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 June 30, 1997
[ ] 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 2,320,050
($.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
June 30, 1997 and December 31, 1996
Condensed Statements of Operations 2
for the quarter ended June 30, 1997
and 1996 and six month period ended
June 30, 1997 and 1996
Condensed Statement of Cash Flows 3-4
for the six months ended June 30,
1997 and 1996
Item 2 - Management's Discussion and Analysis of 6-8
Financial Condition or Plan of Operations
Part II - Other Information
Item 1 - Legal Proceedings 8
Item 2 - Changes in Securities 8
Item 3 - Defaults Upon Senior Securities 8
Item 4 - Submission of Matters to a Vote of 8
Security Holders
Item 5 - Other Information 8
Item 6 - Exhibits and Reports on Form 8-K 8
Signature(s) 9
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Condensed Balance Sheets June 30, December 31,
1997 1996
--------- ------------
CURRENT ASSETS (unaudited)
Cash $ 45,968 $ 55,353
Accounts receivable, net of allowance for
doubtful accounts of $22,000 771,000 602,672
Inventory 48,531 85,915
Prepaid expenses and other current assets 19,403 20,252
Receivable from Insurance Settlement 83,965 --
TOTAL CURRENT ASSETS 968,867 764,192
PROPERTY AND EQUIPMENT, net 897,854 918,442
RESTRICTED CASH 27,498 27,146
TOTAL ASSETS $1,894,219 $1,709,780
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 368,807 $ 314,729
Accrued expenses 113,294 107,134
Notes payable-related party 72,439 173,099
Deferred software maintenance revenue 86,858 231,918
Current portion of long-term debt 16,422 15,605
TOTAL CURRENT LIABILITIES 657,820 842,485
LONG TERM DEBT, less current portion 486,919 494,725
UNEARNED SUPPORT REVENUE 54,123 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; 2,320,050 issued and outstanding 23,201 21,023
Additional paid-in Capital 4,661,283 4,107,605
Accumulated deficit (3,989,127) (3,810,181)
TOTAL STOCKHOLDERS EQUITY 695,357 318,447
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $1,894,219 $1,709,780
========== ==========
See accompanying "Notes to Financial Statements (Unaudited)"
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------- ---------
1997 1996 1997 1996
Net sales $432,105 $759,321 $1,039,611 $997,525
Cost of product 249,937 262,781 508,154 336,572
---------- ---------- ----------- ----------
182,168 496,540 531,457 660,953
Operating expenses:
Personnel costs 220,979 165,748 427,794 336,588
Rent, utilities and telephone 16,143 14,549 35,611 29,783
Travel and entertainment 33,838 12,434 52,640 22,503
Professional fees 46,843 18,964 65,857 28,954
Depreciation 14,238 12,885 27,567 25,332
Other operating expenses 63,757 56,954 105,349 88,919
--------- --------- --------- ---------
Total operating expenses 395,798 281,534 714,818 532,079
---------- ---------- ---------- ----------
Income (loss) from operations (216,630) 215,006 (183,361) (128,874)
Interest Income (expense), Net (17,544) (21,933) (35,585) (37,081)
Gain on Insurance Settlement 40,000 -- 40,000 --
Net Income (loss) $(191,174) $193,073 $(178,946) $91,793
======= ======= ======= ======
Net Income (loss) per share $(.08) $.08 $(.08) $.04
===== ==== ===== ====
Shares used in Computing 2,320,050 2,401,742 2,320,050 2,372,742
Earnings per Share
See accompanying "Notes to Financial Statements (unaudited)"
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30, 1997 June 30, 1996
-------------------------------------
Cash flows provided by (used in)
operating activities:
Net income/(loss) $ (178,946) $ 91,793
Adjustments to reconcile net
income to net cash provided
by operating activities: 27,567 25,332
Depreciation and amortization
Gain on insurance settlement (40,000) --
Change in assets and liabilities:
(Increase) Decrease in accounts receivable (168,328) (399,388)
(Increase) Decrease in inventory 19,884 (24,277)
(Increase) in prepaids and other
current assets 849 13,939
(Increase) in other assets (352) (146)
Increase in accounts payable 54,078 99,898
(Decrease) in deferred software
maintenance revenue (145,060) (122,254)
Increase (Decrease) in accrued expenses
and other current liabilities 6,160 67,606
--------- ---------
Total adjustments (245,202) (339,290)
Net cash provided by (used
in) operating activities (424,148) (247,497)
Cash flows from investing
activities:
Expenditures for property and equipment (33,444) (6,766)
--------- ---------
Net cash used in investing activities $ (33,444) $ (6,766)
(continued on following page)
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30, 1997 June 30, 1996
-------------- --------------
