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, 2002
[ ] 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____ No__X___
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, 2002 and December 31, 2001
Condensed Statements of Operations
for the quarters ended September 30, 2002
and 2000 and nine month periods ended
September 30, 2002 and 2001
Condensed Statement of Cash Flows
for the nine months ended September 30,
2002 and 2001
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)
Certifications
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Condensed Balance Sheets September 30, December 31,
2002 2001
------------ ------------
CURRENT ASSETS (unaudited)
Cash $5,826 $3,537
Accounts receivable, net of allowance
for doubtful accounts of $170,000;
and factored receivables of
$218,552 and $33,500, respectively 224,209 442,803
Accounts receivable, factored 75,443 6,700
Inventory, net of reserve of $10,662 40,300 4,079
Prepaid expenses and other current
assets 38,132 128,438
------ -------
TOTAL CURRENT ASSETS 383,910 585,557
PROPERTY AND EQUIPMENT, net 36,510 61,602
DEPOSITS 82,145 82,145
------ ------
TOTAL ASSETS $502,565 $729,304
======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt,
net of discount $1,820,533 $823,242
Notes payable to related party 182,500 25,000
Accounts payable, trade 1,187,795 922,042
Accounts payable, related parties 62,819 41,915
Current portion of accrued interest
payable on long-term debt 391,799 235,388
Current portion of deferred gain on
sale of land and building 42,614 42,614
Accrued expenses 750,973 872,884
Deferred software maintenance revenue
and unearned revenue 885,368 677,028
------- -------
TOTAL CURRENT LIABILITIES 5,324,401 3,640,113
ACCRUED INTEREST PAYABLE on long-term debt,
net of current portion 30,732 57,735
DEFERRED GAIN on sale of land and building,
net of current portion 121,313 153,274
LONG TERM DEBT, net of current portion and
discount 648,061 1,344,163
------- ---------
TOTAL LIABILITIES 6,124,507 5,195,285
--------- ---------
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,
2002 and December 31, 2001 44,380 44,380
Additional paid-in Capital 8,673,496 8,673,496
Accumulated deficit (14,339,818) (13,183,857)
---------- ----------
TOTAL STOCKHOLDERS DEFICIT (5,621,942) (4,465,981)
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS DEFICIT $502,565 $729,304
======= =======
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,
------------------- ----------------------
2002 2001 2002 2001
Net sales $364,027 $715,405 $1,120,338 $1,422,439
Cost of product 8,318 139,996 124,025 256,375
------- ------- --------- ---------
355,709 575,409 $996,313 1,166,064
Operating expenses:
Personnel costs 519,525 444,273 1,435,455 $1,477,230
Rent, utilities, telephone 52,278 48,940 143,777 150,162
Travel and entertainment 10,025 32,008 35,695 82,144
Professional fees 63,251 39,892 119,491 245,013
Depreciation and amortization 8,364 27,992 25,093 84,784
Research and development 138 9,049 2,159 114,634
Other operating expenses 44,149 64,934 147,620 130,232
------- ------- --------- ---------
Total operating expenses 697,730 667,088 1,909,290 2,284,199
------- ------- --------- ---------
Income(loss) from operations (342,021) (91,679) (912,977) (1,118,135)
Interest income(expense), net (97,539) (52,652) (242,983) (152,978)
Gain on Sale of Fixed Assets -- -- -- 2,402
Net income(loss) $(439,560) $(144,331) $(1,155,960)$(1,268,711)
======= ======= ========= =========
Earnings(loss) per weighted
average common share $(.10) $(.03) $(.26) $(.29)
=== === === ===
Weighted average shares used
in computing earnings per
share 4,437,976 4,355,554 4,437,976 4,355,554
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, 2002 September 30, 2001
------------------ ------------------
Operating Activities:
Net loss $(1,155,960) $(1,268,711)
Adjustments to reconcile net loss to
net cash used for operating activities:
Deferred gain on sale of land
and building (31,961) (31,961)
Depreciation and amortization 25,093 84,784
Gain on sale of property and
equipment -- (2,402)
Amortization of discount on
long-term debt 39,303 --
Changes in operating assets and
liabilities:
Accounts receivable, trade 218,594 (494,650)
Accounts receivable, factored (68,743) 14,770
Inventory (36,221) 6,101
Prepaid expenses and other current
assets 90,306 (31,729)
Deposits -- 2,540
Due to factor -- (36,199)
Accounts payable, trade 265,753 39,493
Accounts payable, related party 20,904 16,855
Accrued interest payable on
long-term debt 146,292 102,899
Accrued expenses (121,911) 203,675
Deferred software maintenance
revenue and unearned revenue 208,340 325,066
------- -------
Total adjustments 755,749 199,242
Net cash used for operating
activities (400,211) (1,069,469)
Investing activities:
Expenditures for property and
equipment -- (2,904)
Proceeds from the sale of property
and equipment -- 3,860
----- -----
Net cash provided by/(used for)
investing activities -- 956
----- -----
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Financing activities:
