[Front cover]
Pamet Systems, Inc.
1999 Annual Report
[Image: Pamet Systems logo]
[Inside front cover]
Description of Business
Pamet Systems (the "Company") is a leading provider of information technology
application and services for public safety agencies. The Company designs,
develops, installs, and supports computer software and data communications
systems for agencies primarily serving municipalities with populations under
400,000. The Company also serves campus, public housing, and transit
authority police agencies. Pamet Systems' innovative applications automate
the acquisition, storage, processing, retrieval, and communication of
information for these agencies.
Pamet Systems' principal products comprise an integrated suite of
information management and communications systems, the foundation of which are
PoliceServer NT, CADServer NT and FireServer NT. PoliceServer NT is an
integrated records management system, which stores and manages information
about arrests, incidents, accidents, warrants and other police operational
data. CADServer NT is a state-of-the-art dispatching system that captures
information about incidents and available resources, and manages the rapid and
secure dispatch of police and fire agency personnel. FireServer NT is an
information management system that provides fire departments with data on
structures, fire suppression plans, and hazardous materials management. A
number of companion products increase the core applications to include digital
imaging, mobile data computing system, mapping, ad hoc reporting, and the
recently introduced Investigator's Tool Kit.
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.
PoliceServer NT, FireServer NT, CADServer NT, are trademarks of the Company.
This Annual Report to Stockholders contains statements that 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: market
expectation for the NT operating environment; customer acceptance of the
Company's NT products; building enhanced capabilities in sales, marketing,
client support services and product distribution channels; growth potential in
the year 2000; improved profitability; the acceptance of the Investigator's
Toolkit; the positive impact of the Utica, NY NLECTC project; ability to
integrate Imaging into the Mobile product; law enforcement trends regarding
E911; adequacy of NT security to prevent tampering; current and ongoing
compatibility with federal standards; adequacy of funding and corporate
infrastructure to complete the NT development and support operations and
anticipated growth; economic and competitive factors affecting market growth
and the Company's competitive position within the market; 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, sell and support the NT product and associated systems; changes in the
marketplace including variations in the demand for public safety software; and
changes in the economic and competitive environment. These factors and other
information contained in this Form 10-KSB could cause such views, assumptions
and factors and the Company's results of operations to be materially
different. We undertake no obligation to update publicly and forward-looking
statements for any reason even if new information becomes available or other
events occur in the future.
To Our Stockholders:
Nineteen ninety-nine was the third year of our three-year reinvestment
program in Pamet Systems. We successfully completed the first phase of
Pamet's rebirth and repositioning. We delivered and successfully installed our
new suite of Microsoft NT platform products, which now set the standard for
integration and functionality in the public safety market.
Three years ago, CEO and President David T. McKay and his team committed to
focusing Pamet on developing a leading product line and strengthening its
customer support. In the fall of 1999, those commitments were delivered within
original cost estimates. Market response to our true 32-bit NT core
applications, PoliceServer NT, FireServer NT and CADServer NT, has been
outstanding. Equally important in a reputation critical industry, Pamet has
enhanced its reputation for outstanding customer support.
Our new product suite, which is already installed in five states, provides
integration of dispatch, records management, advanced reporting, imaging,
mapping (global positioning), and wireless communicationsthat public safety
clients are demanding. While we will continue to enhance and adapt our suite,
our attention will now shift to enhancing our capabilities in sales,
marketing, client support services and channel leverage. Thus, 1999 concluded
the beginning phase of repositioning the Company for growth.
During the past year, investors added $1,050,000 in new capital to the equity
side of the balance sheet. Early in 2000, our noteholders converted
$1,400,000 of their notes to equity and $170,000 warrants were exercised.
At a speed that could not have been forecast even three years ago, the market
will today only accept a real NT based solution. This is forcing a
consolidation among the numerous competitors who have sought to survive by
bolting a Windows front end and NT base on their non-NT architected legacy
applications. Unfortunately for them, such an effort is not a true 32-Bit NT
core system, as ours is, and the market is unimpressed. Consequently, many of
our former competitors are fading away. Some have been unable to raise the
significant funding needed to reengineer their companies or their products
acording to market dictates. Others are being challenged by the diversity of
platforms they must support and migrate.
We have a consistent installed base of over 130 existing VMS clients. We are
offering services to migrate those clients to our new NT product suite and
protect their existing investments. Those migrations are already under way.
The market is also moving toward a "shrink wrapped" application solution. Many
of our competitors must customize each installation to meet client
requirements. Our products have been designed so that the customer has
numerous choices as to which options to chose during installation. Thus, our
new application suite is proving to be very adaptable and is moving us closer
to the point where we may be able to offer customers "Public Safety
Applications in a Box".
The addition of our Investigators ToolKit product has helped us win such
important customers as the Law Enforcement Network Demonstration Project in
Utica, NY. The project, funded by the U.S. Department of Justice and managed
by the National Law Enforcement Corrections Technology Center, will result in
a "Best Practices" paper, which is expected to describe the installation as a
model of current law enforcement technology for small to mid-sized
departments. Furthermore, we have won more than two thirds of the competitive
situations we have bid since the introduction of our new product suite.
The shape of our business is also changing. By design, we are selling less
hardware, which has raised gross margins above 70% and lowered our working
capital requirements. The value added pricing of our NT product suite and
maintenance services should enhance our profitability as we grow.
Our challenge will now be to expand our business base while maintaining our
excellent reputation for customer service. We have already added sales,
marketing and support resources. We will now turn the intensity we have shown
in product development to marketing, sales, alternative product distribution
channels, partnering, and support activities.
I wish to thank everyone, including our stockholders, financial and business
partners, Board of Directors and employees for their continued support and
confidence during 1999. The investors demonstrated their confidence and the
Pamet team has responded.
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]
Bruce J. Rogow
Chairman
781-631-2783
BruceRogow@pamet.net
Pamet Systems, Inc.
1000 Main Street
Acton, MA 01720
(978) 263-2060
FAX: (978) 263-4158
The Pieces Are In Place
We Have the Whole Picture
Systems integration has become the watchword in the public safety software
market. Until recently, many agencies were willing to have their records,
mobile communications and computer aided dispatch all as independent
products. The market has come to expect that all these
[Graphic depicting Pamet's Public Safety Software Suite]
products and more should be tightly integrated, with the philosophy that
data should be entered only once, and then available anywhere throughout
the system.
Public safety personnel understand that each of their information applications
is a piece of a total picture. The pieces must fit together seamlessly and
harmoniously. Reliability is key. As the systems become more complex, system
security has also become paramount. Finally, the law enforcement agencies want
technology that will not become dated immediately. They want systems that can
be continually updated and added to, so their capital investment is not only
protected, but enhanced.
Over the past 30 months, Pamet has migrated from VMS by completely redesigning
its product suite for the Microsoft NT platform. Pamet Systems now has all
the pieces of the puzzle in place, with a full suite of integrated,
feature-rich software on a true 32-bit NT platform. This places Pamet in an
excellent competitive position going into the new millennium.
