U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-QSB
Mark one
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition period from _________ to _________
Commission File No. 1-10623
Pamet Systems, Inc.
___________________________________________________________________________
(exact name of small business issuer as specified in its charter)
Massachusetts 04-2985838
___________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Main Street, Acton, Massachusetts 01720
___________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (978) 263-2060
________________________
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes_X___ No_____
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the close of the period covered by this report:
Title of each class Number of shares outstanding
Common stock 4,437,976
($.01 par value)
Transitional Small Business Disclosure Format
YES________ NO__X___
PAMET SYSTEMS, INC.
FORM 10-QSB TABLE OF CONTENTS
Part I Financial Information
Item 1 Financial Statements
Condensed Balance Sheets
September 30, 2001 and December 31, 2000
Condensed Statements of Operations
for the quarters ended September 30, 2001
and 2000 and nine month periods ended
September 30, 2001 and 2000
Condensed Statement of Cash Flows
for the nine months ended September 30,
2001 and 2000
Item 2 Management's Discussion and Analysis of
Financial Condition or Plan of Operations
Part II Other Information
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signature(s)
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Condensed Balance Sheets September 30, December 31,
2001 2000
------------ ------------
CURRENT ASSETS (unaudited)
Cash $4,872 $1,507
Accounts receivable, net of allowance
for doubtful accounts of $89,588 and
$175,000 and factored receivables of
$0 and $88,502, respectively 718,841 224,191
Accounts receivable, factored --- 14,770
Inventory, net of reserve of $15,000 4,050 10,151
Prepaid expenses and other current
assets 178,861 147,132
------- -------
TOTAL CURRENT ASSETS 906,624 397,751
PROPERTY AND EQUIPMENT, net 63,890 98,312
DEPOSITS 81,650 84,190
CAPITALIZED SOFTWARE DEVELOPMENT COSTS 16,305 65,221
------- ---------
TOTAL ASSETS $1,068,469 $645,474
========= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt 835,000 425,000
Notes payable to related parties --- 385,000
Due to factor --- 36,199
Accounts payable, trade 834,719 795,226
Accounts payable, related parties 36,800 19,945
Current portion of accrued interest
payable on long-term debt 212,237 143,538
Current portion of deferred gain on
sale of land and building 42,614 42,614
Accrued expenses 969,867 766,192
Deferred software maintenance revenue
and unearned revenue 926,571 601,505
--------- ---------
TOTAL CURRENT LIABILITIES 3,857,808 3,215,219
ACCRUED INTEREST PAYABLE on long-term debt,
less current portion 34,200 ---
DEFERRED GAIN on sale of land and building,
net of current portion 163,927 195,888
LONG TERM DEBT, less current portion 1,199,149 410,000
--------- ---------
TOTAL LIABILITIES 5,255,084 3,821,107
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par value,
1,000,000 shares authorized,
none issued ---
Common Stock, $.01 par value,
30,000,000 shares authorized;
issued and outstanding
4,437,976 shares at September 30,
2001 and 4,085,610 shares at
December 31, 2000, respectively 44,380 40,856
Additional paid-in Capital 8,612,798 8,358,593
Accumulated deficit (12,843,793) (11,575,082)
---------- ----------
TOTAL STOCKHOLDERS DEFICIT (4,186,615) (3,175,633)
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS DEFICIT $1,068,469 $645,474
========= =======
See accompanying "Notes to Financial Statements (Unaudited)"
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
2001 2000 2001 2000
Net sales $715,405 $439,713 $1,422,439 $1,504,092
Cost of product 139,996 93,453 256,375 319,949
------- ------- --------- ---------
575,409 346,260 $1,166,064 1,184,143
Operating expenses:
Personnel costs 444,273 487,061 1,477,230 $1,615,814
Rent, utilities, telephone 48,940 48,717 150,162 168,491
Travel and entertainment 32,008 30,719 82,144 90,913
Professional fees 39,892 30,481 245,013 120,584
Depreciation and amortization 27,992 30,277 84,784 88,670
Research and development 9,049 39,540 114,634 334,557
Other operating expenses 64,934 122,944 130,232 304,486
------- ------- --------- ---------
Total operating expenses 667,088 789,739 2,284,199 2,723,515
------- ------- --------- ---------
Income(loss) from operations (91,679) (443,479) (1,118,135) (1,539,372)
Interest income(expense), net (52,652) (43,422) (152,978) (63,025)
Gain on Sale of Fixed Assets --- --- 2,402 ---
Net income(loss) $(144,331) $(486,901) $(1,268,711)$(1,602,397)
======= ======= ========= =========
Earnings(loss) per weighted
average common share $(.03) $(.12) $(.29) $(.40)
=== === === ===
Weighted average shares used
in computing earnings per
share 4,355,554 3,965,810 4,355,554 3,965,810
earnings per share
See accompanying "Notes to Financial Statements (unaudited)"
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Operating Activities:
Net loss $(1,268,711) $(1,602,397)
Adjustments to reconcile net loss to
net cash used for operating activities:
Deferred gain on sale of land
and building (31,961) (31,960)
Depreciation and amortization 84,784 88,670
Gain on sale of property and
equipment (2,402) ---
Changes in operating assets and
liabilities:
Accounts receivable, trade (494,650) 291,273
Accounts receivable, factored 14,770 36,785
Inventory 6,101 (7,871)
Prepaid expenses and other current
assets (31,729) 78,167
Deposits 2,540 ---
Due to factor (36,199) (57,496)
Accounts payable, trade 39,493 (77,175)
Accounts payable, related party 16,855 (23,574)
Accrued interest payable on
long-term debt 102,899 (20,767)
Accrued expenses 203,675 109,980
Deferred software maintenance
revenue and unearned revenue 325,066 392,894
------- ------
Total adjustments 199,242 778,926
Net cash (used for) operating
activities (1,069,469) (823,471)
Investing activities:
Expenditures for property and
equipment (2,904) (24,189)
Proceeds from the sale of property
and equipment 3,860 ---
----- ------
Net cash provided by/(used for)
investing activities 956 (24,189)
----- ------
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Financing activities:
Proceeds from long-term debt-
convertible promissory notes 814,149 ---
Proceeds from related party notes --- 160,000
Issuance of capital stock 257,729 1,455,793
Conversion of convertible
promissory notes to capital stock --- (800,000)
--------- -------
Net cash provided by financing
activities 1,071,878 815,793
--------- -------
Net increase(decrease) in cash 3,365 (31,867)
Cash at beginning of period 1,507 40,207
----- ------
Cash at end of period $4,872 $8,340
===== =====
Supplemental disclosure of cash flow
information:
Cash paid for interest: $59,769 $85,943
====== ======
Summary of non-cash financing activities:
Conversion of convertible promissory notes
to capital stock --- $800,000
Note payable-related party converted to long
term convertible promissory note $385,000 ---
======= =======
See accompanying "Notes to Financial Statements (Unaudited)
PAMET SYSTEMS, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note (1) Statement Presentation
The accompanying unaudited condensed financial statements have been prepared
based upon Securities and Exchange Commission (SEC) rules that permit reduced
disclosure for interim periods and, in the opinion of management, contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position as of September 30, 2001, the results of
operations for the three and nine month periods and changes in cash flows for
the nine month period then ended. There were no material unusual charges or
credits to operations during the recently completed fiscal quarter.