Proceeds from long-term debt-
convertible promissory notes 245,000 814,149
Proceeds from related party notes 182,500 --
Payment of related party notes 25,000
Issuance of capital stock -- 257,729
------- -------
Net cash provided by financing
activities 402,500 1,071,878
------- ---------
Net increase in cash 2,289 3,365
Cash at beginning of period 3,537 1,507
----- ------
Cash at end of period $5,826 $4,872
===== =====
Supplemental disclosure of cash flow
information:
Cash paid for interest: $63,254 $59,769
====== ======
Summary of non-cash financing activities:
Accrued interest-long-term convertible
promissory note converted to long-term
convertible promissory note $16,884 --
====== =======
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, 2002, the results of
operations for the three and nine month periods then ended and 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, 2002 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.
Management believes that its 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 2002.
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-based applications. During the nine month period ended
September 30, 2002, the Company received $245,000 through the issuance of long-
term convertible promissory notes to three investors with an interest rate of
7%. Finally, the Company entered into a Commercial Services Agreement with a
vendor pursuant to which eight of the Company's employees became employees of
the vendor and were leased back to the Company. Under the agreement, the
vendor will bill the Company quarterly for the employees who are working
exclusively on projects for the Company. The original agreement, which expires
on December 31, 2002, specifies repayment in cash or in the equivalent value of
Company common stock, at the discretion of Management. Subsequent to June 30,
2002, the Company received $260,000 through the issuance of additional senior
long-term convertible promissory notes to this vendor with an interest rate of
7%, renegotiated the Commercial Services Agreement extending its term to July
31, 2003 and changing repayment options for services provided before October 1,
2002 to cash or Company common stock at the vendor's option and to a senior
convertible promissory note for services provided on or after October 1, 2002,
and is presently negotiating to extend all existing convertible promissory
notes maturing in 2002 and 2003 to September 30, 2005. The renegotiated
Commercial Services Agreement calls for extending 95% of the Company's existing
convertible promissory notes maturing in 2002 and 2003. In addition to the
$260,000 in cash, the same vendor also committed up to $740,000 in services
under the renegotiated Commercial Services Contract. The Board members are
willing to seek additional funding, as needed. 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 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 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.
Note (4) Loss Per Common Share
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.
Note (5) 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, on an annual basis,
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 in the
Company's annual financial statements included in Form 10-KSB.
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, FireServer, and
CADServer. The Company also offers several companion products including
Imaging, Mobile Access and Advanced Reporting 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, 2002
decreased 49.1% from the three month period ended September 30, 2001 resulting
in year-to-date 2002 revenues that are $302,101 or 21.2% less than in 2001. The
slowdown in the demand which the Company began to feel in the second half of
2000 persisted throughout 2001 and 2002. Management believes that public
safety agencies are being forced to defer decisions to replace aging and/or
inadequate technology infrastructure and application software until economic
conditions stabilize and improve. State revenue shortfalls are forcing cuts in
state aid to cities and towns which are the majority of the Company's
customers. These cuts are forcing municipalities to delay capital
expenditures.
The current economic conditions and the more stable state of the Windows
product suite caused the Company to refocus early in 2002. As a result of the
lukewarm reception the Windows product received upon its initial release in
1999 due to a lack of robustness and functionality, the Company invested a
great deal of its resources in 2000 and 2001 on product enhancements and
improvements. In 2002 the product suite finally realized its original promise,
gaining acceptance from the Company's legacy customers as well as new
customers. Recent product releases improve its ease of use and substantially
extend its capabilities. As a result, the Company has received certification
from three states for its 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 (NFIRS 5.0) capabilities.