New Products, Services
In addition to redesigning and reengineering all of Pamet's core products, we
have now launched a new product, Investigator's ToolKit. This product gives
the public safety officers the ability to record their crime scene
investigations via laptop computers. Investigator's ToolKit simplifies the
considerable task officers and investigators face when filing state and
federal crime reports, completing complex search and arrest warrant requests,
and logging and tracking evidence.
In addition, Pamet Systems will soon launch a broader range of service
offerings. Besides the traditional product support for our applications,
Pamet will begin offering a menu of system support services. These services
are intended to add value for some market segments , while generating
additional Customer Support revenues.
Customer Feedback
Pamet Systems' customers play an ongoing, vital role in tightly joining the
pieces of our software suite. Through dynamic feedback loops, our customers
continually provide suggestions to improve both our core NT products and all
the peripheral applications. Pamet's corporate philosophy is to work closely
with new customers, early adopters and our existing customers to continually
evaluate the design, implementation, utility and functionality of our
products. Needs change. Demands placed upon our customers change. Our Police
and Fire Users Groups are concerned and active and their recommendations about
product features and priorities continue to be invaluable.
A New Phase of Corporate Development
Many regional and national vendors have been slow to develop a native mode NT
Public Safety application suite. The impediment is understandable. It is
difficult to do technically, and if done improperly, can be financially
exorbitant. This has created a window of opportunity for Pamet Systems.
Early indications show our new product suite has broad appeal. It is
noteworthy that Pamet's suite has fared well in competition. See the inset
item about our Utica, N.Y. contract, as an example of our ability to win
business when rigorously compared with other leading vendors.
Given the strength of our new NT-based product suite and the opportunities
open to us after almost three years of intense focus on product development,
Pamet Systems is now focusing on exploring innovative marketing programs,
product packaging alternatives, sales approaches, internet based support,
partnerships, distribution alternatives, and new markets. The transition from
an engineering and product development focus of the past few years has begun
and Pamet is now able to concentrate on customer-focused marketing and sales.
Central N.Y. Law Enforcement Demonstration Project
Pamet Systems won a major contract to install PoliceServer NT, CADServer NT,
Mobile Access, and Investigator's Tool Kit software in Utica, NY.
The contract was an important win for Pamet. It is part of a Network
Demonstration Project, which the U.S. Department of Justice is funding and the
National Law Enforcement Corrections Technology Center (NLECTC) is managing.
Once the Pamet system has been successfully
installed, NLECTC will issue a "Best Practices" paper, which will describe the
installation as a model of current law enforcement technology for small to
mid-sized departments.
Pamet Systems was recommended by the Utica Police Department after it
conducted an exhaustive two-year review of software systems offered by vendors
throughout the United States. "Windows NT 32 bit technology, a GUI interface,
simplicity of use, and no duplicate entry of information were features that
were high on our list," according to Officer Anthony Martino. "Pamet Systems
had them all. Tasks were logically organized and they offered a full suite of
products."
The success of this high profile demonstration project should have a
significant positive impact Pamet's growth.
Installation of the system will be completed by midsummer.
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 NT, FireServer NT, and CADServer NT. The Company
also offers several companion products including Imaging, Mobile, Advanced
Reporting, JailServer NT and Mapping. An additional product, the
"Investigator's Tool Kit" is being brought to market in early 2000. 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, 1999 (the
1999 period) decreased 11.8% to $2,413,534 from $2,736,986 for the 12 month
period ending December 31, 1998 (the 1998 period). With the release of the
Company's redesigned NT product line in the second half of the 1999 period, the
revenues began to shift back to sales of the core products: PoliceServer NT,
CADServer NT, and FireServer NT. These core products have been completely
rebuilt using modern design tools and databases and the entire suite utilizes
the Windows NT operating system. During the previous two years, revenue from
sales to new customers of the core VMS-based PoliceServer and FireServer
products had been decreasing as potential customers waited for or selected
systems that operated on the NT operating system. The decreased system
revenue levels during this period were partially replaced by increased sales
to existing customers of companion products such as Mobile and Imaging. The
shift back to the core products operating in the NT environment that occurred
during the latter half of the 1999 period supports the decisions that were
made in 1997 to redesign and rebuild the product.
The Company began rebuilding its products on the NT platform late in 1997 at
considerable expense. The Company spent over $1.8M during the 1999 period and
over $3.5M during the past three years on research and development. This
spending in the 1999 period includes $1.2M on outside resources and $.6M of
dedicated internal personnel. Although 89.9% of this spending in the 1999
period was on the development of the NT-based suite of products, the Company
also purchased the software product rights for the Mapping product during the
last quarter of the 1999 period. The acquisition of this product enhances the
suite of products now available from the Company. The Mapping product had
previously been integrated with PoliceServer and FireServer and had been
successfully installed in a number of customer sites.
The Company continues to believe that significant market opportunities exist
for its suite of NT-based products based on the following factors. Major
federal grant programs continue to be announced that will infuse up to $1.0B
over the next four years into the public safety market. In addition, the
continuing growth in the number 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
support the belief that the market for the Company's products will continue to
grow. The Company has also seen increased emphasis on the coordination of
public safety systems between neighboring town, 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. Despite what the
Company believes are these growth opportunities, the Company remains hampered
by the fact that its primary market is the government sector, which is
characterized by long lead times and political influence in the decision
making process. As a consequence, the Company is pursuing an analysis of
complementary markets and adaptations for its products.
The primary challenge that the Company is focusing on during the year 2000
fiscal period is to capitalize on the design efforts that have resulted in a
complete suite of NT-based products. To accomplish this, the Company is
focusing its efforts on the sales and marketing of its new products. To
support these efforts, the Company added a Vice President of Sales during the
second quarter of 1999 and a Vice President of Marketing at the start of 2000.
Results of Operations
Year Ended December 31, 1999 vs. Year Ended December 31, 1998.
The Company's net sales decreased 11.8% or $323,452 to $2,413,534 for the 1999
period from $2,736,986 in the 1998 period. Although total revenues decreased
during the 1999 period, the contribution to total Company revenues from the
sale of the core products increased for the first time in the past two years.
The production release of the NT based product early in the second half of the
1999 period resulted in significant revenues for the Company during the third
and fourth quarters of the 1999. The new products have been installed during
the 1999 period in five communities representing eight different agencies in
three states, compared to two installations of the Beta version of the product
in the 1998 period. These new installations in Tennessee, Connecticut and
Massachusetts with PoliceServer NT and CADServer NT as the core system in
conjunction with additional revenues from the Beta installations resulted in
revenues of $751,897 for the 1999 period that were associated with the
Company's NT products compared to $92,275 for the 1998 period.
Revenues for the Mobile product decreased $310,335 or 25.3% to $917,833 for
the 1999 period from $1,228,168 for the 1998 period. Revenues from the
Imaging product decreased 53.9% or $116,313 to $99,483 for the 1999 period
from $215,796 for the 1998 period. The decrease in the Mobile and Imaging
product sales can be attributed to existing customers refocusing their
budgeted capital spending on upgrading their core systems to the Company's new
suite of NT applications.
