10QSB 1 q10q-q301.txt FORM 10QSB 9-30-2001 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, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from _________ to _________ Commission File No. 1-10623 Pamet Systems, Inc. ___________________________________________________________________________ (exact name of small business issuer as specified in its charter) Massachusetts 04-2985838 ___________________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1000 Main Street, Acton, Massachusetts 01720 ___________________________________________________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (978) 263-2060 ________________________ Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_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 4,437,976 ($.01 par value) Transitional Small Business Disclosure Format YES________ NO__X___ PAMET SYSTEMS, INC. FORM 10-QSB TABLE OF CONTENTS Part I Financial Information Item 1 Financial Statements Condensed Balance Sheets September 30, 2001 and December 31, 2000 Condensed Statements of Operations for the quarters ended September 30, 2001 and 2000 and nine month periods ended September 30, 2001 and 2000 Condensed Statement of Cash Flows for the nine months ended September 30, 2001 and 2000 Item 2 Management's Discussion and Analysis of Financial Condition or Plan of Operations Part II Other Information Item 1 Legal Proceedings Item 2 Changes in Securities Item 3 Defaults Upon Senior Securities Item 4 Submission of Matters to a Vote of Security Holders Item 5 Other Information Item 6 Exhibits and Reports on Form 8-K Signature(s) PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements PAMET SYSTEMS, INC. Condensed Balance Sheets September 30, December 31, 2001 2000 ------------ ------------ CURRENT ASSETS (unaudited) Cash $4,872 $1,507 Accounts receivable, net of allowance for doubtful accounts of $89,588 and $175,000 and factored receivables of $0 and $88,502, respectively 718,841 224,191 Accounts receivable, factored --- 14,770 Inventory, net of reserve of $15,000 4,050 10,151 Prepaid expenses and other current assets 178,861 147,132 ------- ------- TOTAL CURRENT ASSETS 906,624 397,751 PROPERTY AND EQUIPMENT, net 63,890 98,312 DEPOSITS 81,650 84,190 CAPITALIZED SOFTWARE DEVELOPMENT COSTS 16,305 65,221 ------- --------- TOTAL ASSETS $1,068,469 $645,474 ========= =======
LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Current portion of long-term debt 835,000 425,000 Notes payable to related parties --- 385,000 Due to factor --- 36,199 Accounts payable, trade 834,719 795,226 Accounts payable, related parties 36,800 19,945 Current portion of accrued interest payable on long-term debt 212,237 143,538 Current portion of deferred gain on sale of land and building 42,614 42,614 Accrued expenses 969,867 766,192 Deferred software maintenance revenue and unearned revenue 926,571 601,505 --------- --------- TOTAL CURRENT LIABILITIES 3,857,808 3,215,219 ACCRUED INTEREST PAYABLE on long-term debt, less current portion 34,200 --- DEFERRED GAIN on sale of land and building, net of current portion 163,927 195,888 LONG TERM DEBT, less current portion 1,199,149 410,000 --------- --------- TOTAL LIABILITIES 5,255,084 3,821,107 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued --- Common Stock, $.01 par value, 30,000,000 shares authorized; issued and outstanding 4,437,976 shares at September 30, 2001 and 4,085,610 shares at December 31, 2000, respectively 44,380 40,856 Additional paid-in Capital 8,612,798 8,358,593 Accumulated deficit (12,843,793) (11,575,082) ---------- ---------- TOTAL STOCKHOLDERS DEFICIT (4,186,615) (3,175,633) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT $1,068,469 $645,474 ========= =======
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, ------------------- ---------------------- 2001 2000 2001 2000 Net sales $715,405 $439,713 $1,422,439 $1,504,092 Cost of product 139,996 93,453 256,375 319,949 ------- ------- --------- --------- 575,409 346,260 $1,166,064 1,184,143 Operating expenses: Personnel costs 444,273 487,061 1,477,230 $1,615,814 Rent, utilities, telephone 48,940 48,717 150,162 168,491 Travel and entertainment 32,008 30,719 82,144 90,913 Professional fees 39,892 30,481 245,013 120,584 Depreciation and amortization 27,992 30,277 84,784 88,670 Research and development 9,049 39,540 114,634 334,557 Other operating expenses 64,934 122,944 130,232 304,486 ------- ------- --------- --------- Total operating expenses 667,088 789,739 2,284,199 2,723,515 ------- ------- --------- --------- Income(loss) from operations (91,679) (443,479) (1,118,135) (1,539,372) Interest income(expense), net (52,652) (43,422) (152,978) (63,025) Gain on Sale of Fixed Assets --- --- 2,402 --- Net income(loss) $(144,331) $(486,901) $(1,268,711)$(1,602,397) ======= ======= ========= ========= Earnings(loss) per weighted average common share $(.03) $(.12) $(.29) $(.40) === === === === Weighted average shares used in computing earnings per share 4,355,554 3,965,810 4,355,554 3,965,810 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, 2001 September 30, 2000 ------------------ ------------------ Operating Activities: Net loss $(1,268,711) $(1,602,397) Adjustments to reconcile net loss to net cash used for operating activities: Deferred gain on sale of land and building (31,961) (31,960) Depreciation and amortization 84,784 88,670 Gain on sale of property and equipment (2,402) --- Changes in operating assets and liabilities: Accounts receivable, trade (494,650) 291,273 Accounts receivable, factored 14,770 36,785 Inventory 6,101 (7,871) Prepaid expenses and other current assets (31,729) 78,167 Deposits 2,540 --- Due to factor (36,199) (57,496) Accounts payable, trade 39,493 (77,175) Accounts payable, related party 16,855 (23,574) Accrued interest payable on long-term debt 102,899 (20,767) Accrued expenses 203,675 109,980 Deferred software maintenance revenue and unearned revenue 325,066 392,894 ------- ------ Total adjustments 199,242 778,926 Net cash (used for) operating activities (1,069,469) (823,471) Investing activities: Expenditures for property and equipment (2,904) (24,189) Proceeds from the sale of property and equipment 3,860 --- ----- ------ Net cash provided by/(used for) investing activities 956 (24,189) ----- ------
Item 1 - Financial Statements PAMET SYSTEMS, INC.
Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2001 September 30, 2000 ------------------ ------------------ Financing activities: Proceeds from long-term debt- convertible promissory notes 814,149 --- Proceeds from related party notes --- 160,000 Issuance of capital stock 257,729 1,455,793 Conversion of convertible promissory notes to capital stock --- (800,000) --------- ------- Net cash provided by financing activities 1,071,878 815,793 --------- ------- Net increase(decrease) in cash 3,365 (31,867) Cash at beginning of period 1,507 40,207 ----- ------ Cash at end of period $4,872 $8,340 ===== ===== Supplemental disclosure of cash flow information: Cash paid for interest: $59,769 $85,943 ====== ====== Summary of non-cash financing activities: Conversion of convertible promissory notes to capital stock --- $800,000 Note payable-related party converted to long term convertible promissory note $385,000 --- ======= =======
See accompanying "Notes to Financial Statements (Unaudited) PAMET SYSTEMS, INC. Notes to Condensed Financial Statements (Unaudited) Note (1) Statement Presentation The accompanying unaudited condensed financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods and, in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2001, the results of operations for the three and nine month periods and changes in cash flows for the nine month period then ended. There were no material unusual charges or credits to operations during the recently completed fiscal quarter. The results reported for the nine months ended September 30, 2001 are not necessarily indicative of the results of operations which may be expected for the entire year. Note (2) Nature of Operations Pamet Systems, Inc. (the Company), a Massachusetts corporation, was formed in November 1987 to engage in the business of designing, developing, installing and servicing computer software systems for the municipal market throughout the United States, principally in the area of public safety. Credit is granted to certain customers, most of which are municipalities. The Company generally does not require collateral. The Company's backlog at November 13, 2001 was approximately $1,003,000. Management believes that this level of backlog and its anticipated sales, as well as the funding described below, are adequate to sustain operations through the end of fiscal year 2001. However, the ultimate success of the Company is still dependent upon its ability to secure financing adequate to meet its working capital and ongoing product development