The Company has also developed utilities to convert customer data files from
older systems, which eases the transition for agencies. This newly competitive
product line has allowed the Company to accelerate the rate of legacy product
migrations late in 2002 and has improved Pamet's reputation in the user
community.
While the suite of products wi11 continue to be enhanced and maintained, the
resources required to do so are substantially less than those needed to create
the product initially. In keeping with the general shift from product creation
to product enhancement, sales and marketing, the Company's Board of Directors
decided early in 2002 to bring in a new Chief Executive Officer (CEO)
experienced in growing small technology companies. The new CEO came on board
during the second quarter of 2002 and initially focused on reducing expenses
and increasing revenues, while realigning resources to support a more
aggressive sales and marketing program. During 2002, the new CEO worked to
stabilize the Company's financial picture and is currently negotiating to
extend and restructure the long-term debt while improving cash flow with a new
$1,000,000 receivables financing credit facility. Also, in the second quarter
of 2002, the Company entered into a Commercial Services Agreement with a vendor
under which eight of the Company's employees became employees of the vendor and
are leased back to the Company. This vendor invoices the Company quarterly for
the cost of the employees who are working on projects exclusively for the
Company. Subsequent to September 30, 2002, this agreement was renegotiated
extending its term from December 31, 2002 to July 31, 2003. Under the
renegotiated agreement, amounts due for services performed in the second and
third quarters of 2002 will be repaid, at the vendor's discretion, in cash or
Company common stock at a conversion rate of $.115 per share. The value of the
Commercial Services Agreement for October 1, 2002 through July 31, 2003 is
limited to an additional $740,000 and will be repaid with senior convertible
debt. In addition, the Company received an additional $260,000 from the vendor
in return for an additional senior convertible debt of like principal amount.
At the beginning of the third quarter of 2002, the Company reorganized its
Sales Department to more effectively pursue and close business in states where
it has existing reference accounts. In those states it is putting particular
emphasis on its competitive strengths including joint police/fire dispatch,
multi-position dispatch, and comprehensive reporting. The Company has also
broadened the focus of its sales and marketing efforts to reach new market
segments. Pamet Systems is actively marketing to larger, more technologically
demanding agencies, as well as packaging and aggressively pricing the product
to meet the needs of smaller agencies. Management believes a significant
market opportunity exists for its suite of products as these efforts have
resulted in a growing pipeline of active prospects which includes prospective
customers who have seen a product demonstration, have expressed interest in the
product, and expect to have funding available. No assurance, however, can be
given that such prospective customers will actually purchase the products.
Also during the third quarter of 2002, the Company finished paying the IRS for
all outstanding payroll tax liabilities from Q3 2001, Q4 2001 and Q1 2002.
Early in the third quarter of 2002 the IRS placed a tax lien on the Company for
these outstanding taxes, but with their full payment later in the quarter
Management expects that the IRS will be lifting the lien shortly. The lien has
had no known material impact on the Company's busines. Additionally, the
Massachusetts Department of Labor (MDOL) undertook an audit of the Company's
401(k) plan during the third quarter of 2002. While the MDOL has not yet issued
its final report, the Company expects the results of the audit will have no
material impact on the Company's financial position.
Management believes the Company's product development efforts during the past
five years position the Company to expand its business as more and more
prospective customers retire legacy systems (e.g., ones built on MS-DOS, IBM
AS/400, DEC VAX/Alpha, etc.). Management also believes that it is possible
that grant programs will be announced as Homeland Security funding expands to
encompass the technology needs of first responders. 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 Management's 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.
Nevertheless, there can be no assurance that the Company will benefit from or
be able to take advantage of these benefits.
Despite additional funding, the commercial services contract, and cost cutting
measures, the Company is continuing to face a shortage of working capital.
There are no assurances that the Company will be successful in its future
fundraising 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.