The results reported for the nine months ended September 30, 2001 are not
necessarily indicative of the results of operations which may be expected
for the entire year.
Note (2) 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 November 13, 2001 was approximately $1,003,000.
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 2001.
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 market
its Microsoft Windows NT computing platform applications. The
current Board members are willing to 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 additional permanent
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 (3) Mortgage and Subsequent Sale and Lease Back of Corporate Training,
Development and Headquarters Facility
On August 6, 1999 the Company sold its headquarters to Area Realty,
LLC for $1,150,000 and signed a lease back agreement with the buyer for 7
years. As part of the lease back agreement with the buyer of the facility, the
Company was required to place $80,000 on deposit with the buyer. The balance
on the first and second mortgages and all accrued interest were paid in full
at the time of the sale. The sale of the building resulted in a gain of
approximately $298,000 that the Company deferred and is recognizing as a
reduction to rent expense over the term of the lease. The monthly 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 the percentage increase in the Consumer Price Index
for Urban Wage Earners and Clerical Workers for the preceding year up to a
maximum of three percent per annum.
Note (4) Loss Per Common Share
In 2001, 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.
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Overview
Pamet Systems, Inc. (the "Company" or "Pamet Systems"), founded in 1987,
designs and implements broad-based information technology solutions for public
safety agencies enabling them to realize cost efficiencies and provide better
service to the public. The foundation of the Company's fully integrated suite
of products is composed of three components: PoliceServer NT, FireServer NT,
and CADServer NT. The Company also offers several companion products
including Imaging, Mobile Access, Advanced Reporting, JailServer NT,
Investigator's Tool Kit and Mapping that are integrated with the police and
fire records management and computer-aided dispatch modules. Pamet Systems
total systems approach to public safety software allows the agency to enter
information once and have it available throughout the product suite. 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 three month period ended September 30, 2001
increased 62.7% from the three month period ended September 30, 2000 resulting
in year-to-date 2001 revenues that are only $81,653 or 5.4% less than in 2000.
In 2001, as in the past, the Company experienced a slower first half due to
the availability of municipal funds. In the Northeast where the Company does
the largest amount of its business, the municipal fiscal year generally begins
on July 1 which is when municipal funds become available. In addition, the
slowdown in the demand which the Company began to feel in the second half of
2000 continued through the first half of 2001. As funding became available in
the third quarter, agencies began to make purchase decisions resulting in
increased revenues in the quarter ended September 30, 2001. In addition,
although management believes that public safety agencies were deferring
decisions to replace aging and/or inadequate technology infrastructure and
application software until economic conditions stabilized, two factors should
positively affect these purchase decisions in the coming quarters. First,
during the third quarter, COPSMore 2001 federal grant awards began to be
announced providing additional funding to the marketplace. Second, the tragic
terrorist attacks of September 11, 2001 on the World Trade Center and the
Pentagon raised public awareness of the need for automated public safety
systems and the importance of sharing data between agencies.
Starting in 1997, taking its cue from advances in technology, the Company's
core products were completely rebuilt using modern design tools and databases.
The entire suite utilizes the Windows NT 32 bit technology and a GUI interface
(graphical user interface). The overall design of the NT-based PoliceServer
and FireServer products and the mainstream technologies on which they are
based are highly suitable for the changing needs of public safety agencies.
In formal procurement processes where competing products are evaluated, the
Company's suite of products has fared well. The Company was recently awarded
a major contract to provide its PoliceServer records management system to the
Milwaukee County Sheriff's Department. This system must support over 800
deputies and additional support staff, as well as a broad range of public
safety activities including airport security, the county jail, expressway
patrol, SWAT team, K-9, process service, warrants, drug enforcement, park
patrol and criminal investigations. Pamet Systems products were selected from
a field of 14 software development companies. The Company believes that the
$5.2 million spent during the past four years on the development of its
NT-based suite of products has positioned it for future growth and leadership
in the marketplace. Management believes that the magnitude of funding
required to develop new public safety software applications using state of the
art technologies will trigger a consolidation in the public safety
marketplace, which is currently dominated by small, privately held companies
that will have difficulty affording the development costs.
The Company's sales and marketing efforts are being focused in several areas.
First, using data gathered from marketing mailings, sales personnel are
actively pursuing public safety agencies using the software of weak
competitors. In most cases, these competitors have product lines employing
aging technology or lacking the ability to provide a complete solution for the
customer. The Company is also broadening the focus of its sales and marketing
efforts to reach new market segments. Pamet Systems is actively marketing to
larger, more technologically demanding agencies such as the Milwaukee County
Sheriff's department mentioned above. In addition, the NT product is being
packaged and aggressively priced to meet the needs of smaller agencies.
Third, the Company is revitalizing efforts to expand geographically both
within the Northeast to New York and New Jersey and in the Midwest and
Southeast. These efforts have resulted in the largest pipeline of active
prospects in the Company's history. The Company includes in the pipeline
prospective customers who have seen a product demonstration, have expressed
interest in the product, and expect to have funding available. However, there
can be no assurances that any prospect in the pipeline will result in a sale.
During 2001, the Company has released major product enhancements and
extensions based, in part, on feedback from its NT customers. These releases
improve the product's ease of use and substantially extend its capabilities.
As a result, the Company has received certification from three states for our
police records system's incident-based reporting (NIBRS) capabilities and
certification from the Massachusetts Fire Marshall for the fire records
system's advanced national reporting (NIFRS 5.0) capabilities. The Company has
also developed utilities to convert customer data files from older systems,
which will ease the transition for agencies. As a result of these
improvements, the Company has thirty-four VMS customers who are in the process
of or have completed migrating to the NT system.
Management continues to believe that significant market opportunities exist
for its suite of NT-based products. Major federal grant programs continue to
be announced that will allow agencies to update their computer systems. In
early 2001, the federal government announced COPSMore 2001, an $81M grant
program earmarked solely for public safety technology. Pamet Systems held
free grant seminars in the Northeast and Midwest to aid agencies in
understanding the grant application process and assisted approximately 200
agencies in preparing their applications, which is estimated to be about 10%
of the applications the Justice Department will receive. The Department of
Justice has begun announcing the recipients of the CopsMore 2001 grants and
many of the agencies that the Company assisted in the grant process have
received funding. The Department of Justice has also requested an additional
$200M for technology in its fiscal 2002 budget which runs October 1, 2001 to
September 30, 2002. 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 terrorist
attacks of September 11, 2001 have served to increase the awareness of the
public regarding importance of integrated automated public safety systems.
The Company's products are designed and marketed with the option to be used in
this type of regional application.
The primary challenges facing the Company are to capitalize on the design
efforts that have resulted in an integrated suite of NT-based products and to
acquire adequate financing to fund immediate needs and future growth. The
Company has launched a major financing program with the goal of raising $10M
to $15M. The program is composed of a $1.5M private placement to meet
immediate cash needs with the remainder planned in a secondary offering later
in 2002. To date, the Company has secured $1,080,625 of working capital from
its private placement offering and converted $385,000 plus accrued interest of
$44,150 from related party lines of credit to long term convertible promissory
notes. However, there are no assurances that the Company will be successful
in completing its fund raising program, in light of, among other things, the
state of the financial markets and the Company's historical financial
performance.
