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, 1996
[ ] 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 (508) 263-2060
Check whether the issurer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes__X__ No_____
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the close of the period covered by this report:
Title of each class Number of shares outstanding
Common stock 2,068,950
($.01 par value)
Transitional Small Business Disclosure Format
YES______ NO___X___
PAMET SYSTEMS, INC.
INDEX TO FORM 10-QSB
PAGE
Part I - Financial Information
Item 1 - Financial Statements
Condensed Balance Sheets 1
September 30, 1996 and December 31, 1995
Condensed Statements of Operations 2
for the quarter ended September 30, 1996
and 1995 and nine months ended September 30,
1996 and 1995
Condensed Statement of Cash Flows 3-4
for the nine months ended September 30,
1996 and 1995
Item 2 - Management's Discussion and Analysis of 6-8
Financial Condition or Plan of Operations
Part II - Other Information
Item 1 - Legal Proceedings 9
Item 2 - Changes in Securities 9
Item 3 - Defaults Upon Senior Securities 9
Item 4 - Submission of Matters to a Vote of 9
Security Holders
Item 5 - Other Information 9
Item 6 - Exhibits and Reports on Form 8-K 9
Signature(s) 10
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Pamet Systems, Inc.
CONDENSED BALANCE SHEETS September 30, December 31,
1996 1995
(unaudited)
CURRENT ASSETS
Cash $ 187,557 $ 28,264
Accounts receivable, net of allowance for
doubtful accounts of $10,000 677,272 246,161
Inventory 50,359 26,921
Prepaid expenses and other current assets 34,741 46,644
---------- ----------
TOTAL CURRENT ASSETS 949,929 347,990
PROPERTY AND EQUIPMENT, NET 923,517 922,596
OTHER ASSETS 575 1,025
RESTRICTED CASH 26,969 26,450
---------- ----------
TOTAL OTHER ASSETS 27,544 27,475
$1,900,990 $1,298,061
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 382,068 $ 245,516
Accrued expenses 145,990 140,684
Notes payable-related party 225,099 81,099
Deferred software maintenance revenue 335,442 190,034
Current portion of long-term debt 14,100 13,069
--------- ---------
TOTAL CURRENT LIABILITIES 1,102,699 670,402
LONG TERM DEBT, less current portion 498,508 509,426
UNEARNED SUPPORT REVENUE 54,123 79,283
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued
Common stock, $.01 par value, 7,500,000 shares
authorized; 2,060,200 issued and outstanding 20,690 20,183
Additional paid-in Capital 4,089,636 4,072,629
Accumulated deficit (3,864,666) (4,053,862)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 245,660 38,950
$1,900,990 $1,298,061
========== ==========
See accompanying notes to financial statements.
Item 1 - Financial Statements
Pamet Systems, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Net sales $788,402 $267,427 $1,785,928 $783,334
Cost of product 319,798 106,369 656,371 319,926
-------- -------- ---------- ----------
468,604 161,058 1,129,557 463,408
Operating expenses:
Personnel costs 201,276 172,885 537,864 498,918
Rent, utilities and telephone 15,498 16,841 45,281 53,618
Travel and entertainment 20,246 11,003 42,749 36,329
Professional fees 21,977 20,124 50,931 49,720
Depreciation 12,885 19,213 38,217 57,743
Other operating expenses 76,489 52,248 165,408 102,858
------- ------- ------- -------
Total operating expenses 348,371 292,314 880,450 799,186
------- ------- ------- -------
Income (loss) from operation 120,233 (131,256) 249,107 (335,778)
Interest income (expense) Net (22,830) (17,067) (59,911) (45,212)
------- ------- ------- -------
Net income (loss) $ 97,403 $(148,323) $ 189,196 $(380,990)
======== ======= ======= =======
Net income (loss) per share $.04 $(.07) $.08 $(.19)
==== ==== === ===
Shares used in Computing 2,380,796 1,966,250 2,396,745 1,966,250
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,
1996 1995
Cash flows provided by (used in)
operating activities:
Net income (loss) $189,196 $(380,990)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 38,217 95,944
Change in assets and liabilities
(Increase) Decrease accounts receivable (431,111) 168,160
(Increase) Decrease in inventory (23,438) 20,597
(Increase) Decrease in prepaids and other
current assets 11,903 (10,856)
Increase (Decrease) in accounts payable 136,552 (141,133)
Increase in deferred software
maintenance revenue 120,248 173,364
Increase in accrued payroll 5,306 13,932
(Increase) in restricted cash (519) (512)
(Increase) Decrease in deposits and
other assets 450 (2)
------- -------
Total adjustments (142,392) 319,494
Net cash provided by (used
in) operating activities 46,804 (61,496)
Cash flows from investing activities:
Sale or disposition of automobile 0 0
Sale of computer equipment 0 1,682
Capital expenditures for property and equipment (39,138) (2,938)
Capital expenditures for software 0 (1,157)
-------- --------
Net cash used in investing activities (39,138) (2,413)
Cash flows from financing activities:
Payment of mortgage (9,887) (8,676)
Net change in note payable related party 144,000 44,900
Exercise of stock options 17,514 15,844
-------- --------
Net cash from financing activities 151,627 52,068
Net increase (decrease) in cash 159,293 11,841
Cash at beginning of period 28,264 16,103
Cash and cash equivalents at end of period $187,557 $4,262
======== ======
Supplemental disclosure of cash
flow information:
Cash paid for interest $60,852 $47,732
See accompanying "Notes to Financial Statements (unaudited)"
PAMET SYSTEMS, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note (1) Statement Presentation
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of
September 30, 1996 and the results of operations for the three and nine
month periods and changes in cash flows for the periods then ended. There
were no material unusual charges or credits to operations during the
recently completed fiscal quarter.
