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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended May 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period of _________________to ______________
Commission file number:0-18700
PRIME CELLULAR, INC.
(exact name of Registrant as specified in its charter)
Delaware 13-3570672
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 First Stamford Pl., Stamford, CT 06902
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (203)327-3620
Securities registered pursuant to Section 12(b) of the Act
None.
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
On August 29, 1997, the aggregate market value of the shares of voting stock of
the Registrant held by non-affiliates was approximately $2,597,081.81 based on
the average of the bid and ask prices as reported by the OTC Bulletin Board of
$0.4375.
As of August 29, 1997, 5,936,187 shares of the Registrant's common stock were
outstanding.
Documents incorporated by reference: Certain portions of the Registrant's
definitive Proxy Statement relating to the Registrant's 1996 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A of the Securities Exchange
Act of 1934 with the Securities and Exchange Commission, are incorporated by
reference into Part III of this Report.
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TABLE OF CONTENTS
PART I PAGE
- ------ ----
Item 1 Business .........................................................................
Item 2 Properties .......................................................................
Item 3 Legal Proceedings ................................................................
Item 4 Submission of Matters to a Vote of Stockholders...................................
PART II
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Item 5 Market for Registrant's Common Stock and
Related Stockholder Matters ...............................................
Item 6 Selected Financial Data ..........................................................
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................................
Item 8 Financial Statements and Supplementary Data ......................................
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ....................................
PART III
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Item 10 Directors and Executive Officers of the Registrant...............................
Item 11 Executive Compensation ..........................................................
Item 12 Security Ownership of Certain Beneficial Owners and Management...................
Item 13 Certain Relationships and Related Transactions...................................
PART IV
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Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................
Exhibit Index ............................................................................
Signatures ...............................................................................
Index to Consolidated Financial Statements ............................................... F-1
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Item 1. BUSINESS
Prime Cellular, Inc. ("Prime" and, together with its wholly-owned
subsidiaries, herein referred to as "the Company") was organized in May 1990 to
provide management services, including business planning, marketing,
engineering, design and construction consulting services, to rural service area
("RSA") cellular telephone licensees. Preferences of owners of construction
permits and the deterioration in general economic conditions subsequent to the
Company's initial public offering in early August 1990 negatively impacted the
Company's business plan and the Company soon determined that it was prudent for
it to explore other uses for the Company's funds.
The Company initially analyzed potential investments in debt and equity
instruments of entities involved in either the cellular or related industries
and subsequently expanded its search to include entities involved in
non-cellular operations. Since 1991, the Company has retained an outside
consultant, who is also a shareholder, under an agreement renewable each July to
assist it in finding new business opportunities for the Company. Fees paid to
this consultant included in general and administrative costs totaled $70,000 for
the year ended May 31, 1997. The consultant was elected President of the Company
in June 1994 and serves as a board member as well.
On June 11, 1996 (the "Closing"), the Company's wholly-owned subsidiary
Prime Cellular Acquisition Corp. (the "Subsidiary"), consummated the merger with
Bern Associates, Inc. ("Bern") pursuant to that certain Merger Agreement, dated
May 14, 1996 (the "Merger Agreement"), by and among Prime, Subsidiary, Bern and
all of the stockholders of Bern (the "Bern Stockholders"). Bern was merged with
and into the Subsidiary (the "Merger") and all of the outstanding shares of
common stock of Bern were converted into an aggregate of 4,100,000 shares
(subsequently reduced by Amendment to 1,586,187 shares) of the Common Stock, par
value $.01 per share, of Prime, representing approximately 48.5% (subsequently
reduced by amendment to 26.7%) after consummation of the transaction of the
outstanding Common Stock of Prime (the "Merger Shares"). Following the Merger,
the Subsidiary changed its name to "Bern Communications, Inc." ("Bern
Communications"). This transaction was accounted for as a reverse acquisition
whereby Bern Communications is the acquirer for financial reporting purposes.
Bern Communications was the sole operating entity of the Company.
