[Front Cover]
Pamet Systems, Inc.
1996 Annual Report
Information Technologies for Public Safety
Description of Business
Pamet Systems (the "Company"), designs, develops, installs, and supports
computer software and turnkey computer and data communications systems for
public safety agencies serving municipalities with populations under 250,000,
as well as campus, public housing, and transit authority police agencies. The
Company's innovative applications automate the acquisition, storage,
processing retrieval, and communication of information for these agencies.
The principal products of the Company comprise an integrated suite of
information management and communications systems, the foundation of which are
the PoliceServer and FireServer products. PoliceServer is an integrated
Computer-Aided Dispatch and records management system, which includes the
clerical and record-keeping functions necessary for police department
operation, from E9-1-1 integrated dispatch and booking to word processing and
electronic mail. FireServer is an information management system and
Computer-Aided Dispatch system that provides fire departments with data on
structures, fire suppression plans, and hazardous materials management.
Companion products include the ImageServer digital imaging system for
management of mug shots and crime scene photos, and the MobileServer system of
mobile computers for field reporting. The Company's products are currently
marketed and installed in New England, the Southeastern states, and lower
Midwestern states. Pamet is headquartered in Massachusetts and maintains a
sales office in South Carolina.
The Company was incorporated on November 24, 1987 by Dr. Joel B. Searcy, its
Chairman of the Board and President.
PoliceServer and FireServer are registered trademarks of the Company.
MobileServer and ImageServer are trademarks of the Company.
Forward Looking Statements
This Annual Report of Form 10-K contains some statements which are not
historical facts. These forward-looking statements reflect management's
current views, are based on many assumptions and factors and may involve risks
and uncertainties. Certain factors and other information contained in this
Annual Report on Form 10-K could cause such views, assumptions and factors and
the Company's results of operations to be materially different.
To Our Stockholders:
The groundwork laid over the past several years came to fruition in 1996 as
Pamet reached its goal of profitability while maintaining revenue growth and
continuing new product development. The year also saw a successful
reorientation of the Company's market position from that of a vendor of
database and dispatch computers to a leading supplier of a comprehensive suite
of information technologies for public safety. This suite of products,
anchored by the PoliceServer and FireServer systems for Computer-Aided
Dispatch (CAD) and police/fire records, now includes ImageServer for digital
imaging, QueryStation for SQL database queries, and MobileServer for remote
wireless access. Development was begun on a significant addition to the
suite, a wide area networking product to allow police agencies to share
offender data over a secure Intranet. This product is scheduled for
deployment in 1997.
The second year of the COPS-MORE grant program was announced in 1996, and
Pamet again conducted twelve sessions of its highly successful seminar in
grant preparation. This Department of Justice grant program is highly
competitive, national in scope, and this year is funded with $200 million
under the terms of the 1994 Crime Bill. These grants, together with the
required 25% local matching funds, will infuse up to $266 million into the
markets we serve. Announcement of grant recipients is expected in the second
quarter of 1997. Every department which attended our previous COPS-MORE grant
seminars and then followed the strategy we provided was awarded a grant in
that initial round awarded last year.
A recent poll of Massachusetts law enforcement agencies showed that Pamet is
the state's leading supplier of law enforcement systems, with 125 agencies
using our products. We hope to achieve similar market penetration in other
states in which we market.
Finally, we have begun a project to rewrite our PoliceServer and FireServer
software under the Microsoft NT operating system. All of our other products
are already running under either NT or Windows 95, and we believe that the
successful completion of this project will position Pamet as a true technology
leader in our industry.
Thank you, our stockholders, for your support and confidence over the past
year. While we are proud of the progress made in 1996, we're also working
diligently to make 1997 an even more productive and successful year. If you
have any suggestions, comments or questions, I encourage you to call, visit,
or send e-mail to me at jsearcy@pamet.net.
[Signature]
Dr. Joel B. Searcy
Chairman of the Board
President
Business Strategy
Market Share
Fiscal 1996 was a year of growth for Pamet. The Company expanded its existing
customer base in Massachusetts while simultaneously increasing its market
share in other states.
In late 1996, the Massachusetts Executive Office of Public Safety issued a
report naming Pamet as the leading information technology supplier to
Massachusetts police departments.
[Map]
The Massachusetts 1996 Police Automation Survey Report was designed to "obtain
information relevant to the status of computerization, equipment and
technology applications by law enforcement in the Commonwealth." The survey
was sent to the 351 municipal agencies and the State Police in Massachusetts
in August of 1996 and received an 86% response rate. Respondents were asked
to report the names of the computer vendors with whom they are contracted.
Pamet Systems led the response with 24% of the responding departments
identifying Pamet as their main computer vendor. Not included in the study
are the forty-eight Massachusetts police departments and municipal agencies
that utilize Pamet software on shared computer systems. With the addition of
these agencies, Pamet is the clear market leader in Massachusetts with more
than 125 sites across the state.