needs. In addition, in order for the Company's operations to be maintained and/or expanded, the Company will need to successfully market its Microsoft Windows NT computing platform applications. The current Board members are willing to seek additional equity financing, as needed. Management believes the Company's current sources of liquidity and funding are adequate to sustain operations. Management is also seeking to enhance the Company's financial position by obtaining additional permanent financing. There can be no assurance, however, that the Company's operations will be sustained or be profitable in the future, that adequate sources of financing will be available at all, when needed or on commercially acceptable terms, or that the Company's product development and marketing efforts will be successful. Note (3) Mortgage and Subsequent Sale and Lease Back of Corporate Training, Development and Headquarters Facility On August 6, 1999 the Company sold its headquarters to Area Realty, LLC for $1,150,000 and signed a lease back agreement with the buyer for 7 years. As part of the lease back agreement with the buyer of the facility, the Company was required to place $80,000 on deposit with the buyer. The balance on the first and second mortgages and all accrued interest were paid in full at the time of the sale. The sale of the building resulted in a gain of approximately $298,000 that the Company deferred and is recognizing as a reduction to rent expense over the term of the lease. The monthly rent for the first three years is $12,997. For years four through seven the monthly base rent increases to $14,564. For the second through seventh year, rent may be further increased by the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers for the preceding year up to a maximum of three percent per annum. Note (4) Loss Per Common Share In 2001, loss per common share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted per share computations are not presented since the effect would be antidilutive. Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Overview Pamet Systems, Inc. (the "Company" or "Pamet Systems"), founded in 1987, designs and implements broad-based information technology solutions for public safety agencies enabling them to realize cost efficiencies and provide better service to the public. The foundation of the Company's fully integrated suite of products is composed of three components: PoliceServer NT, FireServer NT, and CADServer NT. The Company also offers several companion products including Imaging, Mobile Access, Advanced Reporting, JailServer NT, Investigator's Tool Kit and Mapping that are integrated with the police and fire records management and computer-aided dispatch modules. Pamet Systems total systems approach to public safety software allows the agency to enter information once and have it available throughout the product suite. The Company's revenues consist primarily of sales of these software applications, the associated hardware and systems integration, and support and update service fees. The Company's revenues for the three month period ended September 30, 2001 increased 62.7% from the three month period ended September 30, 2000 resulting in year-to-date 2001 revenues that are only $81,653 or 5.4% less than in 2000. In 2001, as in the past, the Company experienced a slower first half due to the availability of municipal funds. In the Northeast where the Company does the largest amount of its business, the municipal fiscal year generally begins on July 1 which is when municipal funds become available. In addition, the slowdown in the demand which the Company began to feel in the second half of 2000 continued through the first half of 2001. As funding became available in the third quarter, agencies began to make purchase decisions resulting in increased revenues in the quarter ended September 30, 2001. In addition, although management believes that public safety agencies were deferring decisions to replace aging and/or inadequate technology infrastructure and application software until economic conditions stabilized, two factors should positively affect these purchase decisions in the coming quarters. First, during the third quarter, COPSMore 2001 federal grant awards began to be announced providing additional funding to the marketplace. Second, the tragic terrorist attacks of September 11, 2001 on the World Trade Center and the Pentagon raised public awareness of the need for automated public safety systems and the importance of sharing data between agencies. Starting in 1997, taking its cue from advances in technology, the Company's core products were completely rebuilt using modern design tools and databases. The entire suite utilizes the Windows NT 32 bit technology and a GUI interface (graphical user interface). The overall design of the NT-based PoliceServer and FireServer products and the mainstream technologies on which they are based are highly suitable for the changing needs of public safety agencies. In formal procurement processes where competing products are evaluated, the Company's suite of products has fared well. The Company was recently awarded a major contract to provide its PoliceServer records management system to the Milwaukee County Sheriff's Department. This system must support over 800 deputies and additional support staff, as well as a broad range of public safety activities including airport security, the county jail, expressway patrol, SWAT team, K-9, process service, warrants, drug enforcement, park patrol and criminal investigations. Pamet Systems products were selected from a field of 14 software development companies. The Company believes that the $5.2 million spent during the past four years on the development of its NT-based suite of products has positioned it for future growth and leadership in the marketplace. Management believes that the magnitude of funding required to develop new public safety software applications using state of the art technologies will trigger a consolidation in the public safety marketplace, which is currently dominated by small, privately held companies that will have difficulty affording the development costs. The Company's sales and marketing efforts are being focused in several areas. First, using data gathered from marketing mailings, sales personnel are actively pursuing public safety agencies using the software of weak competitors. In most cases, these competitors have product lines employing aging technology or lacking the ability to provide a complete solution for the customer. The Company is also broadening the focus of its sales and marketing efforts to reach new market segments. Pamet Systems is actively marketing to larger, more technologically demanding agencies such as the Milwaukee County Sheriff's department mentioned above. In addition, the NT product is being packaged and aggressively priced to meet the needs of smaller agencies. Third, the Company is revitalizing efforts to expand geographically both within the Northeast to New York and New Jersey and in the Midwest and Southeast. These efforts have resulted in the largest pipeline of active prospects in the Company's history. The Company includes in the pipeline prospective customers who have seen a product demonstration, have expressed interest in the product, and expect to have funding available. However, there can be no assurances that any prospect in the pipeline will result in a sale. During 2001, the Company has released major product enhancements and extensions based, in part, on feedback from its NT customers. These releases improve the product's ease of use and substantially extend its capabilities. As a result, the Company has received certification from three states for our police records system's incident-based reporting (NIBRS) capabilities and certification from the Massachusetts Fire Marshall for the fire records system's advanced national reporting (NIFRS 5.0) capabilities. The Company has also developed utilities to convert customer data files from older systems, which will ease the transition for agencies. As a result of these improvements, the Company has thirty-four VMS customers who are in the process of or have completed migrating to the NT system. Management continues to believe that significant market opportunities exist for its suite of NT-based products. Major federal grant programs continue to be announced that will allow agencies to update their computer systems. In early 2001, the federal government announced COPSMore 2001, an $81M grant program earmarked solely for public safety technology. Pamet Systems held free grant seminars in the Northeast and Midwest to aid agencies in understanding the grant application process and assisted approximately 200 agencies in preparing their applications, which is estimated to be about 10% of the applications the Justice