The results reported for the three month and nine month periods ended
September 30, 1996 are not necessarily indicative of the results of
operations which may be expected for the entire year.
Note (2) Mortgage on Corporate Training, Development and Headquarters
Facility
On April 21, 1992 the Registrant consummated an agreement with the
Lexington Savings Bank of Lexington, MA. to mortgage the Registrant's
development, training and headquarters facility, located at 1000 Main
Street, Acton, Massachusetts. The original principal amount of the mortgage
was $560,000. On September 21, 1996 the note was extended for a one year
term with monthly payments determined according to a twenty-year
amortization period. $5,499, including interest at 10.25%, is payable
monthly. The bank has required an interest bearing compensating balance
account. On September 30, 1996 this account equaled $26,969.
Note (3) Earnings Per Share
Earnings per share are computed using the weighted number shares of
common stock and common stock equivalents outstanding during the period
using the treasury stock method.
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Overview
The Registrant's net sales consist primarily of sales of software and
turnkey computer systems, and support and update service fees. Sales
increased 194.8% for the three month period ended September 30, 1996 (the
1996 period) over the sales for the three month period ended September 30,
1995 (the 1995 period). The increase in sales is primarily due to an
increase in system sales and an increase in the sales of the Registrant's
digital imaging product (ImageServer). Approximately 30% of the sales in the
quarter represent sales from grants associated with the "Violent Crime
Control and Law Enforcement Act of 1994" (the Crime Bill). The Registrant
expects to recognize more sales from grants under the Crime Bill during the
final quarter of the year. In addition to the record sales recorded in the
1996 period, the Registrant had at 9/30/96 a backlog of over $700,000.
Three Months Ended September 30, 1996 vs.
Three Months Ended September 30, 1995
Net sales increased $520,975 or 194.8% to $788,402 for the 1996 period
from $267,427 for the 1995 period. The increase is due to sales increases of
all of the Registrant's products. The most significant increases were for
the Registrant's ImageServer and PoliceServer products. Sales of turnkey
systems for the 1996 period included 2 ImageServer, 7 PoliceServer and 2
FireServer Systems compared to 2 PoliceServer and 3 FireServer systems for
the 1995 period. Management believes that the increase in sales is due to
the release of a state grant program that has funded a number of imaging
systems in Massachusetts, the demand for fire systems associated with the
implementation of E-911 in New England and the awards associated with the
Crime Bill. Support revenues increased 11.2% or $10,342 to $102,645 for the
1996 period from $92,303 for the 1995 period reflecting the increase in the
customer base from the 1995 period. Cost of product increased to $319,798
for the 1996 period from $106,369 for the 1995 period reflecting the
increased sales. Gross margin remained effectively flat at 59.4% for the
1996 period compared to 60.2% for the 1995 period.
Operating expenses increased $56,057 or 19.2% to $348,371 for the 1996
period from $292,314 for the 1995 period. Personnel costs increased 16.4% to
$201,276 for the 1996 period from $172,885 for the 1995 period. The increase
reflects the additional part-time staffing for administrative and marketing
assistance and increased commissions. Rent, utilities and telephone
decreased 8.0% to $15,498 for the 1996 period from $16,841 for the 1995
period due to decreased phone charges. Travel and entertainment expenses
increased 84.0% to $20,246 for the 1996 period from $11,003 for the 1995
period due to travel expenses associated with trade shows, sales support,
and Crime Bill grant seminars. Professional fees increased 9.2% to $21,977
for the 1996 period from $20,124 for the 1995 period, primarily due to the
increased usage of legal services. Depreciation expense decreased 32.9% to
$12,885 for the 1996 period from $19,113 for the 1995 period primarily as a
result of the reduced depreciation on the older computer equipment and
office furnishings. Other operating expenses increased 46.4% to $76,489 for
the 1996 period from $52,248 for the 1995 period primarily due to increases
in tax penalties and Internet access/usage, and to expenses associated with
the Crime Bill grant seminars.
Net interest expense for the 1996 period increased to $22,830 for the
1996 period from $17,067 for the 1995 period reflecting the interest
associated with increased usage working capital loans from officers and
directors.
The net income increased to $97,403 or $.04 per share for the 1996
period from a loss of $(148,323) or $(.07) per share for the 1995 period.
This increase is associated with the significant increase in revenues for
the quarter.
Nine Months Ended September 30, 1996 vs.
