualified contributory profit sharing plan [401(k)
Plan]. The Plan covers all eligible employees meeting certain age and service
requirements. Employee contributions are voluntary, based on specific
percentages of compensation. The Plan also provides for contributions by
the Company in any amount approved by the Board of Directors. During 1998
and 1997, the Board elected to make contributions equal to 15% of employee
contributions. The employees' and employer's contributions may not exceed
maximum amounts established by the Internal Revenue Code. Total Company
contributions to the plan were $8,635 during 1998 and $4,914 during 1997.
NOTE O-RESEARCH AND DEVELOPMENT
Research and development costs in the current year represent costs
associated with developing a Microsoft Windows NT computing platform for
the Company's current computer applications as well as developing a mobile
product interface to the state information system.
NOTE P-SUBSEQUENT EVENTS
On January 21, 1999, the Company issued a convertible promissory note
for $100,000 with five year warrants attached which allows the noteholder to
purchase up to 40,000 shares of common stock at $2.50 per share. The
principal amount of the note may be converted to common stock at $2.50 per
share, at the noteholder's option. The interest rate on the note is 11% per
year. Both the principal balance of the note and unpaid accrued interest
are due on January 21, 2001.
In addition, on February 8, 1999, the Company issued another convertible
promissory note for $250,000 with five year warrants attached which allows
the noteholder to purchase up to 100,000 shares of common stock at $2.50
per share. The principal amount of the note may be converted to common
stock at $2.50 per share, at the noteholder's option. The interest rate on
the note is 11% per year. Both the principal balance of the note and the
unpaid accrued interest are due on February 7, 2001.
<PAGE>
NOTE Q--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Summarized quarterly financial data for 1998 and 1997 is as follows:
Quarter Ended
-------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $604,163 $897,304 $597,429 $638,090
Gross Profit 310,032 474,035 376,954 419,342
Operating Loss (417,412) (424,087) (234,688) (566,740)
Net Loss (441,061) (460,300) (283,146) (622,575)
Loss per share $(.17) $(.18) $(.11) $(.24)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $607,506 $432,105 $506,455 $531,830
Gross Profit 349,290 182,168 281,822 221,323
Operating Income (loss) 30,270 (213,630) (158,448) (605,128)
Net Income (loss) 12,228 (191,174) (156,556) (618,812)
Income (loss) per share $.01 $(.08) $(.07) $(.28)
</TABLE>
<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, 1998, and the related statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended
December 31, 1998. 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, 1998, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Carlin, Charron & Rosen LLP
March 30, 1999
Pamet Systems, Inc.
Market for the Company's Common Equity
and Related Stockholder Matters
Shares of the Company's Common Stock are available for trading on
the Nasdaq Stock Market(R) over-the-counter exchange. 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 quoted on the OTC Bulletin Board.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31 COMMON STOCK
High Low
<S> <C> <C>
1997
First Quarter 3.38 1.88
Second Quarter 5.38 1.62
Third Quarter 4.87 2.87
Fourth Quarter 5.50 3.12
1998
First Quarter 4.75 3.62
Second Quarter 4.20 2.75
Third Quarter 3.62 2.25
Fourth Quarter 2.50 1.37
</TABLE>
The Company had 76 registered shareholders of Common Stock on
April 6, 1999. The Company 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 Company and that cash dividends will not be
paid to stockholders.
<PAGE>
[Inside back cover]
Pamet Systems, Inc.
Corporate Information
Board of Directors
Dr. Joel B. Searcy
Chairman of the Board
David T. McKay
President, Chief Executive Officer, and Director
Richard C. Becker
Vice President
Treasurer, Director, and Assistant Clerk
Arthur V. Josephson, Jr.
Clerk and Director
Accounting Consultant
Dr. Stanley J. Robboy
Director
Professor of Pathology, Obstetrics, and Gynecology and Director of
Gynecologic Pathology, Duke University Medical Center
Bruce J. Rogow
Director
Executive Managing Principal, Rogow Opportunity Capital
Dr. Davinder Sethi
Director
Independent Advisor
Officers
Dr. Joel B. Searcy
Chairman of the Board
David T. McKay
President and Chief Executive Officer
Richard C. Becker
Vice President
Treasurer, Director, and Assistant Clerk
Corporation Information
For a copy of the Company's Form 10-KSB for fiscal 1998 or other
information about the Company contact,
Investor Relations
Pamet Systems, Inc.
1000 Main Street
Acton, MA 01720
(978) 263-2060
Auditors
Carlin, Charron & Rosen LLP
446 Main Street
Worcester, MA 01608
Transfer Agent
Continental Stock Transfer & Trust Company
2 Broadway
New York, NY 10004
Annual Meeting
The annual meeting of Pamet Systems, Inc. will be held on May 28, 1999
at 10:00 am at Pamet Systems, 1000 Main Street, Acton, Massachusetts
Pamet Systems, Inc. Offices
Headquarters
1000 Main Street
Acton, MA 01720
(978) 263-2060
101 Southhall Lane
Suite 400
Maitland, FL 32751
(407) 667-4863
Legal Counsel
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, NY 10022
Stock Listing
Pamet Systems, Inc. stock is traded on the NASDAQ OTC (Symbol: PAMT)
[Sideways caption: Designed by Curran & Connors, Inc. / www.curran-
connors.com]
<PAGE>
[Back cover]
Pamet Systems, Inc.
1000 Main Street
Acton, MA 01720
(978) 263-2060
FAX: (978) 263-4158