The Company has continued to see increased revenues from support and update
service fees resulting from increases in the installed base and renewal rates
of almost 100%. Support revenues increased $149,227 or 26.4% to $713,496 for
the 1999 period from $564,269 for the 1998 period. These service revenues
represented 29.6 % of the Company's total revenues in the 1999 period versus
20.6% in the 1998 period. The contribution of support will increase in the
future periods as new customers, as well as those existing customers that
migrate to the NT product, will be charged higher support fees. Migrating
customers, who had previously paid 14% of the original software purchase
price, will begin paying 19% of the current list price for the new products at
the time of conversion.
Cost of sales decreased $377,314 or 32.6% to $779,309 for the 1999 period from
$1,156,623 for the 1998 period reflecting reduced sales and the improved
margins on many of the Company's products. The Company experienced an
improvement in gross margin from 57.7% in the 1998 period to 67.7% in the 1999
period. Substantial increases in margin were attained in several product
categories including new systems and Mobile. The gains in the new systems
margin can be attributed to the trend of customers to provide their own system
hardware, which is less profitable than the software component of sales. The
Mobile margins increased as a result of implementing more favorable pricing
strategies and increased teaming with state bid list contractors who provided
the hardware to the customer.
Software support and update service revenues delivered traditionally high
margins although they decreased from 91.8% in the 1998 period to 86.2% in the
1999 period. This decrease can be attributed to the increase in Mobile
installations where support is purchased from Cerulean Technology, Inc. rather
than being performed by Pamet employees.
The Company's operating expenses increased $979,587 or 30.4% to $4,202,877 for
the 1999 period from $3,223,290 for the 1998 period. The Company's commitment
to bringing the NT product successfully to market in 1999 generated
significant increases in personnel costs and research and development
spending. Of the increases, $601,799 or 61.4% of the increase is associated
with research and development spending which can be attributed almost
exclusively to NT product development. In addition, over $659,000 of
personnel costs are directly related to internal resources devoted to the NT
product development and contractors hired exclusively for the development
effort. Also, $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. No development costs were capitalized during
the 1999 period. The Company continued to use outside resources and employees
hired on short-term contracts in the design, development, and testing of these
projects creating minimal impact on the long-term financial commitments of the
Company for research and development. NT product development will continue
throughout 2000 until all modules and functionality of PoliceServer and
FireServer including Computer-Aided Dispatch (CAD) have been ported to the NT
platform, consistent with market demands. During the 1998 and 1999 periods,
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 29.4% or $457,908 to $2,018,065 for the 1999 period
from $1,560,157 for the 1998 period. The major reasons for the increase in
personnel spending were the hiring of a Vice President of Sales, Senior
Database Engineer, and a Product Development Engineer for the new
"Investigator's Toolkit"; full year salaries in 1999 for the Customer Support
Manager and Northeast salesperson; and the addition of resources on a
short-term basis to support the NT development. Related personnel costs
including employer FICA and Medicare costs, health insurance, employment
agency fees, and commissions also increased significantly as a result of the
new hires. The increased headcount supported the product development effort
in 1999 and positions the company to move to a sales and marketing focus in
2000. 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. The Company also instituted an employee incentive program late in
1997 that is awarded based on the achievement of Company goals set by the
Board of Directors. The amount of these incentive awards has increased
significantly over the past two years.
Rent, utilities and telephone increased 3.5% or $4,930 to $144,971 for the
1999 period from $140,041 for the 1998 period. Increased rent expense
resulting from the sale and leaseback of the Company headquarters building in
August 1999 was offset by reducing the size of the Southeast regional office
in Maitland, FL as resources in the Southeast region were reduced through
attrition. In addition, telephone costs decreased significantly based on the
reduction in lines in the Southeast regional office and reduced long distance
telephone rates.
Travel and entertainment expenses decreased $8,811 or 5.6% to $148,992 for the
1999 period from $157,803 for the 1998 period due to more favorable airline
fares on frequently traveled routes to the Southeast, reduced attendance at
trade shows prior to the production release of the NT products, and a lack of
grant seminars in the 1999 period. Partially offsetting these decreases in
travel expenses were increased rental car and employee mileage costs resulting
from expanding Northeast sales initiatives outside Massachusetts and the
installation of two NT based systems in Connecticut.
Spending on professional fees decreased $135,693 or 45.4% to $162,986 for the
1999 period from $298,679 for the 1998 period. Consulting fees contributed
$123,368 or 90.9% of the decrease being reduced from $135,970 in the 1998
period to $12,602 in the 1999 period. The most significant decreases in
consulting expenditures can be attributed to completion of several projects
including the update of VMS product documentation, the use of a consultant
hired to advise the Company on its capital raising initiatives, and the
installation of an upgraded financial package. The 1998 documentation effort
supported ongoing product quality and customer satisfaction projects relating
to the VMS product. These projects were undertaken to ensure that the VMS
product was at a steady state as the focus of the Company's resources moved to
the NT product and to ease the transition from the VMS product to the NT
product for current customers. Currently the Company has an extensive list of
users desiring to migrate to the NT-based product as soon as possible. Legal
fees decreased 20.0% or $24,494 to $97,812 for the 1999 period from $122,306
for the 1998 as a result of a decrease in legal services required in support
of the Company's debt and equity fundraising activities. Accounting fees
increased $12,169 or 30.0% due to increased audit and accounting fees.
Depreciation expense increased 60.4% or $54,597 to $144,969 for the 1999
period from $90,372 for the 1998 period reflecting the first full year of
amortization on the capitalized PoliceServer NT development expenditures.
This increase was partially offset by the decrease in depreciation resulting
from the sale of the headquarters building in August 1999.
Other operating expenses increased 1.3% or $4,857 to $372,127 for the 1999
period from $367,270 for the 1998 period. Significant decreases in spending
on trade shows, COPSMore grant seminars and office supplies and equipment were
offset by increases in internet access costs, an increased reserve for
uncollectible accounts, officer and directors insurance, and tax penalties.
Net interest expense increased to $267,818 for the 1999 period compared to the
net interest expense of $164,155 for the 1998 period. This increase reflects
accrued interest costs on the convertible promissory notes issued to outside
investors as part of the Company's capital raising program. It should be
noted that this interest would not be payable if the investors decide to
convert their notes to equity. Subsequent to year-end 1999, the Company had
commitments from investors to convert $800,000 of the outstanding notes. This
$800,000 represents nearly 50% of the outstanding debt.
The loss for the 1999 period was $(2,836,470) or $(1.00) per share compared to
a loss of $(1,807,082) or $(.71) per share for the 1998 period.
Liquidity and Capital Resources
The Company's working capital was a deficit of $(1,501,900) at December 31,
1999 compared to $(1,360,973) at December 31, 1998 due to the current level of
research and development spending. During the 1999 period the corporate
headquarters building in Acton Massachusetts was sold and a seven-year triple
net lease agreement was signed by the Company for the continued use of the
facility.