Bern Communications' business consisted principally of designing,
installing, maintaining, servicing and supporting computer systems to enable
regional telephone companies to provide Internet access to their subscribers as
well as developing Internet software. Bern Communications offered its customers
an integrated Internet access solution comprised of off-the-shelf computer
hardware and accessories, systems integration, billing software and twenty-four
hour subscriber support. Bern Communications also provided network management
services to regional telephone companies already offering Internet access.
-4-
After the Merger, the Company and certain Bern Stockholders (the "Amending
Bern Stockholders"), holding approximately 80% of the Merger Shares, entered
into an amendment to the Merger Agreement, dated as of June 11, 1996 (the
"Amendment"), which Amendment provided for a reduction by seventy-five percent
(75%) of the aggregate number of Merger Shares issued to the Amending Bern
Stockholders in the Merger. The Company released and discharged such Amending
Bern Stockholders from any damages or losses incurred by the Company resulting
from any breach of the representations and warranties of the Bern Stockholders
under the Merger Agreement.
The Merger Shares received from the Amending Bern Stockholders, consisting
of an aggregate of 3,075,000 shares, are held by the Company as authorized but
unissued common stock. The Company has pursued its claims against the
individuals owning approximately 20% of the Merger Shares issued in the
acquisition (and currently held in escrow) who have not executed the Amendment.
Under the Amendment, four Amending Bern Stockholders and employees of Bern
Communications (the "Employee Stockholders") also agreed to amend their
employment agreements to reduce their compensation to $95,000 per year and to
extend the terms of their agreements to three years from June 11, 1996. In
addition, each of these Employee Stockholders was granted three-year options to
purchase 256,250 shares of the Common Stock of Prime at an exercise price of
$8.00 per share.
On August 28, 1997, the Company entered into a settlement (the
"Settlement") with the Amending Bern Stockholders with respect to disputes
concerning the operations and direction of the business of Bern Communications.
In connection with the Settlement, the Company purchased substantially all of
the Merger Shares held by the Amending Bern Stockholders, at a purchase price of
$.50 per share (which in the aggregate amounted to 676,937 shares for a total
amount of $338,469), transferred to the Employee Stockholders all right and
title to the intellectual property rights with respect to the computer software
program WEBSITENOW and certain computer hardware used in the development of such
software program, and terminated the employment agreements and option agreements
with the Employee Stockholders. Both the Company and the Amending Bern
Stockholders executed a mutual release as well.
As a result of the Settlement, Bern Communications ceased soliciting
further opportunities or engaging in any further consulting services in
connection with its integrated Internet service business. Moreover, all sales of
computer hardware and/or software of Bern Communications were discontinued
effective as of the Settlement. Bern Communications will nevertheless continue
to provide help desk functions as well as to provide network management services
pursuant to its existing contractual arrangements.
-5-
CUSTOMERS
Bern Communications focused its initial marketing efforts on regional
telephone companies. To those companies that did not yet offer a Internet
solution to their subscribers, Bern Communications offered its design and
installation services. To those regional telephone companies which already
provided Internet access or who were just entering that business, Bern
Communications offered its network management and help desk services.
As of the Settlement, Bern Communications will continue only to provide
help desk service for the benefit of its existing telephone companies pursuant
to contracts entered into with these customers as well as to provide network
management services to one customer pursuant to an existing contractual
arrangement.
Currently Bern Communications has two contracts to provide Internet help
desk services and one contract to provide network management services. Two of
these contracts are with Century Supply Group, Inc. ("Century"). Approximately
88% of Bern Communications' revenues for the year ended May 31, 1997 were
attributable to Century.
MARKETING AND DISTRIBUTION
Prior to the Settlement, Bern Communications focused on providing Internet
service business to regional telephone companies, providing regional telephone
companies with total solutions to Internet access as well as state of the art
network management and help desk services. Bern Communications marketed and sold
its products and services through its employees during the 1997 fiscal year.
On or about July 18, 1997, the Company determined to stop funding ongoing
operations of Bern Communications. In connection with this decision, Bern
Communications discontinued all sales of computer hardware and/or software. Bern
Communications will continue to provide help desk functions as well as network
management services for its existing customer base through the expiration or
earlier termination of its current contractual arrangements with such telephone
companies.
