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, 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 (978) 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 2,347,550
($.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, 1997 and December 31, 1996
Condensed Statements of Operations 2
for the quarter ended September 30, 1997
and 1996 and nine month period ended
September 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 6-10
Financial Condition or Plan of Operations
Part II - Other Information
Item 1 - Legal Proceedings 10
Item 2 - Changes in Securities 10
Item 3 - Defaults Upon Senior Securities 10
Item 4 - Submission of Matters to a Vote of 10
Security Holders
Item 5 - Other Information 10
Item 6 - Exhibits and Reports on Form 8-K 10
Signature(s) 11
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Condensed Balance Sheets September 30, December 31,
1997 1996
--------- ------------
CURRENT ASSETS (unaudited)
Cash $88,856 $ 55,353
Accounts receivable, net of allowance for
doubtful accounts of $22,000 821,705 602,672
Inventory 100,645 85,915
Prepaid expenses and other current assets 22,233 20,252
Receivable from Insurance Settlement 64,468 --
TOTAL CURRENT ASSETS 1,097,907 764,192
PROPERTY AND EQUIPMENT, net 945,767 918,442
CAPITALIZED SOFTWARE DEVELOPMENT 98,695 --
RESTRICTED CASH 27,678 27,146
TOTAL ASSETS $2,170,047 $1,709,780
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 518,782 $ 314,729
Accrued expenses 117,994 107,134
Notes payable-related party 72,439 173,099
Deferred software maintenance revenue 382,578 231,918
Current portion of long-term debt 15,615 15,605
TOTAL CURRENT LIABILITIES 1,107,408 842,485
LONG TERM DEBT, less current portion 482,865 494,725
UNEARNED SUPPORT REVENUE 28,962 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; 2,347,550 issued and outstanding 23,476 21,023
Additional paid-in Capital 4,673,018 4,107,605
Accumulated deficit (4,145,682) (3,810,181)
TOTAL STOCKHOLDERS EQUITY 550,812 318,447
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $2,170,047 $1,709,780
========== ==========
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,
------------------ -----------------
1997 1996 1997 1996
Net sales $506,455 $788,402 1,546,067 $1,785,928
Cost of product 224,633 319,798 732,787 656,371
---------- ---------- ----------- ----------
281,822 468,604 813,280 1,129,557
Operating expenses:
Personnel costs 265,634 201,276 693,429 537,864
Rent, utilities and telephone 20,236 15,498 55,847 45,281
Travel and entertainment 27,480 20,246 80,120 42,749
Professional fees 63,030 21,977 128,887 50,931
Depreciation 14,721 12,885 42,288 38,217
Other operating expenses 49,169 76,489 154,518 165,408
--------- ---------- ---------- ----------
Total operating expenses 440,270 348,371 1,155,089 880,450
---------- ---------- ---------- ----------
Income (loss) from operations (158,448) 120,233 (341,809) 249,107
Interest Income (expense), Net (15,518) (22,830) (51,103) (59,911)
Gain on Insurance Settlement 17,410 -- 57,410 --
Net Income (loss) (156,556) $ 97,403 (335,502) $189,196
======= ======== ======= ========
Net Income (loss) per share $(.07) $.04 $(.14) $.08
===== ===== ===== =====
Shares used in Computing 2,347,550 2,380,796 2,347,550 2,396,745
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, 1997 September 30, 1996
------------------ ------------------
Cash flows provided by (used in)
operating activities:
Net income/(loss) $ (335,502) $ 189,196
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 42,288 38,217
Gain on insurance settlement (57,410) --
Change in assets and liabilities:
(Increase) in accounts receivable (219,033) (431,111)
(Increase) in inventory (31,955) (23,438)
Decrease in inventory on insurance
settlement 10,167 --
(Increase) Decrease in prepaids and
other current assets (1,981) 11,903
(Increase) in other assets (532) (69)
Increase in accounts payable 204,053 136,552
Increase in deferred software
maintenance revenue 125,499 120,248
Increase in accrued expenses
and other current liabilities 10,860 5,306
--------- ---------
Total adjustments 81,956 (142,392)
Net cash provided by (used
in) operating activities (253,546) 46,804
Cash flows from investing
activities:
Expenditures for software development (98,695) --
Expenditures for property and equipment (99,445) (39,138)
Proceeds from insurance settlement
for property and equipment 29,833 --
--------- ---------
Net cash used in investing activities (168,307) (39,138)
(continued on following page)
Item 1 - Financial Statements
PAMET SYSTEMS, INC.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30, 1997 September 30, 1996
------------------ -----------------
Cash flows from financing activities:
Payment of mortgage (11,850) (9,887)
Net change note payable
related party (100,660) 144,000
Issuance of capital stock 567,866 17,514
--------- ---------
Net cash provided by
financing activities 455,356 151,627
Net increase (decrease) in cash 33,503 159,293
Cash and cash equivalents at 55,353 28,264
beginning of period
Cash and cash equivalents at
end of period 88,856 187,557
====== =======
Supplemental disclosure of cash
flow information:
Cash paid for interest: $60,573 $60,852
Supplemental disclosure of non-cash
operating activities:
Inventory lost on insurance settlement 7,058 --
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, 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 nine month periods ended
September 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. In September of 1997 the note was extended for a
one year term through September 21, 1998 with monthly payments determined
according to a twenty-year amortization period of $5,356.69, including
interest at 10.0%, is payable monthly. The remaining balance at September
30, 1997 was $498,480. The bank has required an interest bearing
compensating balance account. On September 30, 1997 this account equaled
$27,678.