The capital raising program initiated during the 1998 period continued during
the 1999 period. During the 1998 period, the Company secured $450,000 of
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 CADServer NT development
program. During the 1999 period, the Company secured an additional $835,000
of new long-term convertible debt and converted $600,000 of long-term
convertible debt secured in 1998 to equity. In addition, the Company
renegotiated the $250,000 vendor line of credit rolling it into a $350,000
long-term convertible note. In general, the outstanding convertible debt
secured in the 1998 and 1999 periods 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. In addition to the debt financing
received in the 1999 period, the Company secured an additional $650,000 in
equity financing in the 1999 period and an investor purchased the warrants
related to his long-term convertible note generating an additional $80,000.
The company also has a line of credit with four Directors for up to $300,000
in additional short-term financing. At the end of the 1999 period, the
outstanding balance on the line of credit with Directors was $175,000.
Subsequent to year end, the Company received commitments from five noteholders
to convert $800,000 of long-term convertible notes to equity, another investor
purchased the warrants associated with his note generating another $90,000,
and two investors purchased a total of $350,000 of common stock
Cash decreased to $40,207 at December 31, 1999 from $54,817 at December 31,
1998. Accounts receivable increased to $672,997 at December 31, 1999 from
$537,405 at December 31, 1998 due to the increase in sales during the fourth
quarter of 1999 over the same period in 1998. 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
combined with sales of the Company's NT 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. Failure to acquire the necessary financing could have a
material adverse effect on the Company. Backlog at March 24, 2000 was
approximately $710,000. 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, 1999, the Company had accumulated approximately $9,086,000
of federal net operating loss carryforwards that expire beginning in the year
2005. In addition, the Company has state net operating losses to carryforward
of $5,887,000 which expire between the years 2000 and 2004. Under the
Internal Revenue Code of 1986, as amended, the rate at which a corporation may
utilize its net operating losses to offsets 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 Recap
The Company had no major problems reported from any of its customers at the
beginning of year 2000. Other than some minor list orientation issues, the
application functioned to specification and handled the transition from 1999
to the year 2000. Internally no problems were experienced with any of the
administrative systems that the Company depends on for its operations.
Inflation
Inflation has not had a significant impact on the Company's operations to
date.
Pamet Systems, Inc.
BALANCE SHEET
PAMET SYSTEMS, INC.
December 31
1999
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ASSETS
CURRENT ASSETS
Cash $40,207
Accounts receivable, trade, net of allowance for
doubtful accounts of $110,000 and factored
receivables of $268,351 619,066
Accounts receivable, factored 53,931
Inventory, net of reserve of $15,000 11,745
Prepaid expenses and other current assets 94,243
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TOTAL CURRENT ASSETS 819,192
PROPERTY AND EQUIPMENT, NET 110,590
DEPOSITS 84,190
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET 130,442
-------
TOTAL ASSETS $1,144,414
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt 450,000
Notes payable to related parties 175,000
Due to factor 57,496
Accounts payable, trade 688,292
Accounts payable, related parties 32,241
Current portion of accrued interest payable
on long-term debt 54,894
Current portion of deferred gain on sale of land
and building 42,614
Accrued expenses 436,625
Deferred software maintenance revenue and unearned
support revenue 383,930
-------
TOTAL CURRENT LIABILITIES 2,321,092
ACCRUED INTEREST PAYABLE on long-term debt, net of current
portion 86,511
DEFERRED GAIN on sale of land and building, net of current
portion 238,502
LONG-TERM DEBT, net of current portion 1,185,000
---------
TOTAL LIABILITIES 3,831,105
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued --
Common stock, $.01 par value, 7,500,000 shares
authorized, 3,285,238 shares issued and outstanding 32,852
Additional paid-in capital 6,688,504
Accumulated deficit (9,408,047)
---------
TOTAL STOCKHOLDERS' DEFICIT (2,686,691)
---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,144,414
=========
The accompanying notes are an integral part of these financial statements
STATEMENTS OF OPERATIONS
PAMET SYSTEMS, INC.
Year Ended December 31,
1999 1998
--------- ---------
Net hardware and software sales $1,700,039 $2,172,716
Support revenues 713,495 564,270
--------- ---------
TOTAL REVENUES 2,413,534 2,736,986
Cost of sales 779,309 1,156,623
--------- ---------
GROSS PROFIT 1,634,225 1,580,363
--------- ---------
Operating expenses
Personnel costs 2,018,065 1,560,157
Rent, utilities and telephone 144,971 140,041
Travel and entertainment 148,992 157,803
Professional fees 162,986 298,679
Depreciation and amortization 144,969 90,372
Research and development 1,210,767 608,968
Other operating expenses 372,127 367,270
--------- ---------
TOTAL OPERATING EXPENSES 4,202,877 3,223,290
--------- ---------
Loss from operations (2,568,652) (1,642,927)
Interest expense, net (267,818) (164,155)
--------- ---------
NET LOSS $(2,836,470) $(1,807,082)
========= =========
Loss per common share $(1.00) $(.71)
==== ====
The accompanying notes are an integral part of these financial statements
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PAMET SYSTEMS, INC.
Common Stock Additional Total
------------ Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity(Deficit)
--------- ------ ----------- ----------- ---------------
BALANCE AT
JANUARY 1, 1998 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)
NET LOSS (2,836,470) (2,836,470)
CONVERSION OF
STOCK OPTIONS 11,750 117 8,860 -- 8,977
CONVERSION OF
PROMISSORY
NOTES TO STOCK 315,988 3,160 596,840 -- 600,000
CONVERSION OF
WARRANTS TO STOCK 87,000 870 129,130 -- 130,000
PRIVATE PLACE-
MENT OF STOCK 325,000 3,250 646,750 -- 650,000
------- ----- ------- ------- -------
BALANCE AT
DECEMBER 31,
1999 3,285,238 $32,852 $6,688,504 $(9,408,047) $(2,686,691)
========= ====== ========= ========= =========
The accompanying notes are an integral part of these financial statements
STATEMENTS OF CASH FLOWS
PAMET SYSTEMS, INC.