SUPPLIER
Bern Communications had no key suppliers; its design solutions for Internet
access utilized off-the-shelf hardware and software as well as Bern
Communication's billing software.
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EMPLOYEES
Prime has one employee at August 31, 1997. Bern Communications employed
three (3) employees full-time and one (1) part-time, of which 3 were employees
of the help desk.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are: (i) Joseph K. Pagano, President
and Chairman of the Board and (ii) Robert A. Reinhart, Chief Financial Officer,
Vice-President, Treasurer and Secretary.
Mr. Pagano is 51 years old and has been President of the Company since June
1995. He also served as Chief Financial Officer from June 1994 until Mr.
Reinhart's engagement. Prior thereto, Mr. Pagano was, and continues to be, a
consultant to the Company. Mr. Pagano has been a private investor for more than
the last 5 years.
Robert A. Reinhart is 47 years old, is a certified public accountant and
has served as the Chief Financial Officer since July 1996, and as
Vice-President, Treasurer and Secretary since May 1997. Prior to his employment
by the Company, Mr. Reinhart served as the Chief Operating Officer and Chief
Financial Officer of DeBoles Nutritional Foods, Inc. ("DeBoles"). Prior to being
engaged by DeBoles in 1992, Mr. Reinhart was a senior manager/engagement
executive with a certified public accounting firm located in Long Island, New
York.
-7-
At August 31, 1997, the officers of Bern Communications consist of Joseph
K. Pagano, President and Robert A. Reinhart, Vice-President, Chief Financial
Officer, Treasurer and Secretary. Prior to Mr. Pagano serving as President, Mr.
Reinhart served as President of Bern Communications from March 1997. Prior to
March 1997, Rafael Collado, an Employee Stockholder, served as President.
Item 2. PROPERTIES
The Company's executive offices are located at 100 First Stamford Place,
Third Floor, Stamford, CT 06902. The Bern Communications help desk is currently
located in Teaneck, New Jersey pursuant to a month-to-month lease in the amount
of $1,000 per month.
Item 3. LEGAL PROCEEDINGS
On or about December 20, 1996, Prime commenced an action in New York
against a former employee of Bern Communications and others. The complaint
alleges that such former employee made false and fraudulent representations in
connection with the Merger and breached her obligations as an employee by, among
other things, various acts of dishonesty, breaches of fiduciary duty and
corporate waste. In the action, Prime seeks an unspecified amount of damages
from the defendants and Prime seeks rescission to recover the Merger Shares
issued to such defendants pursuant to the Merger. The former employee has filed
a counterclaim that seeks unspecified amounts for alleged breach of her
employment agreement. Discovery in the action has recently commenced.
On or about December 20, 1996, Bern Communications commenced an action in
New Jersey against a former employee, seeking unspecified damages. The Complaint
alleges that such former employee breached his obligations as an employee of
Bern Communications by, among other things, various acts of dishonesty, breaches
of fiduciary duty and corporate waste. Bern Communications also seeks a
declaration that the former employee's employment agreement is invalid because
it was not properly authorized. The former employee has filed a separate action
against Bern Communications and Prime, which has been consolidated with Bern
Communications' action, and which seeks unspecified amounts pursuant to the
purported employment agreement of the former employee. Discovery in the action
has recently commenced.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
-8-
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol PCEL. Until August 18, 1994, the Company's Common Stock was quoted by the
NASDAQ Small-Cap Market System. Effective August 18, 1994, NASDAQ delisted the
Company's common stock from its NASDAQ Small-Cap Market System. As of August 31,
1997, there were 5,936,187 shares of Common Stock outstanding held of record by
approximately 39 stockholders. The following table sets forth, for the periods
indicated, the high and low bid quotations for the Company's Common Stock for
the last two fiscal years as reported on the OTC Bulletin Board. The quotations
reflect prices among dealers, do not reflect retail markups, markdowns or other
fees or commissions, and do not necessarily represent actual transactions.