Nine Months Ended September 30, 1995
Net sales for the nine month period ended September 30, 1996 (the 1996
period) increased $1,002,594 or 128.0% to $1,785,928 from $783,334 for the
nine month period ended September 30, 1995 (the 1995 period). The increase
in sales reflects an overall increase in the demand for the Registrant's
products. The most significant increases are associated with the
ImageServer, FireServer, and PoliceServer products. Support revenues
increased 13.3% to $297,833 for the 1996 period from $262,986 for the 1995
period reflecting the increase in the customer base from the 1995 period.
Cost of product increased 105.2% to $656,371 for the 1996 period from
$319,926 for the 1995 period reflecting the increased system sales. Gross
margin increased to 63.2% for the 1996 period from 59.2% for the 1995
period. The increase is due primarily to the higher number of turnkey system
sales and a reduction in the number of sales of lower mark-up hardware
upgrades.
Operating expenses increased $81,264 or 10.2% to $880,450 for the 1996
period from $799,186 in the 1995 period. Personnel costs increased 7.8% to
$537,864 for the 1996 period from $498,918 in the 1995 period. This reflects
the part-time staffing increases in the administrative and marketing areas
and increased commissions. Rent, utilities and telephone expenses decreased
$8,337 or 15.5% to $45,281 for the 1996 period from $53,618 for the 1995
period. This decrease is almost entirely associated with reductions in the
phone cost. Travel and entertainment expenses increased 17.7% to $42,749 for
the 1996 period from $36,329 for the 1995 period, reflecting the increase in
travel associated with sales support and the Crime Bill grant seminars in
the Southeast region. Professional fees increased 2.4% to $50,931 for the
1996 period from $49,720 for the 1995 period due to increased use of the
Registrant's legal counsel which was partially offset by a decrease in
financial consulting services. Depreciation expense decreased 33.8% to
$38,217 for the 1996 period from $57,743 for the 1995 period reflecting the
reduced depreciation associated with older computer equipment and
furnishings. Other operating expenses increased 60.8% to $165,408 for the
1996 period from $102,858 for the 1995 period. These increases reflect
increased reserves, an increase in tax penalties, and expenses associated
with the Crime Bill grant seminars.
Net interest expense was $59,911 for the 1996 period compared to
interest expense of $45,212 for the 1995 period reflecting the interest
associated with increased usage of working capital loans from directors and
officers.
The net income for the 1996 period was $189,196 or $.04 per share as
compared to a loss of $(380,990) or $(.19) per share for the 1995 period due
primarily to the increased revenues for the period.
Liquidity and Capital Resources
The Registrant's working capital improved to a deficit of $152,770 at
September 30, 1996 from a deficit of $322,412 at December 31, 1995 due to
the higher level of sales during the first nine months of 1996. Cash
increased to $187,557 at September 30, 1996 from $28,264 at December 31,
1995. Accounts receivable increased to $677,272 at September 30, 1996 from
$246,161 at December 31, 1995. The increased level of accounts receivable
reflects the increased sales of the Registrant's products. The Registrant is
experiencing an accounts receivable level that averages 60 days sales
outstanding.
The Registrant's financial condition was positively impacted during
the 1996 period by increased system sales. The increase in sales and
associated profitability has helped alleviate (at least temporarily) the
Registrant's liquidity and cash flow shortage, although they remain
problems. The Registrant has established a short term financing agreement
with a director to provide a working capital loan of up to $300,000 to help
address these issues. At September 30, 1996, $225,099 was outstanding under
this loan. In anticipation of the increased working capital needs associated
with the increased sales from the Crime Bill grants, management is exploring
other additional financing alternatives, such as a line of credit, sales of
securities, factoring, mergers, acquisitions or other business combinations,
although, there are no understandings, arrangements or agreements in this
regard. The Registrant is also continuing to evaluate sources of funding to
finance a project to make the Registrant's products hardware and operating
system independent in order to maintain the competitiveness and
attractiveness of the Registrant's products.
As of September 30, 1996 the Registrant had accumulated approximately
$3,700,000 in net operating loss carryforwards for federal income tax
purposes. Some of the loss carryforwards expire beginning in the year 2002.
Under the Internal Revenue Code of 1986, as amended, the rate at which a
corporation may utilize its net operating losses to offset its income for
federal tax purposes is subject to specified limitations during periods
after the corporation has undergone an "ownership change". It has been
determined that an ownership change did take place at the time of the
Registrant's initial public offering. However, the limitations on the loss
carryforwards exceeded the accumulated loss at the time of the "ownership
change". Thus there is no restriction on its use.
Inflation
Inflation has not had a significant impact on the Registrant's
operations to date.
Forward Looking Statements
This Management's Discussion and Analysis of Financial condition and
Results of Operations may include forward-looking statements that may or
may not materialize. Additional information on factors that could
potentially affect the Company's financial results may be found herein and
in the Company's other filings with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
Not applicable.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a note of Security Holders
None
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits none
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)
November 14, 1996 Richard C. Becker
------------------------------- ----------------------
Date Richard C. Becker
Vice President
Principal Financial Officer