The Company agrees with the report's findings that "the law enforcement
community ... has greatly improved communication capabilities and integration
of new technologies into their organizational structures. For example,
entering police reports directly into laptops or mobile terminals in the
cruisers increases accuracy, timeliness, and accessibility of information
while decreasing the amount of time and personnel required."
The Company will continue to develop new products and improve existing
products, with the goal of becoming the industry's leading information
technology vendor on a national scale. With its suite of integrated
information management products, Pamet plans to dramatically expand the role
of information technologies in law enforcement agencies, initially in the New
England, Southeastern U.S., and Midwestern U.S. markets.
Our Suite of Products
Products
In 1996 Pamet significantly expanded its suite of information management
systems with the addition of two new products. ImageServer and MobileServer
were designed to deliver enhanced options to PoliceServer and FireServer
users. The addition of these products allowed Pamet to offer a fully
integrated suite of information management products for law enforcement
agencies. In addition to offering seamless integration with existing Pamet
products, ImageServer and MobileServer may be sold as stand-alone products
offering integration with other systems on the market.
ImageServer
The ImageServer digital imaging system is a complete capture, storage, and
printing system for both color and monochrome images.
ImageServer is fully integrated with the PoliceServer and FireServer systems
and supports unlimited numbers of images (mug shots, incident photographs, and
the like). Its photo lineup capability permits both video and printed
lineups. With the document scanning option, documents relating to individuals
or incidents are permanently linked to database records and can be reprinted
on demand. Incident-related images can be connected to incident reports, and
these can include scans of existing photos and documents. Images can also be
associated with department personnel files and property and evidence.
[ImageServer photo]
MobileServer
The MobileServer system consists of one or more mobile computers which connect
to a police records and dispatch computer system by means of an Ethernet local
area network. The MobileServer units can be mounted in an automobile or can
be contained in a briefcase carrier. Communication with the base station is
via a radio link utilizing the cellular radio system available in most areas.
The units can thus act as fully interactive terminals to a PoliceServer
computer system or to virtually any other system capable of support for
Ethernet networking and the popular TCP/IP protocol. MobileServer units can
also be used to communicate with other remote computer systems such as the
Criminal Justice Information Systems (CJIS) operated by states, and can access
the Internet directly in most areas. The intrinsic security provided by the
CDPD packetized digital transmission system provides the needed secure
environment for transmission of sensitive data.
[MobileServer photo]
Case Study / Bridgewater
Case Study
Department: Bridgewater Police Department
Town: Bridgewater, Massachusetts
Population: 24,000
Officer: Dan Brophy
Pamet Products: PoliceServer
ImageServer
MobileServer
Hardware: Fourteen color terminals
One 233 MHz Alpha Server
Two Mobile Computers
The Problem:
When the Bridgewater Police Department first computerized eleven years ago,
the department assumed their new system would reduce the time officers spent
on paperwork and allow additional hours for community policing efforts. Much
to their dismay, the department discovered that although their computer system
helped keep better track of information, officers still spent several hours on
paperwork through data entry.
[Bidgewater Police Department Photo]
"Even though officers used the computers to enter data, keep records, and
complete reports, it still took almost as much time as it would doing it by
hand," recalls Officer Dan Brophy. "We thought we were ahead of the game
because we were 'automated.' Unfortunately, we just couldn't get the system
to work to our advantage."
As the town got larger, Bridgewater officers couldn't afford to spend four
hours at a computer just to file one incident report. They needed to be
serving their community in person. That's when Bridgewater called on the
experts at Pamet Systems to completely re-automate their department.
The Solution:
Recognizing the department's need to spend more time on the street, Pamet's
first action was not only to update the department's software, but its
hardware as well. Pamet added a new server and fourteen terminals with
increased speeds, allowing data entry, record retrieval, and printing to be
reduced to nearly half the time formerly required.
Pamet next installed PoliceServer, which significantly reduced the amount of
time officers spent on paperwork because of the single-entry philosophy of
Pamet's software. Once a Bridgewater officer entered a piece of information
such as a name or address on one form, that same information automatically
appeared on all required reports and need never be typed again. The
PoliceServer system also provided a significant increase in overall
functionality relative to the previous system.
[Photo of Pamet Headquarters]
The third step was to introduce Pamet's MobileServer to officers who were on
the road. The mobile computers were installed in the cruisers and gave
officers the ability to access the department database from a remote location
or crime scene. This gave officers the ability to instantly cross-check an
address or pull up master name file information without the aid of a
dispatcher. Officers can also complete their reports while in the field,
reducing the time they spend in the station doing paperwork.
The fourth application that Pamet integrated into the Bridgewater system was
ImageServer. Through the use of Pamet's imaging system, officers can
photograph an incident and enter it directly into their incident report file,
allowing them to keep detailed visual records. ImageServer also works with
mug shots and documents connected to particular people and incidents. Today a
Bridgewater officer can instantly pull up a mug shot of a repeat offender,
even with his or her MobileServer system.
The Results:
"Our biggest single accomplishment in 1996 is the addition of Pamet's
MobileServer and our officers' ability to instantly access PoliceServer from
the road," says Brophy. "Pamet Systems has developed a totally integrated
package of computer software and hardware that has consolidated the efforts of
the officers, whether they're in the office or on the beat. Not only has Pamet
developed automation that frees us up from time-consuming paper work, but it
also enhances our ability to do our job. We couldn't be happier."