Department will receive. The Department of Justice has begun announcing the recipients of the CopsMore 2001 grants and many of the agencies that the Company assisted in the grant process have received funding. The Department of Justice has also requested an additional $200M for technology in its fiscal 2002 budget which runs October 1, 2001 to September 30, 2002. In addition, the continuing growth in the number of E911 centers, heightened emphasis on crime in most communities and the awareness by municipalities that computer systems can improve the efficiency and effectiveness of their public safety resources support the belief that the market for the Company's products will continue to grow. The Company has also seen increased emphasis on the coordination of public safety systems between neighboring town, county, and state police organizations. The terrorist attacks of September 11, 2001 have served to increase the awareness of the public regarding importance of integrated automated public safety systems. The Company's products are designed and marketed with the option to be used in this type of regional application. The primary challenges facing the Company are to capitalize on the design efforts that have resulted in an integrated suite of NT-based products and to acquire adequate financing to fund immediate needs and future growth. The Company has launched a major financing program with the goal of raising $10M to $15M. The program is composed of a $1.5M private placement to meet immediate cash needs with the remainder planned in a secondary offering later in 2002. To date, the Company has secured $1,080,625 of working capital from its private placement offering and converted $385,000 plus accrued interest of $44,150 from related party lines of credit to long term convertible promissory notes. However, there are no assurances that the Company will be successful in completing its fund raising program, in light of, among other things, the state of the financial markets and the Company's historical financial performance. Despite what the Company believes are numerous growth opportunities, the Company remains hampered by under capitalization and the fact that its primary market is the government sector, which is characterized by long lead times and political influence in the decision making process. As a consequence, the Company is pursuing an analysis of complementary markets and adaptations for its products. Three Months Ended September 30, 2001 vs. Three Months Ended September 30, 2000 Net sales for the three month period ended September 30, 2001 (the 2001 period) increased 62.7% to $715,405 from $439,713 for the three month period ended September 30, 2000 (the 2000 period). The sales for the 2001 period reflected significant increases in police and fire systems sales, software support and mobile revenues. In addition, Pamet Systems continued to see steady support from its installed base and many customers are earmarking available funding for NT migration. These VMS customers receive the NT software at no charge, however, they must pay for installation, training, and data conversion. In addition, two customers that previously had chosen new software over their VMS PoliceServer systems have returned to using Pamet's VMS software. One of these agencies is in the process of moving to the NT product and added a large mobile system in the 2001 period. During the 2001 period, software support revenues increased 27.4% to $280,729 from $220,333 in the 2000 period reflecting the increase in the customer base from the 2000 period, the higher support rates charged on the NT product and increases in annual support charged by the Company's mobile partner that is passed on to the end user. Annual software support and update service for the NT customers is 19% of the price of the software or list price for migrating customers, an increase from the 14% of the system software purchase price that VMS customers have historically paid. Cost of product increased 49.8% or $46,543 to $139,996 for the 2001 period from $93,453 for the 2000 period as a result of the increase in sales. However, the Company also experienced an increase in gross margin from 78.7% in the 2000 period to 80.4% in the 2001 period which reflected the trend toward software only sales for all products, the use of state bid list contractors to purchase hardware and the Company's software, and continued favorable margins on support revenues. Agencies are increasingly purchasing systems through state bid list contractors. These contractors partner with the Company and provide off-the-shelf hardware that combined with Pamet Systems software offers a complete solution for the customer. This arrangement reduces total revenues for the Company, but significantly increases margins. Operating expenses reflected a decrease of $122,651 or 15.5% to $667,088 for the 2001 period compared to $789,739 for the 2000 period. The most significant factors in this decrease were personnel expenditures, research and development, and uncollectible accounts. The Company focused on keeping spending under tight control while continuing to deliver product improvements. Personnel costs decreased 8.8% or $42,788 to $444,273 for the 2001 period compared to $487,061 for the 2000 period. The decrease in spending can be attributed to attrition and the retirement of one employee. Due to the continued working capital constraints facing the Company, non-key positions are not being immediately filled. Rent, utilities and telephone remained flat at $48,940 in the 2001 period compared to $48,717 for the 2000 period. Decreases in rent resulting from moving the Maitland, Florida office to smaller quarters at the end of the first quarter of 2001 were offset by increases in telephone expense. Travel and entertainment expenses increased 4.2% to $32,008 for the 2001 period from $30,719 for the 2000 period. The slight increase can be attributed to installations outside the Northeast and increased trade show attendance during the quarter. Professional fees increased 30.9% to $39,892 for the 2001 period from $30,481 for the 2000 period primarily due an increase in consulting fees. The Company has retained the services of a financial consultant to evaluate the available alternatives to raise additional capital. This spending was offset by a decrease in legal fees based on reduced usage. Depreciation expense decreased 7.5% to $27,992 for the 2001 period from $30,277 for the 2000 period. External research and development expenditures reflected a decrease of $30,491 or 77.1% to $9,049 for the 2001 period from $39,540 in the 2000 period. The Company is focusing on using internal resources to complete the development work on the NT product line both to build an inhouse staff to support ongoing product enhancements and extensions and to keep expenditures in line with current working capital constraints. The internal team of engineering and support resources are focusing on delivering advanced product capabilities, interfaces to companion products, and utilities to migrate current customers to the NT system from the VMS system. Other operating expenses decreased 47.2% to $64,934 for the 2001 period from $122,944 for the 2000 period. A significant part of the decrease can be attributed to a reduction in the spending on marketing collateral materials and a decrease in the reserve for uncollectible accounts. Net interest expense for the 2001 period was $52,652 compared to $43,422 for the 2000 period. During the first three quarters of 2001 the Company has received $680,000 of new convertible debt funding which is accruing interest at 7% causing additional interest expense. The net loss for the 2001 period was $(144,331) or $(.03) per share compared to net loss of $(486,901) or $(.12) per share for the 2000 period. This improvement can be attributed to the increase in revenues over the prior year and expense control due to working capital constraints. Nine Months Ended September 30, 2001 vs. Nine Months Ended September 30, 2000 Net sales for the nine month period ended September 30, 2001 (the 2001 period) of $1,422,439 decreased $81,653 or 5.4% from net sales of $1,504,092 for the nine months ended September 30, 2000 (the 2000 period). Increased software support revenues were offset by decreases in system hardware and software, mobile, and imaging revenues. During the first nine months of 2001 the Company continued to feel the effects of the general economic slowdown and the hesitance in the public safety marketplace to invest in new software and infrastructure until economic conditions stabilize. In addition, although federal grant programs pump significant funding into public safety, they cause delays in the normal procurement cycle while agencies await grant decisions. The fact that the federal government has begun to announce grant awards for COPSMore 