Year High Low
- ---- ---- ---
Fiscal 1997
First quarter 8.75 3.50
Second quarter 3.75 2.25
Third quarter 3.75 2
Fourth quarter 4.75 2
Year High Low
- ---- ---- ---
Fiscal 1996
First quarter 2 1/2 1 5/16
Second quarter 2 1 1/2
Third quarter 2 1 5/8
Fourth quarter 8 1/2 1
On August 29, 1997 the average of the bid and ask prices for the Company's
Common Stock was $0.4375 as reported by the OTC Bulletin Board.
The payment of dividends on the Common Stock is within the discretion of
the Company's Board of Directors. The Company has not paid cash dividends on its
Common Stock and does not expect to declare cash dividends on the Common Stock
in the foreseeable future.
-9-
Item 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial data for the years ended
May 31, 1997, 1996 and for the period February 22, 1995 (Inception) to May 31,
1995. This information should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Form 10-K.
February 22, 1955
Year Ended May 31, (Inception)
to May 31, 1995
---------------------------- -----------------
1997 1996 1995
Statement of Operations Data:
Total revenues $1,792,948 $2,331,174 $12,000
Net (loss) (474,120) (324,000) ( 18,542)
Net (loss) per
common share ($.08) ($.20) ($.01)
Weighted average number
of shares outstanding 5,892,730 1,586,187 1,586,187
Balance Sheet Data:
Total Assets 6,093,951 881,308 22,363
Stockholders' Equity 5,689,863 (310,278) (8,538)
The 1996 and 1995 financial data is that of Bern Associates, Inc. in
accordance with the accounting treatment of the merger as a reverse acquisition
as discussed in Note 1 of the Financial Statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On June 11, 1996, Prime consummated the Merger with Bern. Bern merged with
an inactive subsidiary of Prime which was formed to complete the Merger and
simultaneously with the consummation of the Merger, the subsidiary changed its
name to Bern Communications, Inc. ("Bern Communications"). Under the Merger
Agreement, all of the outstanding shares of common stock of Bern were exchanged
for 1,586,187 shares of Prime. This transaction was accounted for as a reverse
acquisition whereby Bern was the acquirer for accounting purposes. The
historical financial statements prior to June 1, 1996 are therefore those of
Bern.
-10-
In connection with the Merger, the Company entered into a Settlement
Agreement on August 28, 1997 with certain former Shareholders of Bern
Associates, Inc. as a result of claims made by the Company for possible breaches
of certain representations and warranties of the Bern stockholders with respect
to the Merger and otherwise.
As a result of the Settlement, Bern Communications ceased soliciting
further opportunities or engaging in any further consulting services in
connection with its integrated Internet access services. Moreover, all sales of
computer hardware and/or software of Bern Communications were discontinued
effective as of the Settlement. Bern Communications will continue to provide
help desk services as well as network management services pursuant to its
existing contractual arrangements.
The Company has retained an outside Consultant (since 1991) who is also a
shareholder, under an agreement, to assist it in finding a new business
opportunity for the Company.
1997 vs. 1996
Revenue decreased $538,226 for the year ended May 31, 1997 as compared to
the year ended May 31, 1996. This decrease was due to a large equipment sale
which occurred during the year ended May 31, 1996 which was not duplicated in
the year ended May 31, 1997. Furthermore, the Company did not generate any
equipment sales for the fourth quarter ended May 31, 1997.
Gross profit increased $809,828 for the year ended May 31, 1997 as compared
to the year ended May 31, 1996. This increase resulted from the low gross profit
realized on the large equipment sale made during the year ended May 31, 1996 as
compared to multiple equipment sales, at relatively higher margins, generated
during the year ended May 31, 1997. For the year ended May 31, 1996, the
Company's help desk and network management services were still in a start-up
phase, distinguished by numerous costs and no associated revenue stream.