Despite what the Company believes are numerous growth opportunities, the
Company remains hampered by under capitalization and 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.
Three Months Ended September 30, 2001 vs. Three Months Ended September 30,
2000
Net sales for the three month period ended September 30, 2001 (the 2001
period) increased 62.7% to $715,405 from $439,713 for the three month period
ended September 30, 2000 (the 2000 period). The sales for the 2001 period
reflected significant increases in police and fire systems sales, software
support and mobile revenues. In addition, Pamet Systems continued to see
steady support from its installed base and many customers are earmarking
available funding for NT migration. These VMS customers receive the NT
software at no charge, however, they must pay for installation, training, and
data conversion. In addition, two customers that previously had chosen new
software over their VMS PoliceServer systems have returned to using Pamet's
VMS software. One of these agencies is in the process of moving to the NT
product and added a large mobile system in the 2001 period. During the 2001
period, software support revenues increased 27.4% to $280,729 from $220,333 in
the 2000 period reflecting the increase in the customer base from the 2000
period, the higher support rates charged on the NT product and increases in
annual support charged by the Company's mobile partner that is passed on to
the end user. Annual software support and update service for the NT customers
is 19% of the price of the software or list price for migrating customers, an
increase from the 14% of the system software purchase price that VMS customers
have historically paid.
Cost of product increased 49.8% or $46,543 to $139,996 for the 2001 period
from $93,453 for the 2000 period as a result of the increase in sales.
However, the Company also experienced an increase in gross margin from 78.7%
in the 2000 period to 80.4% in the 2001 period which reflected the trend
toward software only sales for all products, the use of state bid list
contractors to purchase hardware and the Company's software, and continued
favorable margins on support revenues. Agencies are increasingly purchasing
systems through state bid list contractors. These contractors partner with
the Company and provide off-the-shelf hardware that combined with Pamet
Systems software offers a complete solution for the customer. This
arrangement reduces total revenues for the Company, but significantly
increases margins.
Operating expenses reflected a decrease of $122,651 or 15.5% to
$667,088 for the 2001 period compared to $789,739 for the 2000 period. The
most significant factors in this decrease were personnel expenditures, research
and development, and uncollectible accounts. The Company focused on
keeping spending under tight control while continuing to deliver product
improvements.
Personnel costs decreased 8.8% or $42,788 to $444,273 for the 2001 period
compared to $487,061 for the 2000 period. The decrease in spending can be
attributed to attrition and the retirement of one employee. Due to the
continued working capital constraints facing the Company, non-key positions
are not being immediately filled. Rent, utilities and telephone remained flat
at $48,940 in the 2001 period compared to $48,717 for the 2000 period.
Decreases in rent resulting from moving the Maitland, Florida office to
smaller quarters at the end of the first quarter of 2001 were offset by
increases in telephone expense. Travel and entertainment expenses increased
4.2% to $32,008 for the 2001 period from $30,719 for the 2000 period. The
slight increase can be attributed to installations outside the Northeast and
increased trade show attendance during the quarter. Professional fees
increased 30.9% to $39,892 for the 2001 period from $30,481 for the 2000
period primarily due an increase in consulting fees. The Company has retained
the services of a financial consultant to evaluate the available alternatives
to raise additional capital. This spending was offset by a decrease in legal
fees based on reduced usage. Depreciation expense decreased 7.5% to $27,992
for the 2001 period from $30,277 for the 2000 period. External research and
development expenditures reflected a decrease of $30,491 or 77.1% to $9,049
for the 2001 period from $39,540 in the 2000 period. The Company is focusing
on using internal resources to complete the development work on the NT product
line both to build an inhouse staff to support ongoing product enhancements
and extensions and to keep expenditures in line with current working capital
constraints. The internal team of engineering and support resources are
focusing on delivering advanced product capabilities, interfaces to companion
products, and utilities to migrate current customers to the NT system from the
VMS system. Other operating expenses decreased 47.2% to $64,934 for the 2001
period from $122,944 for the 2000 period. A significant part of the decrease
can be attributed to a reduction in the spending on marketing collateral
materials and a decrease in the reserve for uncollectible accounts.
Net interest expense for the 2001 period was $52,652 compared to $43,422 for
the 2000 period. During the first three quarters of 2001 the Company has
received $680,000 of new convertible debt funding which is accruing interest
at 7% causing additional interest expense.
The net loss for the 2001 period was $(144,331) or $(.03) per share compared
to net loss of $(486,901) or $(.12) per share for the 2000 period. This
improvement can be attributed to the increase in revenues over the prior year
and expense control due to working capital constraints.
Nine Months Ended September 30, 2001 vs. Nine Months Ended September 30, 2000
Net sales for the nine month period ended September 30, 2001 (the 2001 period)
of $1,422,439 decreased $81,653 or 5.4% from net sales of $1,504,092 for the
nine months ended September 30, 2000 (the 2000 period). Increased software
support revenues were offset by decreases in system hardware and software,
mobile, and imaging revenues. During the first nine months of 2001 the
Company continued to feel the effects of the general economic slowdown and
the hesitance in the public safety marketplace to invest in new software and
infrastructure until economic conditions stabilize. In addition, although
federal grant programs pump significant funding into public safety, they cause
delays in the normal procurement cycle while agencies await grant decisions.
The fact that the federal government has begun to announce grant awards for
COPSMore 2001 and the focus on the public safety sector since the terrorist
attacks of September 11, 2001 should help offset the effects of the economic
slowdown. Support revenues increased 28.0% to $758,647 for the 2001 period
from $592,652 for the 2000 period reflecting the increased customer base and
rates. Support revenues accounted for 53.4% of sales in the 2001 period as
compared to 39.4% of sales in the 2000 period. Cost of product decreased
19.9% to $256,375 for the 2001 period from the $319,949 for the 2000 period
resulting in a gross margin increase to 82.0% for the 2001 period from 78.7%
for the 2000 period. The improvement in margin can be attributed to software
only sales and the increase in high margin support revenues. Some customers
purchase their hardware directly from the state bid list thereby increasing
the higher margin software component of these sales.
Net operating expenses decreased $441,718 or 16.2% to $2,281,797 for the 2001
period compared to $2,723,515 for the 2000 period. Most significantly,
external research and development expenditures decreased $219,923 or 65.7% to
$114,634 in the 2001 period from $334,557 in the 2000 period reflecting
completion of major portions of the NT development effort. In addition, due
to the continuing working capital constraints the Company is experiencing,
internal engineering and support staff were deployed to product
development and testing and external engineering resources were used very
selectively. The Company has also instituted broad cost cutting measures to
help alleviate the cash flow issues. The 8.6% reduction in personnel spending
from $1,615,814 in the 2000 period to $1,477,230 in the 2001 period can be
attributed to attrition and the retirement of one employee. The Company
continues to backfill on a selective basis to aid in keeping costs under
control. Rent, utilities and telephone decreased $18,329 or 10.9% to $150,162
in the 2001 period from $168,491 in the 2000 period due to the move of the
Maitland, Florida office to smaller quarters and a reduction in telephone
expense due to lower rates. Travel and entertainment decreased 9.6% to
$82,144 in the 2001 period from $90,913 in the 2000 period reflecting decreases
in lodging, meals and rental cars. Professional fees increased 103.2% to
$245,013 in the 2001 period from $120,584 in the 2000 period. Consulting
expenses resulting from hiring professional assistance with the Company's
business plan and a financial consultant to evaluate capital funding
alternatives constituted the bulk of the increase and were partially offset by
decreases in legal and accounting fees. Depreciation expense decreased 4.4%
from $88,670 in the 2000 period to $84,784 in the 2001 period. The decrease
of $174,254 or 57.2% in other operating expenses was attributable to a
reduction in the reserve for uncollectible accounts as outstanding balances
are collected and lower spending for marketing collateral, annual report
expense and employee training.