2001 and the focus on the public safety sector since the terrorist attacks of September 11, 2001 should help offset the effects of the economic slowdown. Support revenues increased 28.0% to $758,647 for the 2001 period from $592,652 for the 2000 period reflecting the increased customer base and rates. Support revenues accounted for 53.4% of sales in the 2001 period as compared to 39.4% of sales in the 2000 period. Cost of product decreased 19.9% to $256,375 for the 2001 period from the $319,949 for the 2000 period resulting in a gross margin increase to 82.0% for the 2001 period from 78.7% for the 2000 period. The improvement in margin can be attributed to software only sales and the increase in high margin support revenues. Some customers purchase their hardware directly from the state bid list thereby increasing the higher margin software component of these sales. Net operating expenses decreased $441,718 or 16.2% to $2,281,797 for the 2001 period compared to $2,723,515 for the 2000 period. Most significantly, external research and development expenditures decreased $219,923 or 65.7% to $114,634 in the 2001 period from $334,557 in the 2000 period reflecting completion of major portions of the NT development effort. In addition, due to the continuing working capital constraints the Company is experiencing, internal engineering and support staff were deployed to product development and testing and external engineering resources were used very selectively. The Company has also instituted broad cost cutting measures to help alleviate the cash flow issues. The 8.6% reduction in personnel spending from $1,615,814 in the 2000 period to $1,477,230 in the 2001 period can be attributed to attrition and the retirement of one employee. The Company continues to backfill on a selective basis to aid in keeping costs under control. Rent, utilities and telephone decreased $18,329 or 10.9% to $150,162 in the 2001 period from $168,491 in the 2000 period due to the move of the Maitland, Florida office to smaller quarters and a reduction in telephone expense due to lower rates. Travel and entertainment decreased 9.6% to $82,144 in the 2001 period from $90,913 in the 2000 period reflecting decreases in lodging, meals and rental cars. Professional fees increased 103.2% to $245,013 in the 2001 period from $120,584 in the 2000 period. Consulting expenses resulting from hiring professional assistance with the Company's business plan and a financial consultant to evaluate capital funding alternatives constituted the bulk of the increase and were partially offset by decreases in legal and accounting fees. Depreciation expense decreased 4.4% from $88,670 in the 2000 period to $84,784 in the 2001 period. The decrease of $174,254 or 57.2% in other operating expenses was attributable to a reduction in the reserve for uncollectible accounts as outstanding balances are collected and lower spending for marketing collateral, annual report expense and employee training. Net interest expense was $152,978 for the 2001 period compared to $63,025 for the 2000 period. The 2000 period included the reversal of accrued interest associated with the conversion of $800,000 of convertible promissory notes to equity in the 2000 period and the conversion of $600,000 of convertible promissory notes to equity in the fourth quarter of 1999. In addition, the Company received $680,000 of new convertible debt funding in the 2001 period that is accruing interest at 7%. The net loss for the 2001 period was $(1,268,711) or $(.29) per share compared to a net loss of $(1,602,397) or $(.40) per share for the 2000 period. Liquidity and Capital Resources The Company had working capital deficit of $(2,951,184) at September 30, 2001 compared to $(2,817,468) at December 31, 2000. The most significant reasons for this deterioration are the increases in deferred software maintenance revenue, the current portion of long-term debt, and accrued expenses. Offsetting these increased liabilities was an increase in accounts receivable. During 2001, the Company has secured $200,625 of additional equity financing and $680,000 of new long term debt financing. In addition, the Company converted $475,000 of notes payable to related parties and the associated interest of $44,149 to long-term convertible promissory notes during the second quarter of 2001. At September 30, 2001, $2,034,149 of convertible promissory notes and $246,437 of related interest remained outstanding as liabilities. In general, the outstanding convertible debt funding accrues interest at either 7% or 11%; has a two year term; carries the option of conversion of the principal to common stock by the debt holder at conversion prices ranging from $0.375 to $2.50 per share, or repayment of principal and accrued interest by the Company; and has 100% warrant coverage attached that allows for the purchase of additional shares of common stock at exercise prices ranging from $1.00 to $2.50 per share. The Company's ability to repay the outstanding convertible promissory notes with accrued interest on the due dates is at risk, especially the notes due in the next twelve months. Cash increased to $4,872 at September 30, 2001 from $1,507 at December 31, 2000. Accounts receivable increased to $718,841 at September 30, 2001 from $224,191 at December 31, 2000 due to higher sales during the third quarter of 2001 as compared to the last quarter of 2000 and a decrease in usage of the receivables financing agreement in 2001. The resources necessary to fund the enhancements and extensions to the NT product and provide working capital for operations continue to be a major concern for the Company. In the fourth quarter of 2000, the Company launched a $1.5M private placement financing program to meet immediate cash needs. The Company received $880,625 during the first nine months of 2001. Subsequent to the end of the third quarter of 2001, an additional $200,000 of convertible debt funding was received by the Company. Late in 2000, the Company felt the effects of a slowdown in the general economic conditions and within the public safety marketplace. However, with the COPSMore 2001 $81 million in grant awards being announced, the heightened emphasis on public safety due to the September 11, 2001 terrorist attacks, the backlog at November 13, 2001 of over $1,003,000 and the sales pipeline resulting from the addition of sales and marketing resources, the Company is optimistic about revenues in the fourth quarter of 2001. If additional funds are required, the Board of Directors is willing to seek additional financing. Nevertheless, the Company continues to be hampered by insufficient cash resources. As noted in the Auditor's Report for 2000 included in the Company's Annual Report on Form 10K, there can be no assurances that the Company will be able to generate adequate cash either through operations or additional financing to continue as a going concern. Failure to acquire the necessary financing could have a material adverse effect on the Company. The Company is continuing to consider projects to increase its cash position such as activities to raise capital, mergers, acquisitions or other business combinations. As of September 30, 2001, the Company had accumulated approximately $12,200,000 of federal net operating loss carryforwards that expire beginning in the year 2005. In addition, the Company has state net operating losses to carry forward of $8,500,000 which expire between the years 2002 and 2005. Under the Internal Revenue Code of 1986, as amended, the rate at which a corporation may utilize its net operating losses to offset income for federal tax purposes is subject to specified limitations during periods after the corporation has undergone an "ownership change". It has been determined that an ownership change did take place at the time of the Company's initial public offering. However, the limitations on the loss carryforward exceed the accumulated loss at the time of the "ownership change". Thus there is no restriction on its use. Seasonality The majority of the Company's installed base has a fiscal year that commences on July 1 and, therefore, the Company bills its customers for their annual software support and update service on July 1 of each year. Consequently, cash flow representing software support revenues has tended to be higher in the second half of the Company's fiscal year, although software support revenues are recognized ratably throughout the fiscal year. Revenue Recognition Revenues from software license fees are recognized when a contract has been executed, the product has been delivered, all significant contractual obligations have been satisfied and collection of the related receivable is probable. Maintenance revenues, including those bundled with the initial license fee, are deferred and recognized ratably over the service period. Consulting and training service revenues are recognized as the services are performed. Inflation Inflation has not had a significant impact on the Company's operations to date. Forward Looking Statements This Form 10-QSB contains statements that are not historical facts. These statements may constitute "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities and Exchange Act of 1934 as amended. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of such words as "believes", "expects", "may", "will", "should", or "anticipates" or the negative thereof or other variations thereon of similar terminology, and/or which include, without limitation, statements regarding the following: impact of current economic conditions on purchasing decisions in the public safety marketplace; market expectation for the NT operating environment and customer acceptance of the Company's NT products; ability of competitors to fund development; ability of the NT product to meet market needs; law enforcement trends; impact of federal grant awards and September 11, 2001 terrorist attacks on the Company's sales and the focus of the marketplace; adequacy of funding to support operations and anticipated growth; and discussions of strategies involving risk and uncertainties that reflect management's current views. These statements are based on many assumptions and factors and may involve risks and uncertainties. The actual results of the Company or industry results may be materially different from any future results expressed or implied by such forward-looking statements because of factors such as insufficient capital resources to operate the Company; inability to successfully market and sell the NT product; changes in the marketplace including variations in the demand for public safety software; and changes in the economic and competitive environment. These factors and other information contained in this Form 10-QSB could cause such views, assumptions and factors and the Company's results of operations to be materially different. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future. PART II - OTHER INFORMATION Item 1 - Legal Proceedings None Item 2 - Changes in Securities c. Sales of 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 4.39 Convertible Note issued to West Country Partners dated August 30, 2001 4.40 Warrant issued to West Country Partners dated August 30, 2001 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) September 14, 2001 (s) Richard C. Becker _______________________________ ______________________ Date Richard C. Becker Vice President Principal Financial Officer No. L-033 CONVERTIBLE PROMISSORY NOTE THIS NOTE WAS ISSUED WITH "ORIGINAL ISSUE DISCOUNT." THE NAME AND TELEPHONE NUMBER OF THE REPRESENTATIVE OF THE ISSUER WHO CAN PROVIDE (i) THE TOTAL AMOUNT OF ORIGINAL ISSUE DISCOUNT, (ii) THE ISSUE DATE, AND (iii) THE YIELD TO MATURITY ON THE ISSUE DATE IS RICHARD C. BECKER, (978)-263-2060. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED OR QUALIFIED THEREUNDER OR AN EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION IS AVAILABLE. CONVERTIBLE PROMISSORY NOTE $130,000 Acton, Massachusetts August 30, 2001 FOR VALUE RECEIVED, PAMET SYSTEMS, INC., a Massachusetts corporation (the "Company"), hereby promises to pay to West Country Partners, a California Limited Partnership of which James S. Schmitt is the General Partner ("Payee"), with its address at 1917 Brittany Park, Camarillo, CA 93012, the principal sum of One Hundred Thirty Thousand Dollars ($130,000), on the dates and in the amounts hereinafter set forth. This Promissory Note is issued by the Company pursuant to the Securities Purchase Agreement, dated as of the date hereof, among the Company and Payee (the "Securities Purchase Agreement"). Capitalized terms used but not defined shall have the respective meanings ascribed to them in the Securities Purchase Agreement. This Promissory Note is hereinafter referred to as this "Note." 1. Principal and Maturity Date. The principal amount of this Note outstanding together with all accrued interest hereon shall be due and payable on August 29, 2003 (the "Maturity Date"). 2. Interest. The outstanding principal amount of this Note shall accrue interest at the per annum rate of seven percent (7.0%) through the earlier of the date of repayment or conversion (in each case computed on the basis of a 365 day year and actual days elapsed). Interest shall be payable in full on the Maturity Date with respect to the principal amount of the Note then outstanding. No interest shall be deemed to have accrued or be payable on any portion of this Note which is Converted on or prior to the Maturity Date. 3. Prepayment. This Note may be prepaid, in whole or in part, without penalty or premium upon not less than thirty (30) days prior written notice from the Company to the Payee, at any time or from time to time. All prepayments made on this Note shall be applied first to the payment of all unpaid interest accrued on this Note, and then to the outstanding and unpaid principal amount of this Note as of the date of the payment. Prepayment, in whole or in part, shall be noted in the accounting records of the Company. 4. General Payment Provisions. All payments or prepayments of principal and interest and other sums due pursuant to this Note shall be made by check payable to the Payee at the address set forth above or at such other address as Payee shall have previously designated to the Company in writing not later than two Business Days (as defined below) prior to the date on which such payment becomes due. If the due date of any payment under this Note would otherwise fall on a day which is not a Business Day, such date will be extended to the immediately succeeding Business Day and interest shall be payable at the rate set forth herein for the period of the extension. The term "Business Day" shall mean any day on which commercial banks in the State of New York are not authorized or required to close. 5. Conversion; Prepayment. (a) Conversion/Prepayment and Conversion Price. The Payee may, subject to the terms and conditions of this Section 5, at any time, or from time to time, exercise its right to convert this Note to Common Stock by delivering a duly executed notice, in the form substantially similar to Exhibit A hereto, of such intention to the Company (the "Conversion Notice"); provided, however, that if, and to the extent, this Note or any portion thereof is called for prepayment, the holder may exercise its right to convert to Common Stock such portion of this Note as was called for prepayment. The Payee shall have the right, subject to the terms and conditions of this Section 5, to, no more frequently than four times per annum in the aggregate, convert all or any part of the principal amount then outstanding under this Note (the "Note Amount"), in an amount not less than $50,000 (or such lesser amount as may then be outstanding), into that number of fully-paid and nonassessable shares of Common Stock (the "Conversion Shares"), obtained by dividing the Note Amount or such portion thereof presented for conversion by the Conversion Price. The "Conversion Price" shall initially be $0.375 per share of Common Stock. Upon a partial conversion or prepayment of this Note, the Company shall execute and deliver to or on the order of the holder hereof, a new Note or Notes of authorized denominations in principal amount equal to the unconverted or unredeemed, as the case may be, portion of this Note. (b) Issuance of Common Stock on Conversion. In order to effect the conversion of this Note, the Payee shall deliver to the Company at its principal office, this Note and a duly executed Conversion Notice; provided, however, that if the Payee desires to convert the Note on the Maturity Date, Payee shall notify the Company in writing of its intention to convert the Note at least five (5) days prior to the Maturity Date. The date upon which the Company receives the Conversion Notice, the Note and any other documentation required under this Section 5 of this Note or the Conversion Notice shall be referred to herein as the "Effective Date." Upon the Effective Date, this Note (or portion thereof) shall be deemed converted into shares of Common Stock in accordance with this Section 5, at which time the rights of the Payee with respect to this Note and the amount so converted shall cease and, subject to the following provisions of this paragraph, the person or persons entitled to receive the shares of Common Stock upon conversion of this Note (or portion thereof) shall be treated for all purposes as having become the record holder or holders of such Common Stock. As promptly as practicable after the Effective Date, the Company shall deliver or cause to be delivered to the Payee, at the address set forth above or at such other address as the Payee shall designate in writing, certificates