Management's Discussion and Analysis
of Financial Condition and Results of Operations.
General
The Company's net sales consist primarily of sales of software and
turnkey computer systems and support and update service fees. Sales
increased 125.4% during the 12 month period ended December 31, 1996 (the
1996 period) from the 12 month period ended December 31, 1995 (the 1995
period). Management believes that the large sales increase and resulting
profitability for the 1996 period were due partially to communities
purchasing systems as a result of the "Cops More 95" grants of the 1994
Crime Bill being released in early 1996. In addition, the Company is
experiencing increased demand for its newer ImageServer and MobileServer
products which enhance the PoliceServer and FireServer products. The Company
believes sales will remain strong as a result of its new products and will
continue when the "Cops More 96" grant awards are announced. The Company
continues to believe there are significant market opportunities based on the
Crime bill funding, the establishment of E911 centers, communities'
heightened emphasis on crime, and the awareness by communities that computer
systems can improve the efficiency and effectiveness of their public safety
resources. The Company has also seen increased emphasis on the coordination
of public safety systems between neighboring towns, county, and state police
organizations. The Company's products are designed and marketed with the
option to be used in this type of regional application.
Results of Operations
Year Ended December 31, 1996 vs. Year Ended December 31, 1995. Net
sales increased 125.4% to $2,468,073 in the 1996 period from $1,094,735 in
the 1995 period. Sales of turnkey systems and hardware upgrades increased
$1,075,409 or 216.4% to $1,572,402 for the 1996 period from $496,993 for the
1995 period. The number of system sales increased from 7 in the 1995 period
to 27 in the 1996 period. Hardware upgrades increased to 10 in the 1996
period from 9 in the 1995 period. The increase in the total revenue and
total number of systems sold can be partially attributed to the delayed
purchases of systems that were funded through "Cops More 95" grants
associated with the 1994 Crime Bill. The remainder of the sales can be
attributed to increasing availability of funding from communities for public
safety activities, both fire and police. Awards from "Cops More 95" portion
of the 1994 crime bill that were included in revenues for the 1996 period
were $574,749 or 23.3% of sales, representing 12 system sales and 3 system
upgrades. A portion of the "Cops More 95" grants are in the Company's
backlog at year end or are yet to be awarded. The software portion of the
systems sales increased 315.9% to $736,937 for the 1996 period from $177,172
for the 1995 period while the hardware portion of system sales increased
161.2% from $319,821 for the 1995 period to $835,465 for the 1996 period.
The disproportional increase in software system sales can be attributed the
significantly larger increase in turnkey systems sales which include a
software component rather than the hardware only upgrades that occurred in
1995. Sales of the ImageServer product increased to $246,737 for the 1996
period from $91,552 in the 1995 period. Sales of the mobile computer systems
(MobileServer) increased from $12,491 for the 1995 period to $78,490 for the
1996 period. Support revenues increased $42,913 or 12.0% to $402,007 for
the 1996 period from $359,094 for the 1995 period. This increase reflects
the increasing customer base.
Cost of sales increased $397,929 or 74.0% to $935,683 for the 1996
period from $537,754 for the 1995 period. The cost of sales increased due to
the overall increase in sales. Gross profit increased 175.1% or $975,409 to
$1,532,390 for the 1996 period from $556,981 for the 1995 period. Gross
margin as a percentage of net sales increased to 62.1% for the 1996 period
from 50.9% for the 1995 period. This increase in margin corresponds to the
increase in the software component of 1996 sales compared to 1995 sales. In
1995, system software sales represented only 16.2 % of sales, whereas in
1996 system software sales increased to 29.9% of sales.
Operating expenses increased $148,964 or 14.0% to $1,213,196 for
the 1996 period from $1,064,232 for the 1995 period. The most significant
increases were due to increases in payroll, commission costs, Cops More 95
and 96 Grant Seminar expenses, training expenses, and tax penalties.
Personnel costs increased 16.2% to $738,221 for the 1996 period
from $635,245 for the 1995 period. The increase expense results from
additional staffing consisting of a new marketing communications
representative, a support specialist and commissions paid on sales. Rent,
utilities and telephone decreased 8.8% to $62,574 for the 1996 period from
$68,585 for the 1995 period reflecting minor decreases in telephone and
rent. Travel and entertainment expenses increased $13,059 or 28.8% to
$58,459 for the 1996 period from $45,400 for the 1995 period due to the
increased travel associated with the remote sales and program management
activities in the Southeast region. Spending on Professional fees was
essentially the same in both 1995 and 1996. Depreciation expense decreased
25.1% to $60,963 for the 1996 period from $81,409 for the 1995 period
reflecting the reduced depreciation on the older computer equipment and
office furnishings. Other operating expenses increased 36.1% or $59,839 to
$225,797 for the 1996 period from $165,958 for the 1995 period. The most
significant components of this increase were the write-off of the Cops More
1995 pre-paid grant seminars which took place during the 1994 period and
were expensed in the 1996 period to coincide with the resulting revenue from
these grants, and tax penalties.