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 software support and update service fees.
Revenues for the three month period ended September 30, 1997 (the 1997
period) decreased 35.8% to $506,455 from $788,402 for the three month period
ended September 30, 1996 (the 1996 period). Revenues decreased 13.4% to
$1,546,067 for the nine month period ended September 30, 1997 from
$1,785,928 for the nine month period ended September 30, 1996. Management
believes that the decrease in revenue for 1997 period was associated with
delays in customers receiving grant awards under the "COPS MORE 96" portion
of the "Violent Crime Control and Law Enforcement Act of 1994" (the 1994
Crime Bill). During the 1996 period, awards from the "COP MORE 95" portion
of the 1994 Crime Bill combined with the matching funds from the local
municipalities infused funding into the Registrant's market. During the 1996
period the Registrant conducted twelve sessions of its grant preparation
seminars that assisted police agencies in preparing proposals for the second
round of grants related to the 1994 Crime Bill, "COPS MORE 96". These grant
applications were submitted in October 1996. The Registrant has seen many
prospects and customers receive grant awards and proceed through the
procurement process during the 1997 period. In addition, other prospective
customers are continuing to be informed of awards from the 1996 program.
Some of the prospects have been reluctant to commit funds until the award is
transferred to the agency's account. There can be no assurance, however, as
to when, if at all, these awards will result in sales to the Registrant.
Until the 1994 Crime Bill grant program expires, a significant portion of
the Registrant's sales will be reflective of these awards. Subsequent to the
expiration of the 1994 Crime Bill grant program, other marketing programs,
which may relate to either federal or state grant programs, may be required
to sustain ongoing revenue streams.
Three Months Ended September 30, 1997 vs.
Three Months Ended September 30, 1996
Net sales decreased $281,947 or 35.8% to $506,455 for the 1997 period
from $788,402 for the 1996 period. The decrease in total revenues is due to
the delays discussed above relative to both the awarding of grants
associated with the "COPS MORE 96" program, as well as the actual funding by
the Federal government. The 1996 period included significant revenue from
state and federal grant programs and construction capital funding. During
the 1997 period there were one PoliceServer, one FireServer and five
MobileServer systems sold compared to two ImageServer, seven PoliceServer
and two FireServer systems during the 1996 period. Support revenues
increased 33.8% to $137,333 for the 1997 period from $102,645 for the 1996
period reflecting the increase in the customer base from the 1996 period.
Cost of product decreased 29.8% or $95,165 to $224,633 for the 1997 period
from $319,798 for the 1996 period primarily reflecting the lower sales
volume. Gross margin decreased to 55.6% for the 1997 period from 59.4% for
the 1996 period reflecting the change of product mix to include more mobile
products.
Operating expenses increased $91,899 or 26.4% to $440,270 for the 1997
period compared to $348,371 for the 1996 period. Personnel costs increased
32.0% to 265,634 for the 1997 period compared to $201,276 for the 1996
period. The increase is due to the continuing addition of resources
including a new President and CEO who was hired in the second quarter of
1997 and the restructuring of salary levels for critical resources in line
with market salary levels. These resources have been added in the areas of
support, training, and marketing to execute the expected increase in annual
business. Rent, utilities and telephone increased 30.6% to $20,236 for the
1997 period from $15,498 for the 1996 period due primarily to the increased
phone expense associated with remote sales, installations and support.
Travel and entertainment expenses increased 35.7% to $27,480 for the 1997
period from $20,246 for the 1996 period. This increase primarily reflects
the increase in travel associated with a major multi-jurisdictional project
in the Southeast that is now nearly fully operational. Professional fees
increased 186.8% to $63,030 for the 1997 period from $21,977 for the 1996
period, primarily due to the consulting fees associated with developing
project plans for two major software development projects. In addition,
increased legal fees resulted from services associated with the working
capital loan agreement and employment agreements for the officers.
Depreciation expense increased 14.3% to $14,721 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 decreased 35.7% to $49,169 for
the 1997 period from $76,489 for the 1996 period primarily due to decreases
in "COPS MORE" grant seminar expenses and tax penalties and a shift of
annual meeting expenses and mortgage closing costs out of the quarter.