Year Ended December 31,
1999 1998
--------- ---------
OPERATING ACTIVITIES
Net loss $(2,836,470) $(1,807,082)
Adjustments to reconcile net loss to net
cash used for operating activities:
Deferred gain on sale of land and building (17,184) --
Depreciation and amortization 144,969 90,372
Interest payable -- 4,635
Provision for losses on accounts receivable,
trade 49,566 --
Long-term debt incurred for research and
development 75,000 --
Line of credit and accounts payable, trade-
vendor incurred for research and development
subsequently converted to long-term debt 180,066 169,934
Capitalized software development costs -- (195,665)
Changes in operating assets and liabilities:
Accounts receivable, trade (250,403) 243,031
Accounts receivable, factored 65,245 (119,176)
Inventory 38,509 39,557
Prepaid expenses and other current assets (12,822) (41,827)
Restricted cash 28,534 (674)
Deposits (80,000) (4,190)
Due to factor (8,484) 65,980
Accounts payable, trade (99,472) 160,537
Accounts payable, related parties 11,728 20,513
Accrued expenses 186,472 105,975
Accrued interest payable on long-term debt 126,291 15,114
Deferred software maintenance revenue and
unearned support revenue 84,459 (9,314)
------ -----
Net cash used for operating activities $(2,313,996) $(1,262,280)
--------- ---------
INVESTING ACTIVITIES
Expenditures for property
and equipment (33,914) (91,590)
Proceeds from sale of land and building 1,089,066 --
--------- ------
Net cash provided by/(used for) investing
activities 1,055,152 (91,590)
========= ======
(continued)
STATEMENTS OF CASH FLOWS - CONTINUED
PAMET SYSTEMS, INC.
Year Ended December 3l,
1999 1998
--------- --------
FINANCING ACTIVITIES
Proceeds from long-term debt-convertible
promissory notes 760,000 450,000
Proceeds from related party notes 250,000 707,561
Payment of related party notes (25,000) --
Payments on mortgage note (479,743) (16,216)
Issuance of capital stock 738,977 226,820
------- -------
Net cash provided by financing activities 1,244,234 1,368,165
--------- ---------
NET INCREASE (DECREASE) IN CASH (14,610) 14,295
Cash at beginning of period 54,817 40,522
------ ------
CASH AT END OF PERIOD $40,207 $54,817
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION
Cash paid for interest $123,000 $127,000
======= =======
SUMMARY OF NON-CASH FINANCING ACTIVITIES
Note payable-related party converted to long-term
debt-convertible promissory note -- 600,000
====== =======
Research and development costs financed through line
of credit and accounts payable, trade-vendor 180,066 169,934
======= =======
Note payable-related party and accrued interest
repaid by issuance of capital stock 50,000 304,635
====== =======
Conversion of related party long-term debt-convertible
promissory notes to capital stock 600,000 --
======= =======
Line of credit and accounts payable, trade-vendor con-
verted to long-term debt-convertible promissory note 350,000 --
======= =======
Deferred gain as a result of the sale and leaseback
transaction 298,299 --
======= =======
Research and development costs financed by long-
term debt-convertible promissory note 75,000 --
====== =====
The accompanying notes are an integral part of these financial statements
NOTES TO FINANCIAL STATEMENTS
PAMET SYSTEMS, INC.
NOTE A--NATURE OF OPERATIONS
Pamet Systems, Inc. (the Company), a Massachusetts corporation, was formed in
November 1987 to engage in the business of designing, developing, installing
and servicing computer software systems for the municipal market throughout
the 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 backlog at March 24, 2000 was approximately $710,000
(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 2000.
However, the ultimate success of the Company is still dependent upon its
ability to secure financing adequate to meet its working capital and ongoing
product development needs. In addition, in order for the Company's operations
to be maintained and/or expanded, the Company will need to successfully finish
the development of its Microsoft Windows NT computing platform and effectively
market these newly developed software applications. Subsequent to year end,
the Company had a private placement in which one investor purchased 116,667
shares of the Company's common stock at a price of $3.00 per share. In
addition, a convertible promissory noteholder exercised 40,000 warrants at
$2.25 per share. Also, five convertible promissory noteholders have agreed to
convert $800,000 worth of promissory notes to an equity position. If
additional funds are required beyond the related party credit facility that is
available as discussed in Note C, the current Board members are willing to
increase their investment or seek additional equity financing, as needed.
Management believes the Company's current sources of liquidity and funding are
adequate to sustain operations. Management is also seeking to enhance the
Company's 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 and marketing efforts will be
successful.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
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.
Reclassifications: Certain reclassifications have been made to the 1998
financial statements to conform with the 1999 financial statement
presentation. These reclassifications had no effect on net loss for 1998 as
previously reported.
(continued)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Deferred gain on sale of land and building: The balance represents a deferred
gain on the sale of real estate, accounted for as a sale-leaseback
transaction. The gain is being amortized and shows as a reduction to rent
expense over the term of the lease on a straight-line basis.
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 1999 and 1998, 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.
(continued)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
PAMET SYSTEMS, INC.
NOTE B-SIGNIFICANT ACCOUNTING POLICIES (continued)
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. Net realizable value is determined
by periodically reviewing net capitalized software development costs for
impairment based upon current and anticipated product revenue and other
changes in circumstances that indicate the carrying amount of the capitalized
software development costs may not be fully recoverable. Commencing with the
initial product release, these costs are amortized on the straight-line method
over the estimated life of the product, generally three to five years. The
Company began amortizing software costs on product that was available for sale
in the first quarter of 1999. Accumulated amortization of capitalized software
costs at December 31, 1999 was $65,223.
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,
1999, which is fully reserved, is net operating loss carryforwards.
NOTE C--RELATED-PARTY TRANSACTIONS
Compensation: The Company expensed approximately $24,000 in 1999 and $22,000
in 1998 relating to a stockholder and director for financial accounting
consulting services. In addition, the Company expensed approximately $360,000
in 1999 and $396,000 in 1998 relating to a Company, in which an employee is a
principal, for research and development expenses.
(continued)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
PAMET SYSTEMS, INC.
NOTE C-RELATED-PARTY TRANSACTIONS (continued)
Notes payable to related parties represent promissory notes payable to two
directors. The promissory notes provide a credit facility up to $425,000 to
the Company from two officers and two directors. Interest is applied at 11%
per annum. Warrants are awarded to the lenders if the notes are utilized for
the balance of the note outstanding, for each six month period, at a rate of
1,000 warrants per $10,000 utilized, at the fair market value of the Company's
shares on that date. The promissory notes maturity date is June 1, 200l.
Accounts payable, related parties represent non-interest bearing amounts owed
to employees and directors for services performed or expense reimbursements.
In addition, during 1999 two stockholders and directors of the Company
converted $600,000 of promissory notes to common stock.
NOTE D--PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION
Property and equipment at December 31, 1999 is as follows:
Balance at Balance at
Beginning Additions End of
Classification of Period at Cost Retirements Period
- -------------- ---------- --------- ----------- ----------
Land $231,283 $ -- $(231,283) $ --
Building 758,728 -- (758,728) --
Furniture and Fixtures 133,327 -- -- 133,327
Computer Equipment 451,625 33,914 (3,012) 482,527
Automobiles 24,894 -- -- 24,894
------- ------ ------- -------
TOTALS $1,599,857 $33,914 $(993,023) $640,748
========= ====== ======= =======
Accumulated depreciation at December 31, 1999 is as follows:
Balance at Additions Balance at
Beginning Charged End of
Classification of Period to Expense Retirements Period
- -------------- ---------- ---------- ----------- ----------
Building $184,194 $15,051 $(199,245) $ --
Furniture and Fixtures 123,162 4,228 -- 127,390
Computer Equipment 328,493 57,736 (3,012) 383,217
Automobiles 16,820 2,731 -- 19,551
------- ------ ------- -------
TOTALS $652,669 $79,746 $(202,257) $530,158
======= ====== ======= =======
(continued)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
PAMET SYSTEMS, INC.