Net interest expense increased to $80,138 for the 1996 period
compared to a net expense of $62,092 for the 1995 period. This reflects the
increased interest expense associated with working capital loans obtained
from Directors and Officers required by the significant growth in sales. The
Company's mobile demo vehicle, no longer necessary for on-site
demonstrations, was sold during 1996 generating a gain of $4,500.
The profit for the 1996 period was $243,681 or $.10 per share
compared to a loss of $569,202 or $(.29) per share for the 1995 period. The
increase can be attributed to the Company's increased sales and improved
gross margins as noted above.
Liquidity and Capital Resources
The Company's working capital improved to a deficit of $78,293 at
December 31, 1996 from a deficit of $322,412 at December 31, 1995. Cash
increased to $55,353 at December 31, 1996 from $28,264 at December 31, 1995.
The improvement in working capital reflects the sustained profitability from
operations for the year. Accounts receivable increased to $602,672 at
December 31, 1996 from $246,161 at December 31, 1995, reflecting the
increased level of sales through the end of the 1996 period. The Company is
experiencing an accounts receivable age that averages 60 days sales
outstanding.
The Company's backlog exclusive of support revenues is in excess of
$360,000 at March 27, 1997. The awards from the "Cops More 96" grant
submissions which based on discussions with the department of Justice should
be awarded in the first half of 1997 combined with sales of the Company's
suite of products should help sustain sales growth in 1997. In addition,
the Company is continuing to consider projects to increase its cash position
such as mergers, acquisitions, or other business combinations. To date no
agreements in these areas have been signed. Subsequent to year-end, the
Company has received a signed letter of intent indicating the commitment to
purchase 200,000 shares of the Company's common stock at $2.75 per share
through a private placement. The transaction has not been completed at this
time. The Company has also secured a line of credit for $300,000 from
officers and directors to support working capital needs. The Company
believes its existing backlog as well as its current market position will be
sufficient to ensure the continued operations through the end of the year.
As of December 31, 1996, the Company had accumulated approximately
$3,700,000 and $1,900,000 in net operating loss carryforwards for federal
and state income tax purposes respectively. The loss carryforwards expire in
the year 2009. Under the Internal Revenue Code of 1986, as amended, the
rate at which a corporation may utilize its net operating losses to offset
its income for federal tax purposes is subject to specified limitations
during periods after the corporation has undergone an "ownership change".
It has been determined that an ownership change did take place at the time
of the Company's initial public offering. However, the limitations on the
loss carryforward exceed the accumulated loss at the time of the "ownership
change". Thus there is no restriction on its use.
Seasonality
For the majority of the municipalities in the states in which the
Company has sold its products through the Company's fiscal 1996, the fiscal
year commences July 1. The Company bills the majority of its customers for
annual software support charges 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 over the fiscal year.
Other Matters
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). SFAS 123 encourages, but does not require, that an entity
account for employee stock compensation under a fair-value based method.
However, SFAS 123 also allows an entity to continue to measure compensation
cost for employee stock-based compensation plans using the intrinsic
value-based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Effective for fiscal
years beginning after December 15, 1995, entities electing to remain with
accounting under APB 25 are required to make pro forma disclosures of net
income and earnings per share as if the fair value-based method of
accounting under SFAS 123 had been applied. The Company will continue to
account for employee stock-based compensation under APB 25 and has made the
pro forma disclosures required under SFAS 123.
Inflation
Inflation has not had a significant impact on the Company's
operations to date.
Pamet Systems, Inc.
BALANCE SHEET
ASSETS December 31, 1996
- -------- -----------------
CURRENT ASSETS
Cash $55,353
Accounts receivable, net of allowance for
doubtful accounts of $25,000 602,672
Inventory, net of reserve of $5,000 85,915
Prepaid expenses and other current assets 20,252
-------
TOTAL CURRENT ASSETS 764,192
PROPERTY AND EQUIPMENT, NET 918,442
RESTRICTED CASH 27,146
---------
TOTAL ASSETS $1,709,780
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $314,729
Accrued expenses 107,134
Notes payable-related party 173,099
Deferred software maintenance revenue 231,918
Current portion of long-term debt 15,605
---------
TOTAL CURRENT LIABILITIES 842,485
LONG TERM DEBT, less current portion 494,725
UNEARNED SUPPORT REVENUE 54,123
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; 2,102,250 issued and outstanding 21,023
Additional paid-in capital 4,107,605
Accumulated deficit (3,810,181)
---------
TOTAL STOCKHOLDERS' EQUITY 318,447
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,709,780
=========
See accompanying notes to financial statements.
PAMET SYSTEMS, INC.