Net interest expense was $152,978 for the 2001 period compared to $63,025 for
the 2000 period. The 2000 period included the reversal of accrued interest
associated with the conversion of $800,000 of convertible promissory notes to
equity in the 2000 period and the conversion of $600,000 of convertible
promissory notes to equity in the fourth quarter of 1999. In addition, the
Company received $680,000 of new convertible debt funding in the 2001
period that is accruing interest at 7%.
The net loss for the 2001 period was $(1,268,711) or $(.29) per share
compared to a net loss of $(1,602,397) or $(.40) per share for the 2000
period.
Liquidity and Capital Resources
The Company had working capital deficit of $(2,951,184) at September 30, 2001
compared to $(2,817,468) at December 31, 2000. The most significant reasons
for this deterioration are the increases in deferred software maintenance
revenue, the current portion of long-term debt, and accrued expenses.
Offsetting these increased liabilities was an increase in accounts receivable.
During 2001, the Company has secured $200,625 of additional equity financing
and $680,000 of new long term debt financing. In addition, the Company
converted $475,000 of notes payable to related parties and the associated
interest of $44,149 to long-term convertible promissory notes during the
second quarter of 2001. At September 30, 2001, $2,034,149 of convertible
promissory notes and $246,437 of related interest remained outstanding as
liabilities. In general, the outstanding convertible debt funding accrues
interest at either 7% or 11%; has a two year term; carries the option of
conversion of the principal to common stock by the debt holder at conversion
prices ranging from $0.375 to $2.50 per share, or repayment of principal and
accrued interest by the Company; and has 100% warrant coverage attached that
allows for the purchase of additional shares of common stock at exercise
prices ranging from $1.00 to $2.50 per share. The Company's ability to repay
the outstanding convertible promissory notes with accrued interest on the due
dates is at risk, especially the notes due in the next twelve months.
Cash increased to $4,872 at September 30, 2001 from $1,507 at December 31,
2000. Accounts receivable increased to $718,841 at September 30, 2001 from
$224,191 at December 31, 2000 due to higher sales during the third quarter of
2001 as compared to the last quarter of 2000 and a decrease in usage of the
receivables financing agreement in 2001. The resources necessary to fund the
enhancements and extensions to the NT product and provide working capital for
operations continue to be a major concern for the Company. In the fourth
quarter of 2000, the Company launched a $1.5M private placement financing
program to meet immediate cash needs. The Company received $880,625 during
the first nine months of 2001. Subsequent to the end of the third quarter of
2001, an additional $200,000 of convertible debt funding was received by the
Company. Late in 2000, the Company felt the effects of a slowdown in the
general economic conditions and within the public safety marketplace.
However, with the COPSMore 2001 $81 million in grant awards being announced,
the heightened emphasis on public safety due to the September 11, 2001
terrorist attacks, the backlog at November 13, 2001 of over $1,003,000 and the
sales pipeline resulting from the addition of sales and marketing resources,
the Company is optimistic about revenues in the fourth quarter of 2001. If
additional funds are required, the Board of Directors is willing to seek
additional financing. Nevertheless, the Company continues to be hampered by
insufficient cash resources. As noted in the Auditor's Report for 2000
included in the Company's Annual Report on Form 10K, there can be no
assurances that the Company will be able to generate adequate cash either
through operations or additional financing to continue as a going concern.
Failure to acquire the necessary financing could have a material adverse
effect on the Company. 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 September 30, 2001, the Company had accumulated approximately
$12,200,000 of federal net operating loss carryforwards that expire beginning
in the year 2005. In addition, the Company has state net operating losses to
carry forward of $8,500,000 which expire between the years 2002 and 2005.
Under the Internal Revenue Code of 1986, as amended, the rate at which a
corporation may utilize its net operating losses to offset 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.
Inflation
Inflation has not had a significant impact on the Company's
operations to date.
Forward Looking Statements
This Form 10-QSB 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: impact of current economic conditions on
purchasing decisions in the public safety marketplace; market expectation for
the NT operating environment and customer acceptance of the Company's NT
products; ability of competitors to fund development; ability of the NT
product to meet market needs; law enforcement trends; impact of federal grant
awards and September 11, 2001 terrorist attacks on the Company's sales and the
focus of the marketplace; adequacy of funding to support operations and
anticipated growth; 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 insufficient capital resources to
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 changes in the economic and competitive environment.
These factors and other information contained in this Form 10-QSB 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 any
forward-looking statements for any reason even if new information becomes
available or other events occur in the future.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
c. Sales of Securities
None
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a vote of Security Holders
None
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
4.39 Convertible Note issued to West Country Partners dated
August 30, 2001
4.40 Warrant issued to West Country Partners dated August 30, 2001
b. Reports on form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
Pamet Systems, Inc.
-------------------------
(Registrant)
September 14, 2001 (s) Richard C. Becker
_______________________________ ______________________
Date Richard C. Becker
Vice President
Principal Financial Officer
No. L-033
CONVERTIBLE PROMISSORY NOTE
THIS NOTE WAS ISSUED WITH "ORIGINAL ISSUE DISCOUNT." THE NAME AND
TELEPHONE NUMBER OF THE REPRESENTATIVE OF THE ISSUER WHO CAN
PROVIDE (i) THE TOTAL AMOUNT OF ORIGINAL ISSUE DISCOUNT, (ii) THE ISSUE
DATE, AND (iii) THE YIELD TO MATURITY ON THE ISSUE DATE IS RICHARD C.
BECKER, (978)-263-2060.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAW AND MAY
NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN
REGISTERED OR QUALIFIED THEREUNDER OR AN EXEMPTION FROM SUCH
REGISTRATION OR QUALIFICATION IS AVAILABLE.
CONVERTIBLE PROMISSORY NOTE
$130,000 Acton, Massachusetts
August 30, 2001
FOR VALUE RECEIVED, PAMET SYSTEMS, INC., a Massachusetts corporation (the
"Company"), hereby promises to pay to West Country Partners, a California
Limited Partnership of which James S. Schmitt is the General Partner
("Payee"), with its address at 1917 Brittany Park, Camarillo, CA 93012, the
principal sum of One Hundred Thirty Thousand Dollars ($130,000), on the dates
and in the amounts hereinafter set forth. This Promissory Note is issued by
the Company pursuant to the Securities Purchase Agreement, dated as of the
date hereof, among the Company and Payee (the "Securities Purchase
Agreement"). Capitalized terms used but not defined shall have the respective
meanings ascribed to them in the Securities Purchase Agreement. This
Promissory Note is hereinafter referred to as this "Note."