NOTE E--ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1999:
Accrued payroll and vacation $300,174
Accrued and withheld payroll taxes 68,685
Other 67,766
-------
$436,625
=======
NOTE F--LONG-TERM DEBT
Long-term debt represents convertible promissory notes with
five year detachable warrants. 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:
Convertible promissory note with five year detachable
warrants, which allow 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, 1999. 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, 1999. The interest rate on the note is
11% per year and interest expense in fiscal year 1999 was
$5,500. Total interest accrued on the note at December 31,
1999 was $5,771. Both the principal balance of the note and
unpaid accrued interest are due on December 13, 2000. See
the subsequent event footnote. 50,000
Convertible promissory note with five year detachable
warrants, which allow 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, 1999. 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, 1999. The interest rate on the note is
11% per year and interest expense in fiscal year 1999 was
$27,500. Total interest accrued on the note at December 31,
1999 was $31,192. Both the principal balance of the note
and unpaid accrued interest are due on November 12, 2000.
See the subsequent event footnote. 250,000
(continued)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
PAMET SYSTEMS, INC.
NOTE F-LONG-TERM DEBT (continued)
Convertible promissory note with five year detachable
warrants, which allow the noteholder to purchase up to
40,000 shares of common stock at $2.50 per share. During
1999 the noteholder exercised all 40,000 warrants at a
discounted price of $2.00 per share. 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,
1999. The interest rate on the note is 11% per year and
interest expense in fiscal year 1999 was $11,000, Total
interest accrued on the note at December 31, 1999 was
$11,663. Both the principal balance of the note and unpaid
accrued interest are due on December 9, 2000. See the
subsequent event footnote. 100,000
Convertible promissory note with five year detachable
warrants, which allow 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, 1999. 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, 1999. The interest rate on the note is
11% per year and interest expense in fiscal year 1999 was
$5,500. Total interest accrued on the note at December 31,
1999 was $5,862. Both the principal balance of the note and
unpaid accrued interest are due on December 7, 2000. See the
subsequent event footnote. 50,000
Convertible promissory note with five year detachable
warrants, which allow 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, 1999. 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, 1999. The interest rate on the note is
11% per year and interest expense in fiscal year 1999 was
$10,367. Total interest accrued on the note at December 31,
1999 was $10,367. Both the principal balance of the note and
unpaid accrued interest are due on January 21, 2001. See the
subsequent event footnote. 100,000
Convertible promissory note with five year detachable
warrants, which allow the noteholder to purchase up to
100,000 shares of common stock at $2.50 per share. No
warrants have been exercised at December 31, 1999. 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, 1999. The interest rate on the note is
11% per year and interest expense in fiscal year 1999 was
$24,863. Total interest accrued on the note at December 31,
1999 was $24,863. Both the principal balance of the note and
unpaid accrued interest are due on February 7, 2001. See the
subsequent event footnote. 250,000
(continued)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
PAMET SYSTEMS, INC.
NOTE F-LONG-TERM DEBT (continued)
Convertible promissory note with five year detachable
warrants, which allow the noteholder to purchase up to
14,000 shares of common stock at $2.50 per share. No
warrants have been exercised at December 31, 1999. 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, 1999. The interest rate on the note is
11% per year and interest expense in fiscal year 1999 was
$2,489. Total interest accrued on the note at December 31,
1999 was $2,489. Both the principal balance of the note and
unpaid accrued interest are due on May 9, 2001. 35,000
Convertible promissory note with five year detachable
warrants, which allow the noteholder to purchase up to
175,000 shares of common stock at $2.50 per share. No
warrants have been exercised at December 31, 1999. 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, 1999. The interest rate on the note is
11% per year and interest expense in fiscal year 1999 was
$26,219. Total interest accrued on the note at December 31,
1999 was $26,219. Both the principal balance of the note and
unpaid accrued interest are due on May 13, 2001. 375,000
Convertible promissory note to a vendor with five year
detachable warrants, which allow the noteholder to purchase
up to 140,000 shares of common stock at $2.50 per share. No
warrants have been exercised at December 31, 1999. 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, 1999. The interest rate on the note is
11% per year and interest expense in fiscal year 1999 was
$22,573. Total interest accrued on the note at December 31,
1999 was $22,573. Both the principal balance of the note and
unpaid accrued interest are due on May 31, 2001. 350,000
Convertible promissory note to a vendor with five year
detachable warrants, which allow the noteholder to purchase
up to 7,500 shares of common stock at $2.19 per share. No
warrants have been exercised at December 31, 1999. The
principal amount of the note may be converted to common
stock at $2.19 per share, at the noteholder's option as
described above. No principal has been converted to common
stock at December 31, 1999. The interest rate on the note is
11% per year and interest expense in fiscal year 1999 was
$407. Total interest accrued on the note at December 31,
1999 was $407 and unlike the notes above is to be paid
quarterly. Both the principal balance of the note and unpaid
accrued interest are due on December 13, 2001 75,000
------
1,635,000
Less current portion of long-term debt 450,000
-------
1,185,000
=========
(continued)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
PAMET SYSTEMS, INC.
NOTE F-LONG-TERM DEBT (continued)
The notes are shown at face value because the value attributed to the
detachable warrants was considered not material. Subsequent to year end
noteholders have committed to convert $800,000 of the above principal to the
Company's common stock.
Annual principal maturities of long-term debt are as follows:
Year ending December 31, 2000 450,000
December 31, 2001 1,185,000
---------
1,635,000
=========
NOTE G--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:
1999 1998
------------------------- ------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net loss $(2,836,470) $(3,199,775) $(1,807,082) $(2,077,835)
========= ========= ========= =========
Loss per common share $(1.00) $(1.13) $(.71) $(.82)
==== ==== === ===
The fair value of each option granted during 1999 and 1998, 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:
1999 1998
------------ ------------
Expected Life 5-8 years* 5-8 years*
Risk-free interest rate 4.51%-6.00%* 4.10%-5.93%*
Expected Volatility 116% 119%
*Amounts vary due to graded vesting for options granted to employees and
differences between options granted to employees and options granted to
directors.
(continued)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
PAMET SYSTEMS, INC.
NOTE G--STOCKHOLDERS' EQUITY (continued)
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 126,750 had been
exercised at December 31, 1999, are exercisable within a ten-year period from
the date of the grant, and are generally fully exercisable when issued to
directors and exercisable 20% per year and continuing over five years for
employees (based on continual employment) 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, 1999 is as follows:
Weighted Average
------------------------------
Number Exercise Price Exercise Fair Value Remain-
Of Options Per Share Price at Grant ing Life
---------- -------------- -------- ---------- --------
Outstanding
January 1, 1998 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
Granted 13,800 $2.50 $2.50 2.07
Cancelled (800) $ .02
Exercised (7,500) $ .02 $ .02
----- ---------
Outstanding
December 31, 1999 273,250 $.02-$5.50 $1.30 1.78 years
======= =========
Exercisable at
December 31, 1999 243,250 $.02-$5.50 $1.15
======= =========
Exercisable at
December 31, 1998 203,950 $.02-$5.50 $.95
======= =========
(continued)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
PAMET SYSTEMS, INC.