STATEMENTS OF INCOME
Year Ended December 31,
1996 1995
--------- --------
Net hardware and software sales $2,066,066 $735,641
Software support revenues 402,007 359,094
--------- ---------
TOTAL REVENUES 2,468,073 1,094,735
Cost of sales 935,683 537,754
--------- ---------
GROSS PROFITS 1,532,390 556,981
Operating expenses
Personnel costs 738,221 635,245
Rent, utilities and telephone 62,574 68,585
Travel and entertainment 58,459 45,400
Professional fees 67,182 67,635
Depreciation 60,963 81,409
Other operating expenses 225,797 165,958
--------- ---------
TOTAL OPERATING EXPENSES 1,213,196 1,064,232
========= =========
Income (loss) from operations 319,194 (507,251)
Interest income 1,118 3,213
Interest expense (81,256) (65,305)
Gain on sale of property and equipment 4,500 --
Other income 125 141
------- -------
NET INCOME (LOSS) $243,681 $(569,202)
======= =======
Earnings (loss) per common share $.10 $(.29)
==== ====
Shares used in computing earnings 2,395,384 1,971,459
(loss) per common share ========= =========
See accompanying notes to financial statements.
PAMET SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Total
___Common_Stock__ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-------- -------- ---------- ----------- ---------
BALANCE AT
JANUARY 1, 1995 1,966,250 $19,663 $4,049,009 $(3,484,660) $584,012
NET LOSS (569,202) (569,202)
CONVERSION OF
STOCK OPTIONS 52,000 520 23,620 -- 24,140
--------- ------ ------- -------- --------
BALANCE AT
DECEMBER 31, 1995 2,018,250 20,183 4,072,629 (4,053,862) 38,950
NET INCOME 243,681 243,681
CONVERSION OF
STOCK OPTIONS 84,000 840 34,976 -- 35,816
--------- ------ ------- -------- ---------
BALANCE AT
DECEMBER 31, 1996 2,102,250 $21,023 $4,107,605 $(3,810,181) $318,447
========= ====== ========= ========= =======
See accompanying notes to financial statements.
PAMET SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995
--------- ---------
OPERATING ACTIVITIES
Net income (loss) $243,681 $(569,202)
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Depreciation and amortization 60,963 163,561
Gain on sale of property and equipment (4,500) --
Changes in operating assets and liabilities:
Accounts receivable (356,511) 217,958
Inventory (58,994) 32,333
Prepaid expenses and other current assets 26,392 (3,042)
Other assets 1,025 398
Restricted cash (696) (685)
Accounts payable 69,213 (75,470)
Accrued expenses (33,550) 62,085
Deferred software maintenance and
unearned support revenue 16,724 102,776
------ -------
Net cash used for
operating activities (36,253) (69,288)
-------- --------
INVESTING ACTIVITIES
Expenditures for property
and equipment (56,809) (4,095)
Proceeds from sale of property and equipment 4,500 1,783
----- -------
Net cash used for investing activities (52,309) (2,312)
-------- -------
FINANCING ACTIVITIES
Proceeds from notes payable-related party 243,000 211,899
Payment of notes payable-related party (151,000) (140,800)
Payments of long-term debt (12,165) (11,478)
Issuance of capital stock 35,816 24,140
------ -------
Net cash provided by
financing activities 115,651 83,761
------- ------
NET INCREASE IN CASH 27,089 12,161
Cash at beginning of period 28,264 16,103
------ ------
CASH AT END OF PERIOD $55,353 $28,264
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION
Cash paid for interest $78,000 $65,000
======= =======
See accompanying notes to financial statements.
PAMET SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--NATURE OF OPERATIONS
Pamet Systems, Inc. (the Company), a Massachusetts corporation, was formed in
November 1987 to engage in the business of designing, developing, installing,
and servicing computer software systems for the municipal market throughout
the Eastern United States, principally in the area of public safety. Credit
is granted to certain customers, most of which are municipalities. The
Company generally does not require collateral.
The Company's committed backlog at December 31, 1996 was in excess of
$500,000 (unaudited). Management believes that this level of backlog and its
anticipated sales are adequate to sustain operations through the end of
fiscal year 1997.
However, the ultimate success of the Company is still dependent upon its
ability to secure adequate interim and permanent funding to meet its working
capital needs and the successful marketing of its products and services
through expansion of the Company's operations. Some directors and officers
of the Company, under certain circumstances, have agreed to provide short
term financing on a temporary basis as needed. Management believes the
Company's current sources of liquidity and funding are adequate to sustain
operations. Management is also trying to enhance its financial position by
obtaining permanent additional financing. There can be no assurance,
however, that the Company's operations will be sustained or be profitable in
the future or that adequate sources of financing will be available at all,
when needed or on commercially acceptable terms.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
Restricted Cash: In connection with its mortgage agreement, the Company is
required to maintain an interest reserve account with the mortgagor.
Withdrawals from the account are restricted to the payment of mortgage
principal or interest.
Property and Equipment: Property and equipment are stated at cost and are
depreciated on the straight line or accelerated methods over their estimated
useful lives, which range from 3 to 31.5 years.