Cash flows from financing activities:
Payment of mortgage (6,989) (5,839)
Net Change Note payable
related party (100,660) 223,440
Issuance of Capital Stock 555,856 17,339
--------- ---------
Net cash provided by
financing activities 448,207 234,940
Net increase (decrease) in cash (9,385) (19,323)
Cash and cash equivalents at 55,353 28,264
beginning of period
Cash and cash equivalents at
end of period $ 45,968 $ 8,941
====== =====
Supplemental disclosure of cash
flow information:
Cash paid for interest: 40,695 $35,775
Supplemental disclosure of non-cash
operating activities:
Inventory lost on insurance settlement 17,500 --
Net book value of fixed assets lost
on insurance settlement 26,465 --
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 June
30, 1997 and the results of operations for the three month periods and
changes in cash flows for the period 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 six month periods ended
June 30, 1997 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 of $5,499, including interest at 10.25%, is payable
monthly. The remaining balance at June 30, 1997 was $503,341.48. The bank
has required an interest bearing compensating balance account. On June
30, 1997 this account equaled $27,497.69.
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. Revenues for
the 6 month period ended June 30, 1997 increased 4.2% to $1,039,611 from
$997,525 for the six month period ended June 30, 1996. Revenues decreased
43.1% to $432,105 for the three month period ended June 30, 1997 (the 1997
period) from $759,321 for the three month period ended June 30, 1996 (the
1996 period). Management believes that the decrease in revenue for 1997
period was associated with the cyclical nature of the market. Most of the
Registrant's customers operate with a fiscal year that ends on June 30. The
Registrant believes that most capital projects such as the funding of
purchases of equipment such as the Registrant's products, are typically
completed prior to the last quarter of the fiscal year. During the 1996
period, however, a Massachusetts state grant program focused on imaging and
the beginning of the "COP MORE 95" portion of the "Violent Crime Control and
Law Enforcement Act of 1994" (the 1994 Crime Bill) infused funding into the
end of the year. In addition, during the 1996 period, one department was
able to utilize a portion of the department's new facility construction
funding to acquire the Registrant's PoliceServer product. In the third
quarter of fiscal 1996 the Registrant conducted twelve sessions of its grant
preparation seminars that assisted police agencies in preparing grant
proposals. The second round of grant proposals related to the 1994 crime
bill, COPS MORE 96, were submitted in the October 1996. The Department of
Justice has begun to inform some of the Registrant's prospective customers
of their awards. This round of awards combined with the 25% local matching
funds could infuse up to $266 million into the Registrant's market. The
Registrant's level of sales will continue to be reflective of the awards
granted under the 1994 Crime Bill. There can be no assurance, however, as to
when, if at all, these awards will result in sales to the Registrant.
Three Months Ended March 31, 1997 vs.
Three Months Ended March 31, 1996
Net sales decreased $327,216 or 43.1% to $432,105 for the 1997 period
from $759,321 for the 1996 period. The decrease in total revenues is due to
general lack of funding for the Registrant's products in the last quarter of
most of the Registrant's customers' fiscal years. As stated above the 1996
period included significant revenue from state and federal grant programs
and construction capital funding. During the 1997 period there were three
ImageServer systems and two MobileServer systems sold compared to five
ImageServer, five PoliceServer systems and five FireServer systems during
the 1996 period. Support revenues increased 14.7% to $117,855 for the 1997
period from $102,745 for the 1996 period reflecting the increase in the
customer base from the 1996 period. Cost of product decreased 4.9% or
$12,844 to $249,937 for the 1997 period from $262,781 for the 1996 period
reflecting the lower sales volume and the low margin third party system
costs for a wireless network, live-scan fingerprinting and a jail records
software included in a large integration sale in the Southeast region. Gross
margin decreased to 42.2% for the 1997 period from 65.4% for the 1996
period. The reduction in margin is due to the higher percentage of sales of
the lower margin MobileServer systems and the third party systems described
above.