representing the number of fully paid and nonassessable shares of Common Stock into which this Note (or portion thereof), shall be converted in accordance with the provisions of this Section 5. If this Note is called for prepayment it may be converted as provided herein up to and including the close of business on the business day preceding the date of prepayment. No fractional shares of Common Stock shall be issued upon conversion of this Note (or portion thereof). In lieu of any fractional share of Common Stock which would otherwise be issuable upon conversion of this Note (or portion thereof), the Company shall pay a cash adjustment in respect of such fraction in an amount equal to such fraction multiplied by the Conversion Price. (c) Reserves. The Company covenants that it will at all times reserve and keep available, free from pre-emptive rights, out of its authorized but unissued Common Stock, solely for the purpose of issue upon conversion of this Note as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of this Note. The Company covenants that all shares of Common Stock which shall be so issuable shall, upon issuance, be duly and validly issued and fully paid and nonassessable. The Company shall from time to time, in accordance with applicable law, increase the authorized amount of its Common Stock if at any time the authorized amount of its Common Stock remaining unissued shall not be sufficient to permit the conversion of this Note at the time outstanding. (d) Taxes Upon Conversion. The issuance of certificates for shares of Common Stock upon the conversion of this Note shall be made without charge to the converting noteholder for any tax in respect of the issuance of such certificates, and such certificates shall be issued in the respective names of, or in such names as may be directed by, the holder of this Note; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder of this Note, and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid; and provided, further, that in no event shall the Company be required to pay or reimburse the holder for any income tax payable by such holder as a result of such issuance. (e) Legends. All certificates representing Conversion Shares shall bear a conspicuous legend stating in substance: "THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED UNDER ANY STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED OR QUALIFIED THEREUNDER OR AN EXEMPTION FROM REGISTRATION OR QUALIFICATION IS AVAILABLE." The Company shall, upon the request of any holder of a stock certificate representing Conversion Shares and the surrender of such certificate, issue a new stock certificate without such legend if (i) the stock evidenced by such certificate has been effectively registered under the Securities Act and qualified under any applicable state securities law and sold by the holder thereof in accordance with such registration and qualification or (ii) such holder shall have delivered to the Company a legal opinion reasonably satisfactory to the Company to the effect that the restrictions set forth herein are no longer required or necessary under the Securities Act or any applicable state law. 6. Subordination. (a) The Company irrevocably covenants and agrees, and the Holder of this Note, by its acceptance thereof, irrevocably covenants and agrees, that the payment of the principal of and interest on this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, to the prior payment and/or cancellation (as shall be appropriate) in full of all Senior Indebtedness (as defined herein). The provisions of this Section 6 are made for the benefit of the holders of Senior Indebtedness, and such holders shall, at any time, be entitled to enforce such provisions against the Company or Noteholder. No holder of any Senior Indebtedness shall be deemed to owe any fiduciary duty or any other obligation to any Holder of this Note now or at any time hereafter. Notwithstanding anything herein contained to the contrary, all the provisions of this Note shall, except as otherwise provided herein, be subject to the provisions of this Section 6, so far as the same may be applicable thereto. (b) For purposes of this Section 6 (and subject to Section 2.06 of the Securities Purchase Agreement), "Senior Indebtedness" shall mean any indebtedness, liability or obligation, contingent or otherwise, other than that arising pursuant to this Note, of the Company (any such indebtedness, liability or obligation being hereinafter in this definition referred to as an "Obligation") (i) which is created, assumed or incurred by the Company after the date of this Note and which, when created, assumed or incurred, is specifically designated by the Company as Senior Indebtedness for the purposes hereof in the instrument creating or evidencing the Company's liability with respect to such Obligations or (ii) any increases, guarantees, refundings, renewals, rearrangements or extensions of and amendments, modifications and supplements to any indebtedness, liability or obligation described in clause (i) above. 8. No Assignment. This Note may not be assigned by the Payee without the prior written consent of the Company. 9. Governing Law. This Note shall be construed in accordance with, and governed by, the laws of the Commonwealth of Massachusetts as applied to contracts made and to be performed entirely in the Commonwealth of Massachusetts without regard to principles of conflicts of law. Each of the parties hereto hereby irrevocably and unconditionally submits to the exclusive jurisdiction of any court of the Commonwealth of Massachusetts or any federal court sitting in the Commonwealth of Massachusetts for purposes of any suit, action or other proceeding arising out of this Note (and agrees not to commence any action, suit or proceedings relating hereto except in such courts). Each of the parties hereto agrees that service of any process, summons, notice or document by U.S. registered mail at its address set forth herein shall be effective service of process for any action, suit or proceeding brought against it in any such court. Each of the parties hereto hereby irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Note, which is brought by or against it, in the courts of the Commonwealth of Massachusetts or any federal court sitting in the Commonwealth of Massachusetts and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. 10. Adjustment of Interest Rate. No provision of this Note shall require the payment of interest to the extent that receipt of any such payment by the Company would be contrary to the provisions of law applicable to the Company limiting the maximum amount of interest that may be charged to or collected from the Company, and if any sum in excess of such maximum rate of interest is paid or charged, the excess will be deemed to have been a prepayment of principal of this Note when paid, without premium or penalty, and all payments made thereafter will be appropriately applied to interest and principal to give effect to such maximum rate, and after such application any excess shall be immediately refunded to the Company. PAMET SYSTEMS, INC. By: Name: David T. McKay Title: President & CEO Attested: By:_________________________ Name: Title: EXHIBIT A TO PROMISSORY NOTE [Form of Conversion Notice] To Pamet Systems, Inc.: The undersigned registered holder (the "Payee") of the Note in the principal amount indicated below and bearing the certificate number indicated below (the "Note"), hereby irrevocably exercises its right to convert the principal amount of the Note indicated herein into shares of common stock, par value $.01 per share, of Pamet Systems, Inc. (the "Company"), in accordance with the terms of the Note, and directs that the shares issuable and deliverable upon such conversion together with a check in payment for fractional shares, be issued and delivered to the Payee unless a different name has been indicated below. If shares are to be issued in the name of a person other than the Payee (such person being referred to as the "Transferee"), the Note must be duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company and duly executed by the undersigned, and the undersigned will pay all transfer taxes payable with respect thereto. In addition, the Transferee must sign this notice. All capitalized terms used in this notice and not otherwise defined shall have the respective meanings ascribed to them in the Note. The Payee, or in the event a Transferee shall receive the Conversion Shares issued upon conversion of this Note, the Transferee, hereby represents and warrants to the Company that (i) he has sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of an investment in the Company, (ii) he is acquiring the Conversion Shares for its own account for investment and not with a view to, or for distribution or sale in connection with any