Capitalized Software Development Costs: Prior to 1995 the Company
capitalized certain software development costs in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed." Software
development costs were capitalized at the lower of cost or net realizable
value beginning with the establishment of the technological feasibility of
the related products as defined in the Statement. Research and development
costs, which are not material, are charged to expense as incurred. In 1995
all of the Company's capitalized software development costs were determined
to have no net realizable value and were written off. Amortization of
capitalized software costs amounted to $86,152 in 1995, and is included in
cost of sales.
Inventory: Inventory, which consists primarily of computer-related supplies,
is stated at the lower of cost (first-in, first-out) or market value.
Deferred Software Maintenance Revenue and Unearned Support Revenue: Deferred
software maintenance revenue and unearned support revenue represent revenue
relating to software support, updates and warranties which the Company has
not yet earned. Software maintenance fees are recognized ratably over the
period of the service contract. The portion of the maintenance fee
associated with the sale of a first time system or software that relates to
the initial maintenance period is also recognized ratably over the period of
the extended service.
Revenue Recognition: The Company generally recognizes product revenue upon
shipment. Revenues for products with extensive installation requirements
under contractual agreements are recognized upon customer acceptance.
Earnings (loss) per Common Share: Earnings per share is computed using the
weighted average number of shares of common stock outstanding and dilutive
common equivalent shares from stock options, using the treasury stock method.
Loss per common share is computed using the average number of common shares
outstanding. Fully diluted earnings per share is the same as, or not
materially different from primary earnings per share and, accordingly, is not
presented.
Stock Based Compensation: The Company measures compensation expense relative
to employee stock based compensation plans using the intrinsic value-based
method of accounting as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees". However, the Company will
disclose the pro forma amounts of net income and earnings per share as if 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 footnote for these disclosures.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Pamet Systems, Inc.
Notes to Financial Statements
(continued)
Income Taxes: The Company accounts for income taxes according to the
liability method of accounting for income taxes. Under this method, deferred
tax assets and liabilities are determined based on differences between
financial reporting and income tax bases of assets and liabilities and are
measured using enacted tax rates and tax laws that will be in effect when the
differences are expected to reverse. The primary component of the Company's
deferred tax asset as of December 31, 1996, which is fully reserved, is net
operating loss carryforwards.
NOTE C--RELATED-PARTY TRANSACTIONS
Director Compensation: The Company paid approximately $14,000 in both 1996
and 1995 to a stockholder and director for financial accounting consulting
services.
Notes Payable - Related party consist of the following:
1996
------
Notes payable to directors for unsecured advances. $173,099
========
NOTE D--PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION
Property and equipment at December 31 is as follows:
Balance at
Beginning Balance at
of Additions End of
Classification Period at Cost Retirements Period
- -------------- ---------- --------- ----------- ----------
Land $231,283 $231,283
Building 758,728 758,728
Furniture & Fixtures 118,049 $4,801 122,850
Computer Equipment 293,960 27,114 $(3,787) 317,287
Automobiles 22,900 24,894 (22,900) 24,894
--------- -------- -------- ----------
TOTALS $1,424,920 $ 56,809 $(26,687) $1,455,042
========= ======== ====== =========
Year Ended December 31, 1995:
Land $ 231,283 $ 231,283
Building 758,728 758,728
Furniture and Fixtures 116,700 $ 1,349 118,049
Computer Equipment 323,982 2,746 $ (32,768) 293,960
Automobiles 22,900 -- -- 22,900
---------- -------- ------- ----------
TOTALS $1,453,593 $ 4,095 $ (32,768) $1,424,920
========== ======== ======== ==========
Accumulated depreciation at December 31 is as follows:
Balance at
Beginning Additions Balance at
of Charged End of
Classification Period To Expense Retirements Period
- -------------- ---------- ---------- ----------- ----------
Year Ended December 31, 1996:
Building $111,849 $ 24,123 $ 135,972
Furniture and Fixtures 98,689 9,878 108,567
Computer Equipment 268,886 22,241 $(3,787) 287,340
Automobiles 22,900 4,721 (22,900) 4,721
-------- -------- ---------- --------
TOTALS $502,324 $ 60,963 $ (26,687) $536,600
======== ======== ======== ========
Year Ended December 31, 1995:
Building $ 87,699 $ 24,150 $ 111,849
Furniture and Fixtures 86,664 12,025 98,689
Computer Equipment 254,636 45,235 $ (30,985) 268,886
Automobiles 22,900 -- -- 22,900
-------- -------- ---------- --------
TOTALS $451,899 $81,410 $ (30,985) $502,324
======== ======== ======== ========
Pamet Systems, Inc.
Notes to Financial Statements
(continued)
NOTE E--ACCRUED EXPENSES
Accrued expenses includes the following:
December 31, 1996
-----------------
Accrued payroll and vacation $ 52,026
Accrued and withheld payroll taxes 20,680
Other 34,428
-------
$ 107,134
=======
NOTE F--COMMITMENTS AND CONTINGENCIES
Legal Fees: In May of 1992, the Company entered into an agreement with its
present attorney to pursue different financing arrangements, acquisitions or
mergers. Approximately $15,000 of legal fees associated with this agreement
have not yet been billed to the Company, since they are to be paid
principally out of the proceeds of any resulting transaction. The amount, if
any, that will be ultimately paid by the Company, and under what conditions,
in connection with this legal work is uncertain at this time.