Operating expenses increased $114,264 or 40.6% to $395,798 for the
1997 period compared to $281,534 for the 1996 period. Personnel costs
increased 33.3% to 220,979 for the 1997 period compared to $165,748 for the
1996 period. The increase is due to the addition of resources necessary to
execute the increased level of annual business including personnel in the
support, training and marketing areas. During the 1997 period the Registrant
also hired a new President and Chief Executive Officer. Rent, utilities and
telephone increased 11.0% to $16,143 for the 1997 period from $14,549 for
the 1996 period due primarily to the increased phone expense associated with
remote sales and installations. Travel and entertainment expenses increased
172.1% to $33,838 for the 1997 period from $12,434 for the 1996 period. This
increase reflects the increase in travel associated with a major project in
the southeast. Professional fees increased 147.0% to $46,843 for the 1997
period from $18,964 for the 1996 period, primarily due to the increased use
of legal services associated with the working capital loan agreement, a
private placement of the Registrant's Stock, the annual meeting and
employment agreements for the officers. Depreciation expense increased 10.5%
to $14,238 for the 1997 period from $12,885 for the 1996 period due to the
upgrading of some of the Registrant's computer systems. Other operating
expenses increased 11.9% to $63,757 for the 1997 period from $56,954 for the
1996 period primarily due to marketing expenses, in-house equipment
purchases and the 1997 Annual meeting expenses. These increases were
partially offset by the reduced tax penalties and bad debt expense.
Net interest expense for the 1997 period was $17,544 compared to
$21,933 for the 1996 period. This reflects the decreased interest associated
with the working capital loan.
A gain on insurance settlement of $40,000 for the 1997 period reflects
the accrued portion of an insurance settlement.
The net loss for the 1997 period was $(191,174) or $(.08) per share
compared to net profit of $193,073 or $.08 per share for the 1996 period.
The loss is due primarily to reduced sales, the low margins associated with
resale of third party products and the increased operating expenses.
Six Months Ended June 30, 1997 vs.
Six Months Ended June 30, 1996
Net sales for the six month period ended June 30, 1997 (the 1997
period) increased $42,086 or 4.2% to $1,039,611 from $997,525 for the six
month period ended June 30, 1996 (the 1996 period). The increase in sales
reflects a significant increase in the sales of the Registrant's
MobileServer product offset by a decrease in the sales of its' PoliceServer
and FireServer products. Support revenues increased 14.0% to $221,724 for
the 1997 period from $195,188 for the 1996 period reflecting the increase in
the customer base from the 1996 period. Cost of product increased 51.0% to
$508,154 for the 1997 period from the 336,572 for the 1996 period reflecting
the lower margin MobileServer systems and the third party sales of the jail
records software, a live-scan fingerprinting system and the wireless
network. Gross margin decreased to 51.1% for the 1997 period from 66.3% for
the 1996 period. The decrease is due primarily to the increased number of
the lower margin MobileServer system sales and the resale of the third party
systems described above.
Operating expenses increased $182,739 or 34.3% to $714,818 for the
1997 period compared to $532,079 for the 1996 period. Personnel costs
increased 27.1% to $427,794 for the 1997 period from $336,588 for the 1996
period. This reflects the staffing increases in the operations and marketing
areas, as well as the hiring of a new President and Chief Executive Officer.
Rent, utilities and telephone expenses increased $5,828 or 19.6% to $35,611
for the 1997 period from $29,783 for the 1996 period. This increase is
almost entirely associated with the increased sales and support costs
outside the New England area. Travel and entertainment expenses increased
133.9% to $52,640 for the 1997 period from $22,503 for the 1996 period,
reflecting the increased travel associated with training and installations
in the Southeast region. Professional fees increased 127.5% to $65,857 for
the 1997 period from $28,954 for the 1996 period due to the increase in the
Registrant's use of legal services associated with establishing a line of
credit loan, work associated with a private placement of the Registrant's
stock, and employment agreements for the officers. Depreciation expense
increased 8.8% to $27,567 for the 1997 period from $25,332 for the 1996
period reflecting the depreciation associated with the upgrades of some of
the Registrant's computer equipment. Other operating expenses increased
18.5% to $105,349 for the 1997 period from $88,819 for the 1996 period.