Three Months Ended September 30, 2002 vs. Three Months Ended September 30,
2001
Net sales for the three month period ended September 30, 2002 (the 2002 period)
decreased 49.1% to $364,027 from $715,405 for the three month period ended
September 30, 2001 (the 2001 period). The sales for the 2002 period reflected
significant decreases in system software, mobile, and software support
revenues. Software support revenues decreased 11.5% to $250,155 from $282,628
in the 2001 period. The decrease in software support revenues is due in part
to the fact that the Company stopped billing support fees for the Company's
third-party mobile software provider in July. Instead the provider now bills
the support fees directly to the end-user. In prior years, the Company was
charged support for the end-users by the third-party vendor and, in turn,
rebilled this support to the end-users. The new billing arrangement reduces
the total revenues, cost of sales and gross margin of the Company. Partially
offsetting the impact of the direct billing of mobile support to the end-user
is the higher support rates charged in 2002 to VMS customers who have
historically paid 14% of the system software purchase price. For the period
July, 2002 through June 2003, this rate was raised to 19% consistent with the
rate charged Windows customers. Pamet Systems continued to see steady support
from its installed base as VMS customers continued to migrate to the Windows
products. These VMS customers receive the Windows software at no charge,
however, they must pay for installation, training, and data conversion.
Cost of product decreased 94.1% or $131,668 to $8,318 for the 2002 period from
$139,996 for the 2001 period as a result of the support billing changes
described above, the reduction in lower margin mobile sales, and the overall
trend toward software only sales for all products. 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 since the contractor takes
the hardware revenue, but significantly increases margins since hardware
margins are typically much lower than the Company's software margins. The
result of the above changes was an increase in gross margin from 80.4% in the
2001 period to 97.7% in the 2002 period.
Operating expenses reflected a increase of $30,642 or 4.6% to $697,730 for the
2002 period from $667,088 for the 2001 period. The most significant
factors in this increase were personnel expenditures and professional fees. The
increases were partially offset by decreases in travel, depreciation and other
operating expenses.
Personnel costs increased 16.9% or $75,252 to $519,525 for the 2002 period
compared to $444,273 for the 2001 period. This increase can be attributed to
the accrual of severance pay for two employees laid off on September 30, 2002,
a bonus accrual for the new CEO, the added expense of an additional employee
in Engineering and the increased costs associated with the Commercial Services
Agreement. Rent, utilities and telephone increased $3,338 to $52,278 in the
2002 period from $48,940 for the 2001 period. A rent increase specified in the
lease of the headquarters building took effect in September 2002 and a
significant increase in electric usage during the summer months explain the
additional expense. Travel and entertainment expenses decreased 68.7% to
$10,025 for the 2002 period from $32,008 for the 2001 period. The decrease can
be attributed to a reduction in installations outside the Northeast and
decreased trade show attendance during the quarter. Professional fees
increased 58.6% to $63,251 for the 2002 period from $39,892 for the 2001 period
as the new CEO was initially compensated on a contract basis during the 2002
period. Depreciation expense decreased 70.1% to $8,364 for the 2002 period from
$27,992 for the 2001 period. All capitalized software development costs were
fully amortized in the 2001 period resulting in a significant decrease in 2002
expense. External research and development expenditures reflected a decrease
of $8,911 or 98.5% to $138 for the 2002 period from $9,049 in the 2001 period.
The Company continues to focus on using internal resources to complete the
development work on the Windows product line, both to build an in-house staff
to support ongoing product enhancements and extensions and to keep expenditures
in line with revenues. The internal team of engineering and support resources
are focusing on delivering advanced product capabilities and migrating
customers from the VMS system to the Windows product. Other operating expenses
decreased 32.0% to $44,149 for the 2002 period from $64,934 for the 2001
period. A significant part of the decrease can be attributed to a decrease in
tax penalties.
Net interest expense for the 2002 period was $97,539 compared to $52,652 for
the 2001 period. This increase is the result of increased outstanding
convertible debt and the amortization of the discount on long-term convertible
notes issued with detachable warrants.
The net loss for the 2002 period was $(439,560) or $(.10) per share compared to
net loss of $(144,331) or $(.03) per share for the 2001 period. The increased
loss resulted from the reduced sales and increased expenses in the 2002 period.