NOTE G--LONG TERM DEBT
In March 1992, the Company secured a $560,000 mortgage on its facility. 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. In addition, the note is
subject to several conditions, including:
- Four officers, directors and/or stockholders of the Company
are limited guarantors of the note to the extent of $50,000
each. In connection with these guarantees these four officers,
directors and/or shareholders were paid $1,500 each in the
current year.
- Payment of dividends is restricted, requiring approval of the
mortgagor.
- Salary increases for officers are restricted, requiring
approval of the mortgagor.
Subsequent to December 31, 1996, the bank issued a commitment letter that
indicates this mortgage will be renewed for one year, until September 1998.
Payment terms and interest rates, although not finalized, are expected to
remain consistent with current terms and rates. Maturities reflect these
terms and rates.
Annual principal maturities of long-term debt are as follows:
Year ending December 31, 1997 $ 15,605
December 31, 1998 494,725
-------
$510,330
=======
NOTE H--STOCKHOLDERS' EQUITY
Stock Option Plans: In 1990, the Company adopted a Stock Option Plan under
which the Board of Directors may grant incentive or non-qualified stock
options to employees, directors and consultants of the Company. The maximum
number of shares of stock subject to issuance under option arrangements is
400,000 shares. These options, of which a total of 51,000 had been exercised
at December 31, 1996, are exercisable within a ten-year period from the date
of the grant, generally fully exercisable when issued to directors and
exercisable 20% per year and continuing over five years for employees and
consultants. The options are not transferrable except by will or domestic
relations order. The option price per share under the Plan is not less than
the fair market value of the shares on the date of grant.
Stock-based compensation expense under the fair value-based method of
accounting would have resulted in pro forma net income and earnings (loss)
per common share approximating the following amounts:
1996 1995
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net Income (loss) $243,681 $186,967 $(569,202) $(629,543)
======= ======= ======= =======
Earnings (loss)
per common share $.10 $.08 $(.29) $(.32)
=== === === ===
The fair value for each option granted during 1996 and 1995, reflecting the
basis for the above pro forma disclosures, was determined on the date of
grant using the Black-Scholes option-pricing model. The following
assumptions were used in determining fair value through the model:
1996 1995
---- ----
Expected Life 5-8 years * 2-8 years *
Risk-free interest rate 6.23%-6.74% * 5.98%-6.39% *
Expected Volatility 136% 164%
*Amounts vary due to graded vesting for options granted to employees and
differences between options granted to employees and granted to directors.
The Company recognizes forfeitures as they occur.
The application of fair value-based accounting in arriving at the pro forma
disclosures above is not an indication of future income statement effects.
The pro forma disclosures do not reflect the effect of fair-value accounting
on stock-based compensation awards granted prior to 1995.
Pamet Systems, Inc.
Notes to Financial Statements
(continued)
Stock option activity for the two year period ended December 31, 1996 is as
follows:
Weighted Average
----------------------------
Number Exercise Price Exercise Fair Value Remain-
Of Options Per Share Price at grant ing Life
---------- -------------- -------- ---------- --------
Outstanding
January 1, 1995 294,500 $.02 - $5.50 $.37 7 years
Granted to Directors 8,000 $1.00 $1.00 $ .94
Granted to Employees 41,000 $1.44 $1.44 $1.41
Exercised (17,000) $.02 $.02
Cancelled (6,000) $.02 $.02
------ --------- ----- ----- -------
Outstanding
December 31, 1995 320,500 $.02-$5.50 $.55 5.71
years
Granted to Directors 8,000 $1.12 $1.12 $1.00
Granted to Employees 54,500 $3.50 $3.50 $3.27
Exercised (34,000) $.02 - $1.44 $.06
-------- ------------ ----- ----- -------
Outstanding
December 31, 1996 349,000 $.02 - $5.50 $1.07 5.08
years
======= ============ ===== ===== =======
Exercisable at
December 31, 1996 214,800 $.02 - $5.50 $.60
======= ============ =====
Exercisable at
December 31, 1995 207,900 $.02 - $5.50 $.60
======= ============ =====
Available for Grant
At December 31, 1996 0
=======
Available for Grant
At December 31, 1995 64,500
=======
In addition, The company also issued the following stock options outside
of any formalized plan as follows;
Weighted Average
----------------------------
Number Exercise Price Exercise Fair Value Remain-
Of Options Per Share Price at grant ing Life
---------- -------------- -------- ---------- --------
Outstanding
January 1, 1995 50,000 $.80 $.80 10 years
Granted to Directors
and Officers in
consideration for
providing short
term financing 105,000 $.68 $.68 $.67
Exercised (35,000) $.68 $.68
-------- ------- ---- ---- -------
Outstanding
December 31, 1995 120,000 $.68 - $.80 $.73 9.60
years
Exercised (50,000) $.68 $.68
Cancelled (5,000) $.68 $.68
-------- ------- ---- ---- -------
Outstanding
December 31, 1996 65,000 $.68 - $.80 $.77 8.20
years
======= =========== ==== ==== =======
On January 1, 1997 options representing 8,000 shares were granted to
directors at an exercise price of $2.75 per share.