These increases reflect increased purchases of internal use equipment and
annual report expenses that were partially offset by reduced bad debt
expense and tax penalties.
Net interest expense was $35,585 for the 1997 period compared to
$37,081 for the 1996 period. This reduction reflects the reduced interest
associated with working capital loans from a director.
The net loss for the 1997 period was $(191,174) or $(.08) per share
compared to a net income of $91,793 or $.04 per share for the 1996 period.
The loss for the period was due to the reduced revenue combined with the low
gross margins associated with MobileServer sales and the resale of large
systems integrated into an installation in the southeast.
Liquidity and Capital Resources
The Registrant's working capital improved to $311,047 from a deficit
of $(78,293) at December 31, 1996 due to the private placement of 200,000
shares of common stock which increased the cash and stockholder's equity by
$550,000. Cash decreased to $45,968 at June 30, 1997 from $55,353 at
December 31, 1996. Accounts receivable increased to $771,000 at June 30,
1997 from $602,672 at December 31, 1996. The Registrant is experiencing an
increase in accounts receivable level that normally averages 60 days sales
outstanding. All outstanding balances have been investigated and the
overall level should return to a level below 60 days outstanding
The Registrant's backlog was approximately $103,000 at June 30, 1997.
On July 31, 1997 the backlog is approximately $315,000. The Registrant is
using the infusion of cash to begin a process to increase its operational
infrastructure to enable it to execute increased volume. Future product
growth is expected to be balanced between all four of the Registrant's
primary products (PoliceServer, FireServer, ImageServer, MobileServer)
which make up an integrated suite of public safety applications. During the
1997 period the Registrant began to be notified by potential customers who
had participated in the Registrant's grant writing seminars that the
Department of Justice had awarded them grants associated with the "COPS
MORE 96" portion of the Crime Bill. Many of these prospective customers
will still have to proceed with a competitive bidding process as required
by their respective state laws, consequently, there can be no assurance as
to when, if at all, these awards will result in sales to the Registrant.
The Registrant is continuing to consider projects to increase its cash
position through business combinations, as well as capital raising
alternatives. The Registrant continues to receive short term working
capital commitments of up to $300,000 from Directors and Officers to
support operations, if needed. The Registrant believes its existing backlog
and working capital combined with its current loan commitments from
directors and shareholders and current sales activities will be sufficient
to ensure the continued operations through the year.
As of June 30, 1997, the Registrant had accumulated approximately
$3,900,000 and $2,100,000 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 Registrant'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.
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 of factors that could
potentially affect the Company's financial results may be found in the
Company's filings with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
On April 14, 1997 the Issuer sold 200,000 shares of Pamet
Systems Common stock at a price of $2.75 per share for a
total of $550,000 to one entity, which is an accredited
investor as defined in Rule 501(a) under the Securities Act
of 1933, as amended (the "Act"). The issuance was exempt from
registration requirements of the Act pursuant to Section 4(2)
thereof.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a note of Security Holders
The Registrant held it 1997 Annual Meeting of Stockholders on
May 30, 1997.
At the Annual Meeting, Richard C. Becker and Arthur V.
Josephson, Jr. were elected directors. The number of shares
of Common Stock voted in favor of the election of each person
was not less than 1,800,982 shares and 0 shares against. In
addition the following other directors continued as such
after the meeting: Laurence B. Berger, Dr. Stanley J. Robboy,
Dr. Joel B. Searcy and Lee Spelke.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
3(ii) Pamet Systems, Inc. BYLAWS, Amended 5/30/97
27 Financial Date Schedule
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)
August 5, 1997 Richard C. Becker
_______________________________ ______________________
Date Richard C. Becker
Vice President
Principal Financial Officer