public offering in violation of the Securities Act of 1933, as amended (the "Securities Act"), (iii) he understands that (x) the Conversion Shares will not have been registered for sale under the Securities Act or qualified under applicable state securities laws and may not be resold without registration under the Securities Act and qualification under any applicable state securities law, (y) such Conversion Shares will be issued to him pursuant to one or more exemptions from the registration or qualification requirements of the Securities Act and that the representations and warranties contained herein are given with the intention that the Company may rely thereon for purposes of claiming such exemptions and (z) the Conversion Shares shall contain a legend substantially as set forth in Section 5(e) of the Note, (iv) he is an "accredited investor" as defined in Section 501 of Regulation D promulgated under the Securities Act, (v) he understands he must bear the economic risk of Conversion Shares issued upon conversion of the Note for an indefinite period of time as the Conversion Shares cannot be sold unless registered under the Securities Act and any other applicable state securities laws or sold in a transaction exempt from such registration thereunder and (vi) representatives of the Company have (x) fully and satisfactorily answered any questions which he deemed to ask concerning the Company and (y) furnished him with such additional information and documents regarding the Company as he has reasonably requested. Principal amount of Note to be converted: $________________ Certificate Number of Note: __ Print name, address (including zip code) and social security or other taxpayer identification number of the person in whose name the Common Stock will be issued: _________________________________ _________________________________ _________________________________ (Zip Code) _________________________________ Social Security or other Taxpayer Identification Number Dated:___________________________ Signature of Noteholder Dated:___________________________ Signature of Transferee LW - 033 WARRANT NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND NEITHER THIS WARRANT NOR SUCH SHARES MAY BE SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY (WHICH ACCEPTANCE SHALL NOT BE UNREASONABLY WITHHELD) THAT SUCH REGISTRATION IS NOT REQUIRED. Void after 5:00 p.m. Eastern Standard Time, on August 29, 2006. WARRANT TO PURCHASE COMMON STOCK OF PAMET SYSTEMS, INC. FOR VALUE RECEIVED, PAMET SYSTEMS, INC. (the "Company"), a Massachusetts corporation, hereby certifies that West Country Partners, a California Limited Partnership of which James S. Schmitt is the General Partner, with its address at 1917 Brittany Park, Camarillo, CA 93012, or his permitted assigns, is entitled to purchase from the Company, at any time or from time to time commencing August 30, 2001, and prior to 5:00 P.M., Eastern Standard Time, on August 29, 2006, a total of Three Hundred Forty Six Thousand Six Hundred Sixty Seven (346,667) fully paid and nonassessable shares of Common Stock, par value $.01 per share, of the Company for an aggregate purchase price of Five Hundred Twenty Thousand Dollars ($520,000) (computed on the basis of $1.50 per share). (Hereinafter, (i) said Common Stock, together with any other equity securities which may be issued by the Company with respect thereto or in substitution therefor, is referred to as the "Common Stock," (ii) the shares of the Common Stock purchasable hereunder are referred to as the "Warrant Shares," (iii) the aggregate purchase price payable hereunder for the Warrant Shares is referred to as the "Aggregate Warrant Price," (iv) the price payable hereunder for each of the Warrant Shares is referred to as the "Per Share Warrant Price," (v) this Warrant, and all warrants hereafter issued in exchange or substitution for this Warrant are referred to as the "Warrant" and (vi) the holder of this Warrant is referred to as the "Holder.") The number of Warrant Shares for which this Warrant is exercisable is subject to adjustment as hereinafter provided. This Warrant is issued by the Company pursuant to the Securities Purchase Agreement, dated as of the date hereof, among the Company and West Country Partners (the "Securities Purchase Agreement"). Capitalized terms used but not defined shall have the respective meanings ascribed to them in the Securities Purchase Agreement. 1. Exercise of Warrant. (a) This Warrant may be exercised, in whole at any time or in part from time to time, commencing August 30, 2001, and prior to 5:00 P.M., Eastern Standard Time, on August 29, 2006, by the Holder of this Warrant by the surrender of this Warrant (with the subscription form at the end hereof duly executed) at the address set forth in Subsection 9(a) hereof, together with proper payment of the Aggregate Warrant Price, or the proportionate part thereof if this Warrant is exercised in part. (b) The Aggregate Warrant Price or Per Share Warrant Price shall be paid in cash by certified or official bank check payable to the order of the Company. (c) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which the Warrant shall have been surrendered to the Company as provided in subsection 1(a) above (an "Exercise Date"). At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 1(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (d) If this Warrant is exercised in part, the Holder shall be entitled to receive a new Warrant covering the number of Warrant Shares in respect of which this Warrant has not been exercised and setting forth the proportionate part of the Aggregate Warrant Price applicable to such Warrant Shares. Upon such surrender of this Warrant, the Company will (a) issue a certificate or certificates in the name of the Holder for the shares of the Common Stock to which the Holder shall be entitled, and (b) deliver the proportionate part thereof if this Warrant is exercised in part, pursuant to the provisions of the Warrant. (e) No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the fair value of a share. 2. Reservation of Warrant Shares. The Company agrees that, prior to the expiration of this Warrant, the Company will at all times have authorized and in reserve, and will keep available, solely for issuance or delivery upon the exercise of this Warrant, the shares of the Common Stock as from time to time shall be receivable upon the exercise of this Warrant. 3. Adjustments. (a) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the number of Warrant Shares for which this Warrant may be exercised shall be adjusted so that if the Holder surrendered this Warrant for exercise after such action the Holder would be entitled to receive the number of shares of Common Stock or other capital stock of the Company which he would have been entitled to receive had such Warrant been exercised immediately prior to such action. An adjustment made pursuant to this subsection (a) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this subsection (a), the Holder of this Warrant shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of this Warrant promptly after such adjustment) shall determine the allocation of the adjusted Per Share Warrant Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. (b) In case of any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the holder shall have the right thereafter to exercise this Warrant for the kind and amount of securities, cash or other property which he would have owned or have been entitled to receive immediately after such consolidation, merger, statutory exchange, sale or conveyance had such Warrant been exercised immediately prior to the effective date of such consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the conversion of this Warrant. The above provisions of this subsection (b) shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. Notice of any such consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holder not less than 30 days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. (c) In the event of any adjustment to the number of Warrant Shares issuable upon exercise of this Warrant, the Per Share Warrant Price shall be adjusted by multiplying the Per Share Warrant Price in effect immediately prior to such adjustment by a fraction the numerator of which is the aggregate number of Warrant Shares for which this Warrant may be exercised immediately prior to such adjustment and the denominator of which is the aggregate number of Warrant Shares for which this Warrant may be exercised immediately after such adjustment. (d) Whenever the Per Share Warrant Price is adjusted as provided in this Warrant and upon any modification of the rights of the Holder of this Warrant in accordance with this Section 3, the Company shall promptly prepare a certificate of an officer of the Company, setting forth the Per Share Warrant Price and the number of Warrant Shares after such adjustment or modification, a brief statement of the facts requiring such adjustment or modification and the manner of computing the same and cause a copy of such certificate to be mailed to the Holder. 