Nine Months Ended September 30, 2002 vs. Nine Months Ended September 30, 2001
Net sales for the nine month period ended September 30, 2002 (the 2002 period)
of $1,120,338 decreased $302,101 or 21.2% from net sales of $1,422,439 for the
nine months ended September 30, 2001 (the 2001 period). Increases in software
support and migration revenues were offset by decreases in system software,
mobile, and imaging revenues. During the first nine months of 2002 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. Software support revenues
increased 3.8% to $789,155 for the 2002 period from $760,896 for the 2001
period reflecting the fact that the increases from a larger customer base and
higher rates are being offset by the direct billing of mobile software support
by the Company's third-party vendor for the July 2002 through June 2003 period.
Support revenues accounted for 70.4% of sales in the 2002 period as compared to
53.5% of sales in the 2001 period. Cost of product decreased 51.6% to $124,025
for the 2002 period from the $256,375 for the 2001 period resulting in a gross
margin increase to 88.9% for the 2002 period from 82.0% for the 2001 period.
The improvement in margin can be attributed to software only sales, the
increase in high margin support revenues, and improved software support margins
resulting from the cessation of billing for third-party mobile support.
Net operating expenses decreased $374,909 or 16.4% to $1,909,290 for the 2002
period compared to $2,284,199 for the 2001 period. As part of Management's
efforts to make the Company profitable, the Company instituted broad cost
cutting measures. The 2.9% reduction in personnel spending from $1,477,230 in
the 2001 period to $1,435,455 in the 2002 period can be attributed to attrition
and lay offs, although severance costs for employees laid off at the end of the
2002 period partially offset the reductions. Rent, utilities and telephone
decreased $6,385 or 4.3% to $143,777 in the 2002 period from $150,162 in the
2001 period due to a reduction in telephone expense due to lower rates and
reduced headcount. Travel and entertainment decreased 56.5% to $35,695 in the
2002 period from $82,144 in the 2001 period reflecting decreases in all areas
except employee mileage. These reductions are the result of decreased
installations and support outside the Northeast, attendance at fewer trade
shows and stricter guidelines on travel spending. Professional fees decreased
51.2% to $119,491 in the 2002 period from $245,013 in the 2001 period. 2001
consulting spending included one-time expenses from hiring professional
assistance with the Company's business plan and a financial consultant to
evaluate capital funding alternatives. The Company did not incur these type of
expenses in 2002. Offsetting these decreases was the cost of the new CEO who
worked during the second and third quarters of 2002 on a consulting basis.
Depreciation expense decreased 70.4% from $84,784 in the 2001 period to $25,093
in the 2002 period. The capitalized software development from the Windows
development effort was fully amortized in 2001 resulting in the decrease in
2002 spending. External research and development costs decreased 98.1% in 2002
to $2,159 from $114,634 in the 2001 period. The Company is using internal
engineering and support resources to complete the Windows development effort.
The increase of $17,388 or 13.4% in other operating expenses is attributable to
the 2001 reduction in the reserve for uncollectible accounts resulting from the
payment of several old invoices which reduced expenses in the 2001 period. The
2002 period did not reflect a similar expense reduction. However, the 2002
period did reflect lower spending for tax penalties and marketing expenses.
Net interest expense was $242,983 for the 2002 period compared to $152,978 for
the 2001 period. This increase can be attributed to increased convertible debt
outstanding which accrues interest at 11% or 7% and the amortization of
discounts on convertible debt with detachable warrants.
The net loss for the 2002 period was $(1,155,960) or $(.26) per share compared
to a net loss of $(1,268,711) or $(.29) per share for the 2001 period.
Liquidity and Capital Resources
The Company had a working capital deficit of $(4,940,491) at September 30, 2002
compared to $(3,054,556) at December 31, 2001. The most significant reasons
for this deterioration are the increases in the current portion of long-term
debt, deferred software maintenance revenue, and trade accounts payable. The
negative impact of the increased liabilities was compounded by a decrease in
accounts receivable and other current assets.