Selling, general and administrative expenses increased $1,266,736 for the
year ended May 31, 1997 as compared to the year ended May 31, 1996. This
increase resulted from Prime's selling, general and administrative costs of
$380,198 which were not present for the year ended May 31, 1996, as well as
expenses of $886,538 incurred to increase equipment sales and revenue for the
year ended May 31, 1997. Interest income increased as a result of acquiring
significant cash and investments from Prime following the Merger in June 1996.
1996 vs 1995
Bern was incorporated on February 22, 1995 and had little operating
activity for the period ended May 31, 1995. Operations of Bern commenced during
the year ended May 31, 1996 when significant contracts and revenue were
received. Selling, general and administrative expenses increased $477,462 for
the year ended May 31, 1996 as compared to the inception period ended
-11-
May 31, 1995. This increase was due to the increased costs incurred in order to
secure Bern's first major contracts as well as the costs associated with
servicing these customers and developing an internal organization.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1997 the Company had approximately $5,750,000 in cash and
investments and working capital of approximately $5,500,000.
Net cash used by operating activity aggregated $261,899 and $279,089 for
the years ended May 31, 1997 and 1996, respectively. The decrease in cash used
by operating activities was attributable to a large decrease in accounts payable
and an additional net loss, offset by a large decrease in accounts receivable
and inventory.
Net cash used in investing activity was $857,992 and $131,336 for the years
ended May 31, 1997 and 1996, respectively. This increase was primarily due to
cash of $960,223 acquired from Prime in connection with the June 1996 merger.
Cash flow from financing activities increased to $6,397,700 from $583,785
for the year ended May 31, 1997 as compared to the year ended May 31, 1996. The
increase resulted from the Merger as well as proceeds, in the amount of $62,520,
from the sale of stock and payments, in the amount of $76,561, made with respect
to officers' loans to the Company.
Inflation has not historically had a material impact on the Company's
operations.
SEASONALITY
The operations of the Company are not considered to be seasonal.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required pursuant to this Item are included herein
commencing on Page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On July 28, 1997, the Company dismissed BDO Seidman, LLP ("BDO") as its
principal independent accountant and engaged Marcum & Kliegman LLP ("Marcum") as
its principal independent accountants to audit and report on the financial
statements of the Company for the fiscal year ending May 31, 1997. The decision
to change accountants was approved by the Company's Board of Directors.
BDO's reports on the financial statements of the Company for the fiscal
years ended May 31, 1996 or May 31, 1995 were unqualified with a modification
paragraph addressing the Company's ability to continue as a going concern.
During the fiscal years ended May 31, 1996 and May 31, 1995 and during the
period from June 1, 1996 through July 28, 1997, there were no disagreements with
BDO on any matter of accounting
-12-
principles or practices, financial statement disclosure or auditing scope or
procedure or any reportable event.
Additional information with respect to matters set forth in Item 304 of
Regulation S-K is incorporated herein by reference to the report dated July 25,
1997 filed on Form 8-K pursuant to Section 13 of the Securities Exchange Act of
1934.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information contained under the heading "Proposal No. 1 - Election of
Directors" in the Company's definitive Proxy Statement (the "Proxy Statement")
relating to the Company's Annual Meeting of Stockholders to be held on or about
November 10, 1997, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 with the Securities and Exchange Commission, is
incorporated herein by reference. For information concerning the executive
officers of the Company, see "Executive Officers of the Registrant" in Part I of
this Report.
Item 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in the
Company's Proxy Statement is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information contained under the heading "Beneficial Ownership of Common
Stock" in the Company's Proxy Statement is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Relationships and
Related Transactions" in the Company's Proxy Statement is incorporated herein by
reference.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) (1) Financial Statements - See list of Financial Statements on F-1.
(2) Schedules - Not applicable.
(b) Reports on Form 8-K
The Company filed two reports on Forms 8-K dated each of June 11, 1996 and
July 25, 1997, which reports concerned the acquisition of Bern Associates, Inc.
and the change of the Company's accountants, respectively.