NOTE I--INCOME TAXES
There is no current provision for federal or state income taxes due to the
Company's utilization of past operating loss carryforwards to completely
offset taxable income in 1996. During 1995 the Company recorded a deferred
tax asset from the benefit of net operating losses in the amount of $118,000.
The cumulative amount of this deferred tax asset is $710,000 at December 31,
1996. This deferred tax asset is fully reserved due to the Company's history
of operating losses prior to 1996. Thus Management has concluded that the
realization of the benefit is not likely. The Company has available for
federal and state income tax purposes net operating loss carryforwards of
approximately $3,700,000 and $1,900,000 respectively, which may be used to
offset future taxable income. If unused, these net operating loss
carryforwards expire in 2009.
The reconciliation of income tax attributable to operations computed at the
U.S. federal statutory tax rates to income tax expense for 1996 is as
follows:
Tax at U.S. Statutory Rates $82,852 34%
State income taxes, net of
federal tax effect -- --
Other $(15,403) (34)%
Effect of net operating
loss carryforwards $(67,449) (34)%
------- ------
TOTALS $ -- -- %
======= ======
NOTE J--SIGNIFICANT CUSTOMERS
There were no sales to individual customers that were greater than 10% of
total revenues for the years ended December 31, 1996 and 1995.
NOTE K--ECONOMIC DEPENDENCY
The Company obtained approximately 33% of its merchandise from one source in
1996. Management believes that if this supplier ceased providing
merchandise, the Company could find alternative suppliers without serious
interruption of business.
NOTE L--SUBSEQUENT EVENT
On February 24, 1997, the Company obtained a signed letter of intent from a
potential investor indicating a desire to purchase 200,000 shares of the
Company's common stock at a price of $2.75 per share.
NOTE M--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 is as follows:
Quarter Ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
-------- -------- -------- --------
Revenues $ 238,204 $ 759,321 $788,402 $ 682,146
Gross Profits 164,413 496,540 468,604 402,833
Operating Income
(loss) (86,133) 215,006 120,233 70,088
Net Income
(loss) (101,280) 193,073 97,403 54,485
Income (loss)
per share $ (.05) $ .08 $ .04 $ .03
Quarter Ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
-------- -------- -------- --------
Revenues $ 180,127 $ 335,780 $267,427 $ 311,401
Gross Profits 82,206 220,145 161,058 93,572
Operating Income
(loss) (176,993) (27,528) (131,256) (171,474)
Net Income
(loss) (189,459) (43,208) (148,323) (188,212)
Income (loss)
per share $ (.10) $ (.02) $ (.07) $ (.10)
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Pamet Systems, Inc.
We have audited the accompanying balance sheet of Pamet Systems, Inc. as
of December 31, 1996, and the related statements of income, stockholders'
equity and cash flows for each of the two years in the period ended
December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pamet Systems, Inc. as
of December 31, 1996, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Carlin, Charron & Rosen LLP
March 20, 1997
Worcester, Massachusetts
Company Information
Board of Directors
For a copy of Company's Form 10-KSB for
Dr. Joel B. Searcy fiscal 1996 or other information about
Chairman of the Board the Company contact,
President Investor Relations
Lauren E. Searcy
Richard C. Becker Pamet Systems, Inc.
Vice President, Chief Operating 1000 Main Street
Officer, Treasurer, Director and Acton, MA 01720
Assistant Clerk (508) 263-2060
lsearcy@pamet.net
Arthur V. Josephson, Jr.
Clerk and Director Auditors
Accounting Consultant
Carlin, Charron & Rosen LLP
Laurence B. Berger 446 Main Street
Consultant Worcester, MA 01608
Dr. Stanley J. Robboy Transfer Agent
Professor of Pathology, Obstetrics
and Gynecology and Director of Continental Stock Transfer &
Gynecologic Pathology, Duke Trust Company
University Medical Center 2 Broadway
New York, NY 10004
Lee Spelke
Financial Consultant Annual Meeting
Officers The annual meeting of Pamet Systems, Inc.
will be held on Friday, May 30, 1997 at
Dr. Joel B. Searcy 10:00 am at Pamet Systems, 1000 Main St.,
Chairman of the Board Acton, Massachusetts
President
Pamet Systems, Inc. Offices
Richard C. Becker
Vice President, Chief Operating Headquarters
Officer, Treasurer, Director and 1000 Main Street
Assistant Clerk Acton, MA 01720
(508)-263-2060
1836 Ashley River Road
Suite 130
Charleston, SC 29407
(803)-766-8111
Legal Counsel
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Ave.
New York, NY 10022
Stock Listing
Pamet Systems, Inc. stock is traded on
the NASDAQ OTC (Symbol: PAMT)
[Back Cover]
Pamet Systems, Inc.
1000 Main Street
Acton, MA 01720
(508)-263-2060
FAX (508)-263-4158