NOTE G--STOCKHOLDERS' EQUITY (Continued)
Available for Grant At
December 31, 1999 --
======
Available for Grant At
December 31, 1998 13,000
======
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 250,000 shares.
These options, of which at total of 3,250 had been exercised at December 31,
1999, 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 (based on continual
employment) 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 two year period
ended December 31, 1999 is as follows:
Weighted Average
------------------------------
Number Exercise Price Exercise Fair Value Remain-
Of Options Per Share Price at Grant ing Life
---------- -------------- -------- ---------- --------
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
Granted to Officers 27,250 $1.50-$2.50 $2.32 $1.24-2.07
Granted to Employees 145,250 $1.50-$3.19 $1.95 $1.24-2.65
Exercised (3,250) $1.87 $1.87
Cancelled (15,000) $1.37 $1.37
------ ----
Outstanding 5.12
December 31, 1999 246,750 $1.37-$3.19 $1.87 years
======= ==========
(continued)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
PAMET SYSTEMS, INC.
NOTE G--STOCKHOLDERS' EQUITY (Continued)
Exercisable at
December 31, 1999 84,375 $1.37-$3.19 $2.02
====== ========== =====
Exercisable at
December 31, 1998 --
======
Available for Grant at
December 31, 1999 --
======
Available for Grant at
December 31, 1998 157,500
=======
During 1999 the Company issued stock options to directors outside of any
formalized plan. During 2000, it is expected the Company will adopt a
Non-Employee Director Stock Option Plan (the NED Plan) for outside directors.
These options, of which none had been exercised at December 31, 1999, are
exercisable within a ten-year period from the date of the grant, and are
generally exercisable at 33% per year. The options are not transferable except
by will or domestic relations order. The option price per share is not less
than the fair market value of the shares on the date of the grant.
Stock option activity for the directors for the one year period ended December
31, 1999 is as follows:
Weighted Average
-----------------------------
Number Exercise Price Exercise Fair Value Remain-
Of Options per Share Price at Grant ing Life
---------- -------------- -------- ---------- --------
Outstanding
January 1, 1999 -- -- --
Granted to Directors 53,000 $1.37-$2.50 $1.46 $1.13-$2.07
------ ----------
Outstanding
December 31, 1999 53,000 $1.37-$2.50 $1.43 5 years
====== ==========
Exercisable at
December 31, 1999 37,700 $1.37-$2.50 $1.46
====== ==========
Available For Grant at
December 31, 1999 197,000
========
Subsequent to December 31, 1999, options representing 6,000 share were granted
to Directors at an exercise price of $3.88.
(continued)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
PAMET SYSTEMS, INC.
NOTE G--STOCKHOLDERS' EQUITY (Continued)
In addition, the Company also issued additional 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 (for options based on continual employment) 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, 1999 is
as follows:
Weighted Average
-----------------------------
Number of Exercise Price Exercise Fair Value Remain-
Options/Warrants Per Share Price at Grant ing Life
---------------- -------------- -------- ---------- --------
Outstanding 5.94
January 1, 1998 373,000 $.68-$4.25 $2.10 years
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-$3.56
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 4.80
December 3l, 1998 849,163 $.68-$4.75 $2.45 years
(continued)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE G-STOCKHOLDERS' EQUITY (continued)
Weighted Average
------------------------------
Number of Exercise Price Exercise Fair Value Remain-
Options/Warrants Per Share Price at Grant ing Life
---------------- -------------- -------- ---------- --------
Options Granted
to Officer 56,200 $2.50 $2.50 $2.07
Warrants Granted
to Officers 2,500 $2.50 $2.50 $2.07
Warrants Granted
to Directors 162,546 $2.50-$3.19 $2.57 $2.07-$2.65
Warrants Granted
to Convertible
Debt Holders 444,000 $2.50 $2.50 $2.07
Warrants Granted
to new Stockholders 325,000 $2.50 $2.50 $2.08
Warrants Granted to
Consultant/Debt
Holders for goods
and services
provided 37,500 $2.19-$2.50 $2.44 $1.82-$2.07
Options Exercised (1,000) $2.75 $2.75
Warrants Exercised (87,000) $0.80-$2.00 $1.70
Warrants Cancelled (8,000) $0.80
------- ----------
Outstanding 4.34
December 31,1999 1,780,909 $0.68-$4.75 $2.52 years
========= ==========
Exercisable at
December 31, 1999 1,644,459 $0.68-$4.75 $2.48
========= ==========
Exercisable at
December 31, 1998 306,625 $0.68-$4.75 $2.60
======= ==========
Subsequent to December 31, 1999, options representing 25,000 shares were
granted to a new marketing director at an exercise price of $3.88.
NOTE H-EARNINGS PER SHARE DISCLOSURE
Earnings per share disclosures for the two year period ended December 31, 1999
are as follows:
For the Year Ended December 31, 1999
--------------------------------------
Weighted- Per Share
Income Average Shares Amount
------ -------------- ---------
Basic loss per common share
Income available to common
stockholders $(2,836,470) 2,838,728 $(1.00)
========= ========= ====
(continued)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE H-EARNINGS PER SHARE DISCLOSURE (continued)
For the Year Ended December 31, 1998
---------------------------------------
Weighted- Per Share
Income Average Shares Amount
------ -------------- ---------
Basic loss per common share
Income available to common
stockholders $(1,807,082) 2,529,408 $(.71)
========= ========= ===
NOTE I--INCOME TAXES
During 1999, the Company recorded deferred tax assets for the benefit of net
operating losses in the amount of $606,000. The cumulative amount of these
assets, which is $1,838,000 at December 31, 1999 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, 1999, the Company has federal net operating loss carryforwards
of $9,086,000 that expire beginning in the year 2005. Additionally, the
Company has Massachusetts state net operating losses to carryforward which
expire as follows:
Year Ending
December 31, Amount
------------ ------
2000 $ 514,000
2001 --
2002 980,000
2003 1,752,000
2004 2,641,000
---------
$5,887,000
=========
NOTE J-COMMITMENTS AND CONTINGENCIES
Lease: During 1999, the Company entered into a real estate transaction in
which it sold its main operating facility and land to an unaffiliated third
party and leased the property back. The lease is being accounted for as an
operating lease. The transaction resulted in a gain of approximately $298,000,
that the Company has deferred and will recognize as a reduction to rent
expense over the term of the lease (see Note B). The proceeds from the sale of
the building were used to fully repay the outstanding mortgage note payable on
the building. The lease agreement is for 7 years through August 2006 with a 5
year renewal option available. The monthly base rent for the first three years
is $12,997. For years four through seven the monthly base rent increases to
$14,564. For the second through seventh year, rent may be further increased by
multiplying the base rent for the preceding year by the percentage increase in
the Consumer Price Index for Urban Wage Earners and Clerical Workers, up to a
maximum of a three percent increase per annum.