Net interest expense for the 1997 period was $15,518 compared to
$22,830 for the 1996 period. This reflects the decreased interest associated
with the working capital loan.
A gain on insurance settlement of $17,410 for the 1997 period reflects
the accrued portion of an insurance settlement.
The net loss for the 1997 period was $(156,556) or $(.07) per share
compared to net profit of $97,403 or $.04 per share for the 1996 period. The
loss is due primarily to reduced sales, the lower margins associated the
MobileServer product and increased operating expenses.
Nine Months Ended September 30, 1997 vs.
Nine Months Ended September 30, 1996
Net sales for the nine month period ended September 30, 1997 (the 1997
period) decreased $239,861 or 13.4% to $1,546,067 from $1,785,928 for the
nine month period ended September 30, 1996 (the 1996 period). The decrease
in sales reflects a decrease in the sales of the Registrant's PoliceServer
and FireServer products which was partially offset by a significant increase
in sales of the MobileServer product. Support revenues increased 20.6% to
$359,055 for the 1997 period from $297,833 for the 1996 period reflecting
the increase in the customer base from the 1996 period. Cost of product
increased 11.6% to $732,787 for the 1997 period from $656,371 for the 1996
period reflecting the lower margin MobileServer system sales and the third
party sales of the jail records software, a live-scan fingerprinting system
and the wireless network. Gross margin decreased to 52.6% for the 1997
period from 63.2% 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 $274,639 or 31.2% to $1,155,089 for the
1997 period compared to $880,450 for the 1996 period. Personnel costs
increased 28.9% to $693,429 for the 1997 period from $537,864 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 $10,566 or 23.3% to $55,847
for the 1997 period from $45,281 for the 1996 period. This increase is
almost entirely associated with the increased sales and support activity
outside the New England area. Travel and entertainment expenses increased
87.4% to $80,120 for the 1997 period from $42,749 for the 1996 period,
reflecting the increased travel associated with sales, training and
installations in the Southeast region. Professional fees increased 153.1% to
$128,887 for the 1997 period from $50,931 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. In
addition, consulting costs associated with developing the project plan to
port the Registrant's product to Windows NT have contributed significantly
to the increase. Depreciation expense increased 10.7% to $42,288 for the
1997 period from $38,217 for the 1996 period reflecting the depreciation
associated with the upgrades of some of the Registrant's computer equipment.
Other operating expenses decreased 6.6% to $154,518 for the 1997 period from
$165,408 for the 1996 period. This decrease reflects reduced bad debt
expense and tax penalties which were partially offset by the purchase of
internal use equipment and annual report expenses.
Net interest expense was $51,103 for the 1997 period compared to
$59,911 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 $(335,502) or $(.14) per share
compared to a net income of $189,196 or $.08 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 a deficit of $(9,501)
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
stockholders' equity by $550,000. Cash increased to $88,856 at September
30, 1997 from $55,353 at December 31, 1996. Accounts receivable increased
to $821,705 at September 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 $250,000 at September 30,
1997. On November 7, 1997 the backlog was approximately $410,000. The
Registrant is using the infusion of cash in the second quarter to increase
its operational infrastructure to enable it to execute anticipated
increased sales volume and to perform maintenance, add enhancements, and
upgrade the documentation on its current products. In addition, a
significant investment is continuing to be made in the detailed design and
development of the next generation of PoliceServer and FireServer,
operating on a Microsoft NT server platform. It is management's belief that
this next generation of the Registrant's products should position the
Registrant to be technologically compliant with the future public safety
marketplace requirements of having a graphical user interface and being
computer platform independent. In addition, the Registrant announced on
November 7, 1997 that it has reached general agreement to acquire the
assets of Technology Assemblers, Inc. of Longwood, Florida (TAI). TAI
produces jail management software products. This acquisition will be
financed with cash on hand. It is anticipated that three key employees will
become employees of the Registrant pursuant to three year employment
agreements. It is management's belief that the incorporation of TAI's
products into the Registrant's product suite further strengthens the
Registrant's position in the public safety and criminal justice
marketplace. However, there can be no assurance that this transaction will
be completed. These investments should position the Registrant for ongoing
revenue growth. 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 and anticipated capital infusion from directors and
shareholders and current sales activities will be sufficient to ensure the
continued operations through the year.
As of September 30, 1997, the Registrant had accumulated
approximately $4,000,000 and $2,200,000 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, including
statements regarding revenue expectations and product mix, grant awards,
new product development, capital position, prospect for the TAI acquisition
and ability to continue operations through the year, that may or may not
materialize. These forward looking statements are subject to certain
risks, including further delays in the grant and funding process which
would impact future revenues, unanticipated development problems relating
to new products, the inability to raise additional capital and the
inability to complete and successfully integrate the TAI acquisition.
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
None
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a vote of Security Holders
None
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
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)
November 13, 1997 Richard C. Becker
_______________________________ ______________________
Date Richard C. Becker
Vice President
Principal Financial Officer