1. Principal and Maturity Date. The principal amount of this Note
outstanding together with all accrued interest hereon shall be due and payable
on August 29, 2003 (the "Maturity
Date").
2. Interest. The outstanding principal amount of this Note shall
accrue interest at the per annum rate of seven percent (7.0%) through the
earlier of the date of repayment or conversion (in each case computed on the
basis of a 365 day year and actual days elapsed). Interest shall be payable
in full on the Maturity Date with respect to the principal amount of the Note
then outstanding. No interest shall be deemed to have accrued or be payable
on any portion of this Note which is Converted on or prior to the Maturity
Date.
3. Prepayment. This Note may be prepaid, in whole or in part,
without penalty or premium upon not less than thirty (30) days prior written
notice from the Company to the Payee, at any time or from time to time. All
prepayments made on this Note shall be applied first to the payment of all
unpaid interest accrued on this Note, and then to the outstanding and unpaid
principal amount of this Note as of the date of the payment. Prepayment, in
whole or in part, shall be noted in the accounting records of the Company.
4. General Payment Provisions. All payments or prepayments of
principal and interest and other sums due pursuant to this Note shall be made
by check payable to the Payee at the address set forth above or at such other
address as Payee shall have previously designated to the Company in writing
not later than two Business Days (as defined below) prior to the date on which
such payment becomes due.
If the due date of any payment under this Note would otherwise fall
on a day which is not a Business Day, such date will be extended to the
immediately succeeding Business Day and interest shall be payable at the rate
set forth herein for the period of the extension. The term "Business Day"
shall mean any day on which commercial banks in the State of New York are not
authorized or required to close.
5. Conversion; Prepayment.
(a) Conversion/Prepayment and Conversion Price. The Payee may,
subject to the terms and conditions of this Section 5, at any time, or from
time to time, exercise its right to convert this Note to Common Stock by
delivering a duly executed notice, in the form substantially similar to
Exhibit A hereto, of such intention to the Company (the "Conversion Notice");
provided, however, that if, and to the extent, this Note or any portion
thereof is called for prepayment, the holder may exercise its right to convert
to Common Stock such portion of this Note as was called for prepayment.
The Payee shall have the right, subject to the terms and conditions
of this Section 5, to, no more frequently than four times per annum in the
aggregate, convert all or any part of the principal amount then outstanding
under this Note (the "Note Amount"), in an amount not less than $50,000 (or
such lesser amount as may then be outstanding), into that number of fully-paid
and nonassessable shares of Common Stock (the "Conversion Shares"), obtained
by dividing the Note Amount or such portion thereof presented for conversion
by the Conversion Price. The "Conversion Price" shall initially be $0.375 per
share of Common Stock.
Upon a partial conversion or prepayment of this Note, the Company
shall execute and deliver to or on the order of the holder hereof, a new Note
or Notes of authorized denominations in principal amount equal to the
unconverted or unredeemed, as the case may be, portion of this Note.
(b) Issuance of Common Stock on Conversion. In order to effect the
conversion of this Note, the Payee shall deliver to the Company at its
principal office, this Note and a duly executed Conversion Notice; provided,
however, that if the Payee desires to convert the Note on the Maturity Date,
Payee shall notify the Company in writing of its intention to convert the Note
at least five (5) days prior to the Maturity Date. The date upon which the
Company receives the Conversion Notice, the Note and any other documentation
required under this Section 5 of this Note or the Conversion Notice shall be
referred to herein as the "Effective Date." Upon the Effective Date, this
Note (or portion thereof) shall be deemed converted into shares of Common
Stock in accordance with this Section 5, at which time the rights of the Payee
with respect to this Note and the amount so converted shall cease and, subject
to the following provisions of this paragraph, the person or persons entitled
to receive the shares of Common Stock upon conversion of this Note (or portion
thereof) shall be treated for all purposes as having become the record holder
or holders of such Common Stock. As promptly as practicable after the
Effective Date, the Company shall deliver or cause to be delivered to the
Payee, at the address set forth above or at such other address as the Payee
shall designate in writing, certificates representing the number of fully paid
and nonassessable shares of Common Stock into which this Note (or portion
thereof), shall be converted in accordance with the provisions of this Section
5. If this Note is called for prepayment it may be converted as provided
herein up to and including the close of business on the business day preceding
the date of prepayment.
No fractional shares of Common Stock shall be issued upon conversion
of this Note (or portion thereof). In lieu of any fractional share of Common
Stock which would otherwise be issuable upon conversion of this Note (or
portion thereof), the Company shall pay a cash adjustment in respect of such
fraction in an amount equal to such fraction multiplied by the Conversion
Price.
(c) Reserves. The Company covenants that it will at all times
reserve and keep available, free from pre-emptive rights, out of its
authorized but unissued Common Stock, solely for the purpose of issue upon
conversion of this Note as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion of this Note. The Company
covenants that all shares of Common Stock which shall be so issuable shall,
upon issuance, be duly and validly issued and fully paid and nonassessable.
The Company shall from time to time, in accordance with applicable law,
increase the authorized amount of its Common Stock if at any time the
authorized amount of its Common Stock remaining unissued shall not be
sufficient to permit the conversion of this Note at the time outstanding.
(d) Taxes Upon Conversion. The issuance of certificates for shares
of Common Stock upon the conversion of this Note shall be made without charge
to the converting noteholder for any tax in respect of the issuance of such
certificates, and such certificates shall be issued in the respective names
of, or in such names as may be directed by, the holder of this Note; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of
any such certificate in a name other than that of the holder of this Note, and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid; and provided,
further, that in no event shall the Company be required to pay or reimburse
the holder for any income tax payable by such holder as a result of such
issuance.
(e) Legends. All certificates representing Conversion Shares shall
bear a conspicuous legend stating in substance:
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER ANY STATE SECURITIES LAW AND
MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF
UNLESS THEY HAVE BEEN REGISTERED OR QUALIFIED
THEREUNDER OR AN EXEMPTION FROM REGISTRATION
OR QUALIFICATION IS AVAILABLE."
The Company shall, upon the request of any holder of a stock certificate
representing Conversion Shares and the surrender of such certificate, issue a
new stock certificate without such legend if (i) the stock evidenced by such
certificate has been effectively registered under the Securities Act and
qualified under any applicable state securities law and sold by the holder
thereof in accordance with such registration and qualification or (ii) such
holder shall have delivered to the Company a legal opinion reasonably
satisfactory to the Company to the effect that the restrictions set forth
herein are no longer required or necessary under the Securities Act or any
applicable state law.
6. Subordination.
(a) The Company irrevocably covenants and agrees, and the Holder of
this Note, by its acceptance thereof, irrevocably covenants and agrees, that
the payment of the principal of and interest on this Note is hereby expressly
subordinated, to the extent and in the manner hereinafter set forth, to the
prior payment and/or cancellation (as shall be appropriate) in full of all
Senior Indebtedness (as defined herein). The provisions of this Section 6 are
made for the benefit of the holders of Senior Indebtedness, and such holders
shall, at any time, be entitled to enforce such provisions against the Company
or Noteholder. No holder of any Senior Indebtedness shall be deemed to owe
any fiduciary duty or any other obligation to any Holder of this Note now or
at any time hereafter. Notwithstanding anything herein contained to the
contrary, all the provisions of this Note shall, except as otherwise provided
herein, be subject to the provisions of this Section 6, so far as the same may
be applicable thereto.