During the nine month period ended September 30,2002, the Company received
$245,000 from investors in new long-term debt financing. At September 30,
2002, $2,496,033 of convertible promissory notes and $422,531 of related
accrued interest remained outstanding as liabilities. However, the long-term
debt is reported net of discounts of $27,441 associated with notes issued with
detachable warrants. In general, $835,000 of the outstanding current
convertible debt at the end of the 2002 period accrues interest at 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 $2.19 to $2.50 per
common 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 $2.19 to
$2.50 per share. The remaining $1,661,033 of long term convertible debt at the
end of the 2002 period accrues interest at 7%; has a two year term; carries the
option of the conversion of the principal to common stock by the debt holder at
conversion prices ranging from $.20 to $.6825 per share, or the repayment of
the 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 $1.50 per share. In addition, the Company negotiated a Commercial
Services Agreement with a vendor in April, 2002 under which eight of the
Company's employees became employees of the vendor and are leased back to the
Company. This vendor invoices the Company quarterly for the cost of the
employees who are working on projects exclusively for the Company. The
contract negotiated in April 2002 specifies repayment in cash or Pamet Systems
common stock, at the discretion of Management. During current period, the
Company was billed by the vendor for services performed under the contract
in Q2 2002. Payment for these services is currently overdue.
Since the Company was unable to repay the outstanding convertible debt
principal and accrued interest due upon expiration of notes in 2002 and the
availability of funds to repay the notes due in 2003 could not be reasonably
assured, Management is currently in negotiations to extend all the existing
convertible debt due in 2002 and 2003 to September 30, 2005. The $245,000 of
convertible debt funding received in the current year prior to September 30,
2002 and approximately $201,000 in vendor payables converted to a long-term
convertible note subsequent to September 30, 2002 carry terms consistent with
the prior round of funding accruing interest at 7%; having a two year term;
carrying the option of the conversion of the principal to common stock by the
debt holder at conversion price of $.20 per share, or the repayment of the
principal and accrued interest by the Company; and having 100% warrant coverage
attached that allows for the purchase of additional shares of common stock at
$1.00 per share.
Cash was $5,826 at September 30, 2002 and $3,537 at December 31, 2001. Accounts
receivable decreased to $224,209 at September 30, 2002 from $442,803 at
December 31, 2001. Pamet Systems hired a new President and CEO in April of
2002 and his primary focus has been to alleviate the urgent cash flow situation
which continued during the first nine months of 2002 and to address the
Company's lack of profitability. In addition to beginning negotiations to
extend the current convertible promissory notes as discussed above, the Company
renegotiated the length and repayment terms of the original Commercial Services
Agreement dated April, 2002. Under the renegotiated terms of the agreement,
services rendered under the agreement during the second and third quarters of
2002 will be repaid, at the vendor's discretion, in cash or common stock at a
conversion rate of $.115 per share. Service provided under the agreement from
October 1, 2002 to July 31, 2003 will be repaid in senior convertible
promissory notes. Under the terms of the extended Commercial Services
contract, the Company agrees to extend 95% of the Company's existing
convertible promissory notes that expire in 2002 and 2003 to September 30,
2005. The same vendor has made an additional commitment of up to $1,000,000-
$260,000 in cash and up to $740,000 under the renegotiated Commercial Services
Agreement from October 1, 2002 through July 31, 2003. The vendor will receive
senior convertible promissory notes maturing September 30, 2005 with an
interest rate of 7%, a conversion price of $.115 per share, 20% warrant
coverage, and a warrant exercise price of $.45 per share for this investment.
Thirdly, the Company signed a new $1,000,000 receivables financing agreement
during the second quarter of 2002. Finally, the Company reduced headcount by
approximately 20% through layoffs in the first quarter of 2002. The Company
continued to reduce personnel during the third quarter of 2002 and realign
remaining employees to focus on sales, product extensions and enhancements, and
legacy customer migrations. Despite these new sources of funding and the cost
reduction plans that have been implemented, the continued sluggish economy has
perpetuated slow sales in the public safety sector and the Company continues to
tightly control expenses and seek additional funding. 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.
There can be no assurance about the Company's ability to repay the its
indebtedness or other obligations as they become due. If the Company's
financial difficulties continue it could have a material adverse effect on the
Company, its creditors and its stockholders.