(c) Exhibits
2.1 Merger Agreement, dated as of May 14, 1996, by and among the
Company, the Subsidiary, Bern Associates and the Bern
Stockholders.**
2.2 List of Omitted Schedules/Exhibits to Merger Agreement.**
3.1 Certificate of Incorporation of the Company*
3.2 By-laws of the Company*
10.1 Consulting Agreement dated July 2, 1991 among the Company, Prime
Cellular of Florida, Inc. and Joseph K. Pagano*
10.2 Amendment to Consulting Agreement*
10.3 Stock Option Plan*
10.6 Registration Rights Agreement, dated June 10, 1996, between
Registrant and the Bern Stockholders.**
10.7 Escrow Agreement, dated June 10, 1996, between Registrant and the
Bern Stockholders.**
10.8 Indemnification Agreement, dated June 10, 1996 between Registrant and
the Bern Stockholders.*
10.9 Form of Amendment to Merger Agreement, dated as of June 11, 1997.
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10.10 Form of Settlement Agreement, dated August 28, 1997 (with Exhibits)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
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* Previously filed with the Securities and Exchange Commission as Exhibits
to, and incorporated herein by reference from, the Company's Annual Report on
Form 10-K for the years ended May 31, 1995, May 31, 1994, May 31, 1993, May 31,
1992 or May 31, 1991.
** Previously filed with the Securities and Exchange Commission as Exhibits
to, and incorporated herein by reference from, the Company's Report on Form 8-K
dated June 11, 1996.
-15-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PRIME CELLULAR, INC.
September 15, 1997 By: /s/ Joseph K. Pagano
-----------------------------------
Joseph K. Pagano, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the date
indicated.
Signature Title Date
- --------- ----- ----
/s/ Joseph K. Pagano Director, President & September 15, 1997
- ------------------------- (principal executive officer)
Joseph K. Pagano
/s/ Robert A. Reinhart Chief Financial Officer, Treasure, September 15, 1997
- ------------------------ Secretary and vice President (principal
Robert A. Reinhart financial officer)
/s/ Director September __, 1997
- ------------------------
Frederick R. Adler
/s/ Samuel Rozzi Director September 15, 1997
- -------------------------
Samuel Rozzi
-16-
PRIME CELLULAR, INC. AND SUBSIDIARIES
CONTENTS
Page
REPORTS OF INDEPENDENT ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Balance Sheets F-4
Statements of Operations F-5
Statements of Stockholders' Equity (Deficit) F-6
Statements of Cash Flows F-7
NOTES TO FINANCIAL STATEMENTS F-9
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are either not required
under the related instructions or are inapplicable, and therefore have been
omitted.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders of
Prime Cellular, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Prime Cellular,
Inc. and Subsidiaries as of May 31, 1997, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Prime
Cellular, Inc. and Subsidiaries as of May 31, 1996 and 1995 include the
historical accounts solely of Bern Communications, Inc., as a result of the
reverse acquisition which occurred on June 11, 1996 as discussed in Note 1 and
were audited by other auditors whose report dated August 14, 1996 expressed an
unqualified opinion on those statements with a modification paragraph addressing
the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Prime Cellular, Inc.
and Subsidiaries as of May 31, 1997 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Marcum & Kliegman LLP
Woodbury, New York
September 5, 1997
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and Stockholders of
Bern Communications, Inc.
Teaneck, New Jersey
We have audited the accompanying balance sheets of Bern Communications, Inc.
(formerly Bern Associates, Inc.) as of May 31, 1996 and the related statements
of operations, stockholders' deficit, and cash flows for the year ended May 31,
1996 and the period February 22, 1995 (inception) to May 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bern Communications, Inc.
(formerly Bern Associates, Inc.) at May 31, 1996 and the results of its
operations and its cash flows for the year ended May 31, 1996 and the period
February 22, 1995 (inception) to May 31, 1995, in conformity with generally
accepted accounting principles.