(b) For purposes of this Section 6 (and subject to Section 2.06 of
the Securities Purchase Agreement), "Senior Indebtedness" shall mean any
indebtedness, liability or obligation, contingent or otherwise, other than
that arising pursuant to this Note, of the Company (any such indebtedness,
liability or obligation being hereinafter in this definition referred to as an
"Obligation") (i) which is created, assumed or incurred by the Company after
the date of this Note and which, when created, assumed or incurred, is
specifically designated by the Company as Senior Indebtedness for the purposes
hereof in the instrument creating or evidencing the Company's liability with
respect to such Obligations or (ii) any increases, guarantees, refundings,
renewals, rearrangements or extensions of and amendments, modifications and
supplements to any indebtedness, liability or obligation described in clause
(i) above.
8. No Assignment. This Note may not be assigned by the Payee
without the prior written consent of the Company.
9. Governing Law. This Note shall be construed in accordance
with, and governed by, the laws of the Commonwealth of Massachusetts as
applied to contracts made and to be performed entirely in the Commonwealth of
Massachusetts without regard to principles of conflicts of law. Each of the
parties hereto hereby irrevocably and unconditionally submits to the exclusive
jurisdiction of any court of the Commonwealth of Massachusetts or any federal
court sitting in the Commonwealth of Massachusetts for purposes of any suit,
action or other proceeding arising out of this Note (and agrees not to
commence any action, suit or proceedings relating hereto except in such
courts). Each of the parties hereto agrees that service of any process,
summons, notice or document by U.S. registered mail at its address set forth
herein shall be effective service of process for any action, suit or
proceeding brought against it in any such court. Each of the parties hereto
hereby irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Note, which is
brought by or against it, in the courts of the Commonwealth of Massachusetts
or any federal court sitting in the Commonwealth of Massachusetts and hereby
further irrevocably and unconditionally waives and agrees not to plead or
claim in any such court that any such action, suit or proceeding brought in
any such court has been brought in an inconvenient forum.
10. Adjustment of Interest Rate. No provision of this Note shall
require the payment of interest to the extent that receipt of any such payment
by the Company would be contrary to the provisions of law applicable to the
Company limiting the maximum amount of interest that may be charged to or
collected from the Company, and if any sum in excess of such maximum rate of
interest is paid or charged, the excess will be deemed to have been a
prepayment of principal of this Note when paid, without premium or penalty,
and all payments made thereafter will be appropriately applied to interest and
principal to give effect to such maximum rate, and after such application any
excess shall be immediately refunded to the Company.
PAMET SYSTEMS, INC.
By:
Name: David T. McKay
Title: President & CEO
Attested:
By:_________________________
Name:
Title:
EXHIBIT A TO PROMISSORY NOTE
[Form of Conversion Notice]
To Pamet Systems, Inc.:
The undersigned registered holder (the "Payee") of the Note in the
principal amount indicated below and bearing the certificate number indicated
below (the "Note"), hereby irrevocably exercises its right to convert the
principal amount of the Note indicated herein into shares of common stock, par
value $.01 per share, of Pamet Systems, Inc. (the "Company"), in accordance
with the terms of the Note, and directs that the shares issuable and
deliverable upon such conversion together with a check in payment for
fractional shares, be issued and delivered to the Payee unless a different
name has been indicated below. If shares are to be issued in the name of a
person other than the Payee (such person being referred to as the
"Transferee"), the Note must be duly endorsed by, or accompanied by
instruments of transfer in form satisfactory to the Company and duly executed
by the undersigned, and the undersigned will pay all transfer taxes payable
with respect thereto. In addition, the Transferee must sign this notice. All
capitalized terms used in this notice and not otherwise defined shall have the
respective meanings ascribed to them in the Note.
The Payee, or in the event a Transferee shall receive the Conversion
Shares issued upon conversion of this Note, the Transferee, hereby represents
and warrants to the Company that (i) he has sufficient knowledge and
experience in financial and business matters to be capable of evaluating the
merits and risks of an investment in the Company, (ii) he is acquiring the
Conversion Shares for its own account for investment and not with a view to,
or for distribution or sale in connection with any public offering in
violation of the Securities Act of 1933, as amended (the "Securities Act"),
(iii) he understands that (x) the Conversion Shares will not have been
registered for sale under the Securities Act or qualified under applicable
state securities laws and may not be resold without registration under the
Securities Act and qualification under any applicable state securities law,
(y) such Conversion Shares will be issued to him pursuant to one or more
exemptions from the registration or qualification requirements of the
Securities Act and that the representations and warranties contained herein
are given with the intention that the Company may rely thereon for purposes of
claiming such exemptions and (z) the Conversion Shares shall contain a legend
substantially as set forth in Section 5(e) of the Note, (iv) he is an
"accredited investor" as defined in Section 501 of Regulation D promulgated
under the Securities Act, (v) he understands he must bear the economic risk of
Conversion Shares issued upon conversion of the Note for an indefinite period
of time as the Conversion Shares cannot be sold unless registered under the
Securities Act and any other applicable state securities laws or sold in a
transaction exempt from such registration thereunder and (vi) representatives
of the Company have (x) fully and satisfactorily answered any questions which
he deemed to ask concerning the Company and (y) furnished him with such
additional information and documents regarding the Company as he has
reasonably requested.
Principal amount of Note to be converted: $________________
Certificate Number of Note: __
Print name, address (including zip code) and social security or other taxpayer
identification number of the person in whose name the Common Stock will be
issued:
_________________________________
_________________________________
_________________________________
(Zip Code)
_________________________________
Social Security or other
Taxpayer Identification
Number
Dated:___________________________
Signature of Noteholder
Dated:___________________________
Signature of Transferee
LW - 033
WARRANT
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND
NEITHER THIS WARRANT NOR SUCH SHARES MAY BE SOLD, ENCUMBERED OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION
SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY (WHICH ACCEPTANCE SHALL NOT BE UNREASONABLY
WITHHELD) THAT SUCH REGISTRATION IS NOT REQUIRED.
Void after 5:00 p.m. Eastern Standard Time, on August 29, 2006.
WARRANT TO PURCHASE COMMON STOCK
OF
PAMET SYSTEMS, INC.