(continued)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE J-COMMITMENTS AND CONTINGENCIES (continued)
Future minimum lease payments are as follows:
Year ending
December 31, Amount
------------ ------
2000 $ 155,961
2001 155,961
2002 162,229
2003 174,765
2004 174,765
Thereafter 279,056
-------
TOTAL $1,102,752
=========
Employment Contracts
On May 3, 1999 the Company entered into a joint venture and service agreement
with Hanahan Computer Designs. As part of the agreement Pamet has obtained the
right to a product and has an employment agreement with the owner of Hanahan
Computer Designs.
Under the joint venture agreement, Hanahan Computer Designs will receive
royalties of fifty percent of gross sales of the product until June 30, 2002,
subject to a maximum aggregate royalty payment of $170,000. Thereafter, the
owner of Hanahan Computer Designs will receive a thirty percent commission on
all his sales of this product.
Under the Hanahan employment agreement which runs through June 30, 2002, a
minimum salary of $90,000 per annum is payable. The employee also is eligible
of an annual bonus for up to 15% of his annual salary.
In addition, the Company has employment agreements with three key management
employees through December 2000 that total $319,500 per year.
NOTE K-SIGNIFICANT ACCOUNTS RECEIVABLE, TRADE/CUSTOMERS
Amounts due from three customers represented approximately 48% of total
accounts receivable-trade, outstanding at December 31, 1999.
Sales to one customer represented approximately 12% of total revenues for the
year ended December 31, 1999. There were no sales to individual customers that
were greater than 10% of total revenues for the year ended December 31, 1998.
(continued)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE L-MAJOR SUPPLIER
The Company obtained approximately 46% of its merchandise from one supplier in
1999. Management believes that if this supplier ceased providing software, the
Company could find alternative suppliers, although there would be a short
interruption of this line of business as the new software was integrated with
the Company's products.
NOTE M--PROFIT SHARING PLAN
The Company has a qualified contributory profit sharing plan [401(k) Plan].
The Plan covers all 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 1999 and 1998, 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 $11,183 during 1999 and $8,635 during 1998.
NOTE N-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 accompanying software
support applications for the NT system.
Included in personnel costs are approximately $660,000 relating to personnel
who have worked exclusively on the development of the Company's NT computing
platform and supporting applications during fiscal year 1999.
NOTE O-SUBSEQUENT EVENTS
In January 2000, a convertible promissory noteholder exercised 40,000 warrants
at a discounted price of $2.25 per share.
During March 2000, the Company had a private placement in which an investor
purchased 116,667 shares of the Company's common stock at a price of $3.00 per
share.
Five convertible promissory noteholders have agreed to convert $800,000 worth
of promissory notes to the Company's common stock. The Company had recorded
approximately $90,000 of accrued interest relating to these notes as of
December 31, 1999.
(continued)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
PAMET SYSTEMS, INC.
NOTE P--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1999 and 1998 is as follows:
Quarter Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
Revenues $395,790 $576,594 $530,907 $910,243
Gross Profit 246,011 342,536 346,279 699,399
Operating Loss (557,077) (394,737) (301,988) (1,314,850)
Net Loss (631,137) (443,908) (377,611) (1,383,814)
Loss per share $(.25) $(.15) $(.13) $(.46)
Quarter Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
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) $(.25)
Loss per share is computed independently for each of the quarters presented.
Therefore, the sum of the quarterly loss per share information may not equal
annual loss per common share as reported on the statement of operations
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, 1999, and the related statements of operations, stockholders'
equity (deficit) and cash flows for each of the two years in the period ended
December 31, 1999. 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, 1999, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
The Company has incurred significant losses from operations in each of the
last two years (See Note A).
CARLIN, CHARRON & ROSEN LLP
March 24, 2000
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 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.
FISCAL YEAR ENDED
DECEMBER 31 COMMON STOCK
High Low
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
1999
First Quarter $2.56 $1.50
Second Quarter 2.16 1.37
Third Quarter 4.25 2.06
Fourth Quarter 3.88 2.12
The Company had 83 registered shareholders of Common Stock on April
6, 2000. 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.
Sales of Securities
On November 19, 1999, the Company sold 50,000 shares of Pamet Systems
Common Stock at a price of $2.00 per share and warrants to purchase 50,000
shares of Common Stock at the exercise price of $2.50 for a total of $100,000
to one entity, which is an accredited investor as defined in Rule 501(a) under
the Securities Act of 1933, as amended (the "Act"). The issuance was exempt
from registration requirements of the Act pursuant to Section 4(2) thereof.
On November 30, 1999, the Company sold 175,000 shares of Pamet Systems
Common Stock at a price of $2.00 per share and warrants to purchase 175,000
shares of Common Stock at the exercise price of $2.50 for a total of $350,000
to one entity, which is an accredited investor as defined in Rule 501(a) under
the Securities Act of 1933, as amended (the "Act"). The issuance was exempt
from registration requirements of the Act pursuant to Section 4(2) thereof.
On December 14, 1999, the Company sold 100,000 shares of Pamet Systems
Common Stock at a price of $2.00 per share and warrants to purchase 100,000
shares of Common Stock at the exercise price of $2.50 for a total of $200,000
to one entity, which is an accredited investor as defined in Rule 501(a) under
the Securities Act of 1933, as amended (the "Act"). The issuance was exempt
from registration requirements of the Act pursuant to Section 4(2) thereof.
On December 23, 1999, 40,000 shares of Pamet Systems Common Stock were
issued to an investor who exercised his warrants in connection with a warrant
solicitation program whereby the Company offered the warrant holder a 20%
discount to exercise the warrants associated with an earlier securities
purchase agreement. The issuance was exempt from registration requirements of
the Act pursuant to Section 4(2) thereof.
[Inside back cover]
Corporate Information
Board of Directors
Bruce J. Rogow
Chairman of the Board
Executive Managing Principal, Rogow Opportunity Capital
David T. McKay
President, Chief Executive Officer,
And Director
Richard C. Becker
Vice President
Treasurer, Director, and Assistant Clerk
Dr. Stanley J. Robboy
Director
Professor of Pathology, Obstetrics, and Gynecology and Vice Chairman,
Department of Pathology, Duke University Medical Center
Dr. Joel B. Searcy
Senior Advisor
Director
Dr. Davinder Sethi
Director
Independent Advisor
Officers
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 1999 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
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
405 Lexington Avenue
New York, NY 10174
Stock Listing
Pamet Systems, Inc. stock is traded on the NASDAQ OTC (Symbol:PAMT)
[Back Cover]
Pamet Systems, Inc.
1000 Main Street, Acton, MA 01720
(978) 263-2060 FAX: (978) 263-4158