4. Fully Paid Stock; Taxes. The Company agrees that the shares of the Common Stock represented by each and every certificate for Warrant Shares delivered on the proper exercise of this Warrant shall, at the time of such delivery, be validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive rights, and the Company will take all such actions as may be necessary to assure that the par value or stated value, if any, per share of the Common Stock is at all times equal to or less than the then Per Share Warrant Price. Subject to Section 5(e) hereof, the Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state stamp, original issue or similar taxes that may be payable in respect of the issuance of any Warrant Shares or certificates therefor. The Holder covenants and agrees that it shall pay, when due and payable, any and all federal, state and local income or similar taxes that may be payable in respect of the issuance of any Warrant Shares or certificates therefor. 5. Transfer (a) Securities Laws. Neither this Warrant nor the Warrant Shares issuable upon the exercise hereof have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or under any state securities laws and unless so registered may not be transferred, sold, pledged, hypothecated or otherwise disposed of unless an exemption from such registration is available. In the event the Holder desires to transfer this Warrant or any of the Warrant Shares issued, the Holder must give the Company prior written notice of such proposed transfer including the name and address of the proposed transferee. Such transfer may be made only either (i) upon publication by the Securities and Exchange Commission (the "Commission") of a ruling, interpretation, opinion or "no action letter" based upon facts presented to said Commission, or (ii) upon receipt by the Company of an opinion of counsel acceptable to the Company to the effect that the proposed transfer will not violate the provisions of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the rules and regulations promulgated under either such act, or to the effect that the Warrant or Warrant Shares to be sold or transferred have been registered under the Securities Act of 1933, as amended, and that there is in effect a current prospectus meeting the requirements of Subsection 11(a) of the Securities Act, which is being or will be delivered to the purchaser or transferee at or prior to the time of delivery of the certificates evidencing the Warrant or Warrant Shares to be sold or transferred. (b) Conditions to Transfer. Prior to any such proposed transfer (including, without limitation, a transfer by will or pursuant to the laws of descent and distribution), and as a condition thereto, if such transfer is not made pursuant to an effective registration statement under the Securities Act, the Holder will, if requested by the Company, deliver to the Company (i) an investment covenant, in form and substance equivalent to that signed by the original Holder of this Warrant, signed by the proposed transferee, (ii) an agreement by such transferee to the restrictive investment legend set forth herein on the certificate or certificates representing the securities acquired by such transferee, (iii) an agreement by such transferee that the Company may place a "stop transfer order" with its transfer agent or registrar, and (iv) an agreement by the transferee to indemnify the Company to the same extent as set forth in the next succeeding paragraph. (c) Indemnity. The Holder acknowledges that the Holder understands the meaning and legal consequences of this Section 5, and the Holder hereby agrees to indemnify and hold harmless the Company, its representatives and each officer and director thereof from and against any and all loss, damage or liability (including all attorneys' fees and costs incurred in enforcing this indemnity provision) due to or arising out of (a) the inaccuracy of any representation or the breach of any warranty of the Holder contained in, or any other breach by the Holder of, this Warrant, (b) any transfer of the Warrant or (c) any untrue statement or omission to state any material fact in connection with the investment representations or with respect to the facts and representations supplied by the Holder to counsel to the Company upon which its opinion as to a proposed transfer shall have been based. (d) Transfer. Upon surrender of this Warrant to the Company or at the office of its stock transfer agent, if any, with assignment documentation duly executed and funds sufficient to pay any transfer tax, and upon compliance with the foregoing provisions, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment, and this Warrant shall promptly be canceled. Any assignment, transfer, pledge, hypothecation or other disposition of this Warrant attempted contrary to the provisions of this Warrant, or any levy of execution, attachment or other process attempted upon the Warrant, shall be null and void and without effect. (e) Legend and Stop Transfer Orders. Unless the Warrant Shares have been registered under the Securities Act, upon exercise of any part of the Warrant and the issuance of any of the Warrant Shares, the Company shall instruct its transfer agent to enter stop transfer orders with respect to such shares, and all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend, insofar as is consistent with Massachusetts law: "The shares of common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, offered for sale, assigned, transferred or otherwise disposed of unless registered pursuant to the provisions of that Act or an opinion of counsel to the Company is obtained stating that such disposition is in compliance with an available exemption from such registration." 6. Loss, etc. of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 7. Warrant Holder Not Shareholder. Except as otherwise provided herein, this Warrant does not confer upon the Holder any right to vote or to consent to or receive notice as a shareholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a shareholder, prior to the exercise hereof. 8. Communication. No notice or other communication under this Warrant shall be effective unless the same is in writing and is mailed by first-class mail, postage prepaid, addressed to: (a) the Company at 1000 Main Street, Acton, Massachusetts 01720, or such other address as the Company has designated in writing to the Holder, or (b) the Holder at the address contained in the first paragraph of this Warrant, or such other address as the Holder has designated in writing to the Company. 9. Headings. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 10. Applicable Law. This Warrant shall be governed by and construed in accordance with the law of the Commonwealth of Massachusetts without giving effect to the principles of conflict of laws thereof. IN WITNESS WHEREOF, PAMET SYSTEMS, INC., has caused this Warrant to be signed by a duly authorized officer as of this 30th day of August, 2001. ATTEST: PAMET SYSTEMS, INC. By:_______________________ By:___________________________________ Name: Richard C. Becker Name: David T. McKay Title: VP, Finance and Administration Title: President & CEO SUBSCRIPTION The undersigned, __________________________________________, pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe for the purchase of _________________________ shares of the Common Stock of PAMET SYSTEMS, INC. covered by said Warrant, and makes payment therefor in full at the price per share provided by said Warrant. Dated __________________ Signature__________________________ Address____________________________ ____________________________ ASSIGNMENT FOR VALUE RECEIVED _________________________ hereby sells, assigns and transfers unto _________________________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _________________________, attorney, to transfer said Warrant on the books of PAMET SYSTEMS, INC. Dated __________________ Signature_________________________ Address___________________________ ___________________________ PARTIAL ASSIGNMENT FOR VALUE RECEIVED _________________________ hereby assigns and transfers unto _________________________ the right to purchase _________________________ shares of the Common Stock of PAMET SYSTEMS, INC. by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced hereby, and does irrevocably constitute and appoint _________________________, attorney, to transfer that part of said Warrant on the books of PAMET SYSTEMS, INC. Dated ___________________ Signature__________________________ Address____________________________ ____________________________