FOR VALUE RECEIVED, PAMET SYSTEMS, INC. (the "Company"), a
Massachusetts corporation, hereby certifies that West Country Partners, a
California Limited Partnership of which James S. Schmitt is the General
Partner, with its address at 1917 Brittany Park, Camarillo, CA 93012, or his
permitted assigns, is entitled to purchase from the Company, at any time or
from time to time commencing August 30, 2001, and prior to 5:00 P.M., Eastern
Standard Time, on August 29, 2006, a total of Three Hundred Forty Six Thousand
Six Hundred Sixty Seven (346,667) fully paid and nonassessable shares of
Common Stock, par value $.01 per share, of the Company for an aggregate
purchase price of Five Hundred Twenty Thousand Dollars ($520,000) (computed
on the basis of $1.50 per share). (Hereinafter, (i) said Common Stock,
together with any other equity securities which may be issued by the Company
with respect thereto or in substitution therefor, is referred to as the
"Common Stock," (ii) the shares of the Common Stock purchasable hereunder are
referred to as the "Warrant Shares," (iii) the aggregate purchase price
payable hereunder for the Warrant Shares is referred to as the "Aggregate
Warrant Price," (iv) the price payable hereunder for each of the Warrant
Shares is referred to as the "Per Share Warrant Price," (v) this Warrant, and
all warrants hereafter issued in exchange or substitution for this Warrant are
referred to as the "Warrant" and (vi) the holder of this Warrant is referred
to as the "Holder.") The number of Warrant Shares for which this Warrant is
exercisable is subject to adjustment as hereinafter provided.
This Warrant is issued by the Company pursuant to the Securities
Purchase Agreement, dated as of the date hereof, among the Company and West
Country Partners (the "Securities Purchase Agreement"). Capitalized terms
used but not defined shall have the respective meanings ascribed to them in
the Securities Purchase Agreement.
1. Exercise of Warrant.
(a) This Warrant may be exercised, in whole at any time or in part from time
to time, commencing August 30, 2001, and prior to 5:00 P.M., Eastern Standard
Time, on August 29, 2006, by the Holder of this Warrant by the surrender of
this Warrant (with the subscription form at the end hereof duly executed) at
the address set forth in Subsection 9(a) hereof, together with proper payment
of the Aggregate Warrant Price, or the proportionate part thereof if this
Warrant is exercised in part.
(b) The Aggregate Warrant Price or Per Share Warrant Price shall be
paid in cash by certified or official bank check payable to the order of the
Company.
(c) Each exercise of this Warrant shall be deemed to have been
effected immediately prior to the close of business on the day on which the
Warrant shall have been surrendered to the Company as provided in subsection
1(a) above (an "Exercise Date"). At such time, the person or persons in whose
name or names any certificates for Warrant Shares shall be issuable upon such
exercise as provided in subsection 1(d) below shall be deemed to have become
the holder or holders of record of the Warrant Shares represented by such
certificates. (d) If this Warrant is exercised
in part, the Holder shall be entitled to receive a new Warrant covering the
number of Warrant Shares in respect of which this Warrant has not been
exercised and setting forth the proportionate part of the Aggregate Warrant
Price applicable to such Warrant Shares. Upon such surrender of this Warrant,
the Company will (a) issue a certificate or certificates in the name of the
Holder for the shares of the Common Stock to which the Holder shall be
entitled, and (b) deliver the proportionate part thereof if this Warrant is
exercised in part, pursuant to the provisions of the Warrant.
(e) No fractional shares or scrip representing fractional shares
shall be issued upon the exercise of this Warrant. With respect to any
fraction of a share called for upon any exercise hereof, the Company shall pay
to the Holder an amount in cash equal to such fraction multiplied by the fair
value of a share.
2. Reservation of Warrant Shares. The Company agrees that, prior
to the expiration of this Warrant, the Company will at all times have
authorized and in reserve, and will keep available, solely for issuance or
delivery upon the exercise of this Warrant, the shares of the Common Stock as
from time to time shall be receivable upon the exercise of this Warrant.
3. Adjustments.
(a) In case the Company shall hereafter (i) pay a dividend or make
a distribution on its capital stock in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock into a greater number of shares, (iii)
combine its outstanding shares of Common Stock into a smaller number of shares
or (iv) issue by reclassification of its Common Stock any shares of capital
stock of the Company, the number of Warrant Shares for which this Warrant may
be exercised shall be adjusted so that if the Holder surrendered this Warrant
for exercise after such action the Holder would be entitled to receive the
number of shares of Common Stock or other capital stock of the Company which
he would have been entitled to receive had such Warrant been exercised
immediately prior to such action. An adjustment made pursuant to this
subsection (a) shall become effective immediately after the record date in the
case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification. If, as a result of an adjustment made pursuant to this
subsection (a), the Holder of this Warrant shall become entitled to receive
shares of two or more classes of capital stock or shares of Common Stock and
other capital stock of the Company, the Board of Directors (whose
determination shall be conclusive and shall be described in a written notice
to the Holder of this Warrant promptly after such adjustment) shall determine
the allocation of the adjusted Per Share Warrant Price between or among shares
of such classes of capital stock or shares of Common Stock and other capital
stock.
(b) In case of any consolidation or merger to which the Company is
a party other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to another entity
of the property of the Company as an entirety or substantially as an entirety,
or in the case of any statutory exchange of securities with another
corporation (including any exchange effected in connection with a merger of a
third corporation into the Company), the holder shall have the right
thereafter to exercise this Warrant for the kind and amount of securities,
cash or other property which he would have owned or have been entitled to
receive immediately after such consolidation, merger, statutory exchange, sale
or conveyance had such Warrant been exercised immediately prior to the
effective date of such consolidation, merger, statutory exchange, sale or
conveyance and in any such case, if necessary, appropriate adjustment shall be
made in the application of the provisions set forth in this Section 3 with
respect to the rights and interests thereafter of the Holder to the end that
the provisions set forth in this Section 3 shall thereafter correspondingly be
made applicable, as nearly as may reasonably be, in relation to any shares of
stock or other securities or property thereafter deliverable on the conversion
of this Warrant. The above provisions of this subsection (b) shall similarly
apply to successive consolidations, mergers, statutory exchanges, sales or
conveyances. Notice of any such consolidation, merger, statutory exchange,
sale or conveyance and of said provisions so proposed to be made, shall be
mailed to the Holder not less than 30 days prior to such event. A sale of all
or substantially all of the assets of the Company for a consideration
consisting primarily of securities shall be deemed a consolidation or merger
for the foregoing purposes.
(c) In the event of any adjustment to the number of Warrant Shares
issuable upon exercise of this Warrant, the Per Share Warrant Price shall be
adjusted by multiplying the Per Share Warrant Price in effect immediately
prior to such adjustment by a fraction the numerator of which is the aggregate
number of Warrant Shares for which this Warrant may be exercised immediately
prior to such adjustment and the denominator of which is the aggregate number
of Warrant Shares for which this Warrant may be exercised immediately after
such adjustment.
(d) Whenever the Per Share Warrant Price is adjusted as provided in
this Warrant and upon any modification of the rights of the Holder of this
Warrant in accordance with this Section 3, the Company shall promptly prepare
a certificate of an officer of the Company, setting forth the Per Share
Warrant Price and the number of Warrant Shares after such adjustment or
modification, a brief statement of the facts requiring such adjustment or
modification and the manner of computing the same and cause a copy of such
certificate to be mailed to the Holder.
4. Fully Paid Stock; Taxes. The Company agrees that the shares of
the Common Stock represented by each and every certificate for Warrant Shares
delivered on the proper exercise of this Warrant shall, at the time of such
delivery, be validly issued and outstanding, fully paid and nonassessable, and
not subject to preemptive rights, and the Company will take all such actions
as may be necessary to assure that the par value or stated value, if any, per
share of the Common Stock is at all times equal to or less than the then Per
Share Warrant Price. Subject to Section 5(e) hereof, the Company further
covenants and agrees that it will pay, when due and payable, any and all
Federal and state stamp, original issue or similar taxes that may be payable
in respect of the issuance of any Warrant Shares or certificates therefor.