As of September 30, 2002, the Company had accumulated approximately $13,800,000
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 $10,000,000 which expire between the years 2002 and 2006. 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: having backlog sales and funding to support
operations through 2002; enhancement and maintenance of the Company's products;
competition and consolidation in the public safety marketplace; market
expectation for the Windows operating environment and customer acceptance of
the Company's Windows products; ability of the Windows product to meet market
needs; market outlook and opportunities; growth potential in the year 2002 and
beyond; law enforcement trends; availability of Homeland Security and other
grant funding for customers; adequacy of funding and corporate infrastructure
to support operations and anticipated growth; increased contribution from
support fees; economic and competitive factors affecting the public safety
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 insufficient capital resources to operate the Company;
inability to obtain extensions of the Company's long term debt; inability to
successfully market and sell the Windows 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.
ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and that
such information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Principal Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Within the 90 days prior to the date of this report on Form 10-Q, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's Chief Executive Officer and Principal Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14). Based upon
that evaluation, the Chief Executive Officer and Principal Financial Officer
concluded that the Company's disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company
(including its consolidated subsidiary) required to be included in the
Company's periodic SEC filings. Subsequent to the date of that evaluation,
there have been no significant changes in internal controls or in other factors
that could significantly affect internal controls.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
The Company failed to pay when due the principal and interest on a $35,000
convertible note due May 9, 2002 issued to West Country Partners. The
accrued and unpaid interest on the note as of the date of the filing of
this 10-Q is approximately $14,682.78. Management has commenced negotiation
with the noteholder to extend the note until September 30, 2005.
The Company failed to pay when due the principal and interest on a $375,000
convertible note due May 13, 2002 issued to BSI SA. The accrued and unpaid
interest on the note as of the date of the filing of this 10-Q is
approximately $156,862.96. Management has commenced negotiation with the
noteholder to extend the note until September 30, 2005.
The Company failed to pay when due the principal and interest on a $350,000
convertible note due May 31, 2002 issued to Sumaria Systems. The accrued
and unpaid interest on the note as of the date of the filing of this 10-Q
is approximately $144,506.79. Management has commenced negotiation with the
noteholder to extend the note until September 30, 2005.
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
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes- Oxley Act of 2002.
99.2 Certification of Principal Financial Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002.
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)
March 3,2003 (s) Kirke S. Curtis
_______________________________ ______________________
Date Kirke S. Curtis
President
Chief Executive Officer
CERTIFICATIONS
I, Kirke S. Curtis, as President and CEO of Pamet Systems, Inc. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pamet Systems, Inc.
(the "Company") for the fiscal quarter ended September 30, 2002 (this
"Report");
2. Based on my knowledge, this Report does not contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material respects
the financial condition and results of operations and cash flows of the Company
as of, and for, the periods presented in this Report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Report (the "Evaluation Date"); and
(c) presented in this Report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
the Company's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize, and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
6. The Company's other certifying officers and I have indicated in this Report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
March 3, 2003
(s) Kirke S. Curtis
______________________
Kirke S. Curtis
Chief Executive Officer
Pamet Systems, Inc
1000 Main Street
Acton, MA 01720
978-263-2060
I, Kirke S. Curtis, as Principal Financial Officer of Pamet Systems, certify
that:
1. I have reviewed this quarterly report on Form 10-QSB of Pamet Systems, Inc.
(the "Company") for the fiscal quarter ended September 30, 2002 (this
"Report");
2. Based on my knowledge, this Report does not contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material respects
the financial condition and results of operations and cash flows of the Company
as of, and for, the periods presented in this Report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Report (the "Evaluation Date"); and
(c) presented in this Report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
the Company's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize, and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
6. The Company's other certifying officers and I have indicated in this Report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
March 3, 2003
/s/ Kirke S. Curtis
____________________
Kirke S. Curtis
Principal Financial Officer
Exhibit 99.1 Certification of Chief Executive Officer
PAMET SYSTEMS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pamet Systems, Inc. (the "Company")
on Form 10-QSB for the period ended September 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
- the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
- the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
March 3, 2003
(s) Kirke S. Curtis
______________________
Kirke S. Curtis
Chief Executive Officer
Exhibit 99.2 Certification of Principal Financial Officer
PAMET SYSTEMS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pamet Systems, Inc. (the "Company")
on Form 10-QSB for the period ended September 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
- the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
- the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
March 3, 2003
(s) Kirke S. Curtis
______________________
Kirke S. Curtis
Principal Financial Officer