The Holder covenants and agrees that it shall pay, when due and payable, any
and all federal, state and local income or similar taxes that may be payable
in respect of the issuance of any Warrant Shares or certificates therefor.
5. Transfer
(a) Securities Laws. Neither this Warrant nor the Warrant Shares
issuable upon the exercise hereof have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), or under any state securities
laws and unless so registered may not be transferred, sold, pledged,
hypothecated or otherwise disposed of unless an exemption from such
registration is available. In the event the Holder desires to transfer this
Warrant or any of the Warrant Shares issued, the Holder must give the Company
prior written notice of such proposed transfer including the name and address
of the proposed transferee. Such transfer may be made only either (i) upon
publication by the Securities and Exchange Commission (the "Commission") of a
ruling, interpretation, opinion or "no action letter" based upon facts
presented to said Commission, or (ii) upon receipt by the Company of an
opinion of counsel acceptable to the Company to the effect that the proposed
transfer will not violate the provisions of the Securities Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or the rules and
regulations promulgated under either such act, or to the effect that the
Warrant or Warrant Shares to be sold or transferred have been registered under
the Securities Act of 1933, as amended, and that there is in effect a current
prospectus meeting the requirements of Subsection 11(a) of the Securities Act,
which is being or will be delivered to the purchaser or transferee at or prior
to the time of delivery of the certificates evidencing the Warrant or Warrant
Shares to be sold or transferred.
(b) Conditions to Transfer. Prior to any such proposed transfer
(including, without limitation, a transfer by will or pursuant to the laws of
descent and distribution), and as a condition thereto, if such transfer is not
made pursuant to an effective registration statement under the Securities Act,
the Holder will, if requested by the Company, deliver to the Company (i) an
investment covenant, in form and substance equivalent to that signed by the
original Holder of this Warrant, signed by the proposed transferee, (ii) an
agreement by such transferee to the restrictive investment legend set forth
herein on the certificate or certificates representing the securities acquired
by such transferee, (iii) an agreement by such transferee that the Company may
place a "stop transfer order" with its transfer agent or registrar, and (iv)
an agreement by the transferee to indemnify the Company to the same extent as
set forth in the next succeeding paragraph.
(c) Indemnity. The Holder acknowledges that the Holder understands
the meaning and legal consequences of this Section 5, and the Holder hereby
agrees to indemnify and hold harmless the Company, its representatives and
each officer and director thereof from and against any and all loss, damage or
liability (including all attorneys' fees and costs incurred in enforcing this
indemnity provision) due to or arising out of (a) the inaccuracy of any
representation or the breach of any warranty of the Holder contained in, or
any other breach by the Holder of, this Warrant, (b) any transfer of the
Warrant or (c) any untrue statement or omission to state any material fact in
connection with the investment representations or with respect to the facts
and representations supplied by the Holder to counsel to the Company upon
which its opinion as to a proposed transfer shall have been based.
(d) Transfer. Upon surrender of this Warrant to the Company or at
the office of its stock transfer agent, if any, with assignment documentation
duly executed and funds sufficient to pay any transfer tax, and upon
compliance with the foregoing provisions, the Company shall, without charge,
execute and deliver a new Warrant in the name of the assignee named in such
instrument of assignment, and this Warrant shall promptly be canceled. Any
assignment, transfer, pledge, hypothecation or other disposition of this
Warrant attempted contrary to the provisions of this Warrant, or any levy of
execution, attachment or other process attempted upon the Warrant, shall be
null and void and without effect.
(e) Legend and Stop Transfer Orders. Unless the Warrant Shares
have been registered under the Securities Act, upon exercise of any part of
the Warrant and the issuance of any of the Warrant Shares, the Company shall
instruct its transfer agent to enter stop transfer orders with respect to such
shares, and all certificates representing Warrant Shares shall bear on the
face thereof substantially the following legend, insofar as is consistent with
Massachusetts law:
"The shares of common stock represented by this
certificate have not been registered under the
Securities Act of 1933, as amended, and may not be
sold, offered for sale, assigned, transferred or
otherwise disposed of unless registered pursuant to the
provisions of that Act or an opinion of counsel to the
Company is obtained stating that such disposition is in
compliance with an available exemption from such
registration."
6. Loss, etc. of Warrant. Upon receipt of evidence satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant, and
of indemnity reasonably satisfactory to the Company, if lost, stolen or
destroyed, and upon surrender and cancellation of this Warrant if mutilated,
the Company shall execute and deliver to the Holder a new Warrant of like
date, tenor and denomination.
7. Warrant Holder Not Shareholder. Except as otherwise provided
herein, this Warrant does not confer upon the Holder any right to vote or to
consent to or receive notice as a shareholder of the Company, as such, in
respect of any matters whatsoever, or any other rights or liabilities as a
shareholder, prior to the exercise hereof.
8. Communication. No notice or other communication under this
Warrant shall be effective unless the same is in writing and is mailed by
first-class mail, postage prepaid, addressed to:
(a) the Company at 1000 Main Street, Acton, Massachusetts 01720,
or such other address as the Company has designated in writing to the Holder,
or
(b) the Holder at the address contained in the first paragraph of
this Warrant, or such other address as the Holder has designated in writing to
the Company.
9. Headings. The headings of this Warrant have been inserted as a
matter of convenience and shall not affect the construction hereof.
10. Applicable Law. This Warrant shall be governed by and
construed in accordance with the law of the Commonwealth of Massachusetts
without giving effect to the principles of conflict of laws thereof.
IN WITNESS WHEREOF, PAMET SYSTEMS, INC., has caused this Warrant to
be signed by a duly authorized officer as of this 30th day of August, 2001.
ATTEST: PAMET SYSTEMS, INC.
By:_______________________ By:___________________________________
Name: Richard C. Becker
Name: David T. McKay
Title: VP, Finance and
Administration Title: President & CEO
SUBSCRIPTION
The undersigned, __________________________________________,
pursuant to
the provisions of the foregoing Warrant, hereby agrees to subscribe for the
purchase of
_________________________ shares of the Common Stock of PAMET SYSTEMS, INC.
covered
by said Warrant, and makes payment therefor in full at the price per share
provided by said Warrant.
Dated __________________ Signature__________________________
Address____________________________
____________________________
ASSIGNMENT
FOR VALUE RECEIVED _________________________ hereby sells, assigns
and
transfers unto _________________________ the foregoing Warrant and all rights
evidenced thereby,
and does irrevocably constitute and appoint _________________________,
attorney, to transfer said
Warrant on the books of PAMET SYSTEMS, INC.
Dated __________________ Signature_________________________
Address___________________________
___________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED _________________________ hereby assigns and
transfers unto _________________________ the right to purchase
_________________________
shares of the Common Stock of PAMET SYSTEMS, INC. by the foregoing Warrant,
and a
proportionate part of said Warrant and the rights evidenced hereby, and does
irrevocably constitute
and appoint _________________________, attorney, to transfer that part of said
Warrant on the
books of PAMET SYSTEMS, INC.
Dated ___________________ Signature__________________________
Address____________________________
____________________________