The financial statements referred to above have been prepared assuming that the
Company will continue as a groing concern. The Company has suffered losses since
inception and has a net working capital deficit and a capital deficit. These
conditions raise substantial doubt as to the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Valhalla, New York BDO Seidman, LLP
August 14, 1996
F-3
PRIME CELLULAR, INC. AND SUBSIDIARIES
BALANCE SHEETS
May 31, 1997 and 1996
ASSETS
------
1997 1996
----------- -----------
(Consolidated)
CURRENT ASSETS
Cash and cash equivalents $ 779,216 $ 184,684
Investments 4,969,512 -0-
Accounts receivable, net of allowance
of $3,500 and $15,000 as of May 31, 1997
and 1996 respectively 44,744 294,196
Inventory -0- 268,707
Notes and other receivables 120,102 11,136
----------- -----------
Total Current Assets 5,913,574 758,723
PROPERTY & EQUIPMENT, Net 176,777 119,153
OTHER ASSETS 3,600 3,432
----------- -----------
TOTAL ASSETS $ 6,093,951 $ 881,308
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 366,450 $ 615,025
Deferred revenue 37,638 -0-
Note payable, related party -0- 500,000
Due to officers -0- 76,561
----------- -----------
TOTAL LIABILITIES 404,088 1,191,586
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 20,000,000 shares authorized,
5,936,187 shares issued and outstanding in 1997 and 400
shares authorized, issued and outstanding in 1996 59,362 4
Additional paid-in capital 6,447,163 32,260
Accumulated deficit (816,662) (342,542)
----------- -----------
TOTAL STOCKHOLERS EQUITY (DEFICIT) 5,689,863 (310,278)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 6,093,951 $ 881,308
=========== ===========
The accompanying notes are an integral part of these Financial Statements.
F-4
PRIME CELLULAR, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
For the Period
For the Year For the Year February 22, 1995
Ended Ended (Inception) to
May 31, 1997 May 31, 1996 May 31, 1995
------------ ------------ -------------
(Consolidated)
REVENUES
Equipment $ 1,219,529 $ 1,767,737 $ -0-
Service 573,419 563,437 12,000
----------- ----------- -----------
TOTAL REVENUES 1,792,948 2,331,174 12,000
----------- ----------- -----------
COST OF REVENUES
Equipment 588,988 1,567,436 -0-
Service 231,222 600,828 21,094
----------- ----------- -----------
TOTAL COST OF REVENUES 820,210 2,168,264 21,094
----------- ----------- -----------
GROSS PROFIT (LOSS) 972,738 162,910 (9,094)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,753,646 486,910 9,448
----------- ----------- -----------
OPERATING LOSS (780,908) (324,000) (18,542)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Dividend and interest income 309,155 -0- -0-
Interest expense (2,367) -0- -0-
----------- ----------- -----------
TOTAL OTHER INCOME 306,788 -0- -0-
----------- ----------- -----------
NET LOSS $ (474,120) $ (324,000) $ (18,542)
=========== =========== ===========
LOSS PER SHARE OF COMMON STOCK $ (.08) $ (.20) $ (.01)
=========== =========== ===========
WEIGHTED AVERAGE COMMON STOCK
OUTSTANDING 5,892,730 1,586,187 1,586,187
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
PRIME CELLULAR, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
$.01 Par Value
Common Stock Additional
---------------------- Paid-In Accumulated Unearned
Shares Amount Capital Deficit Compensation Total
------ ------ ---------- ----------- ------------ -----
BALANCE - February 22, 1995
(Inception) -0- $ -0- $ -0- $ -0- $ -0- $ -0-
Issuance of stock 400 4 32,260 32,264
Contribution of Capital -
stock subcription receivable (22,260) (22,260)
Net loss for the period February 22,
1995 (inception) to May 31, 1995 (18,542) (18,542)
--------- ------- ---------- --------- ------- ----------
BALANCE - May 31, 1995 400 4 32,260 (18,542) (22,260) (8,538)
Satisfaction of stock subscription
receivable 22,260 22,260
Net loss for the year ended
May 31, 1996 (324,000) (324,000)
--------- ------- ---------- --------- ------- ----------
BALANCE - May 31, 1996 400 4 32,260 (342,542) -0- (310,278)
Exercise of stock options 50,000 500 74,500 75,000
Issuance of stock resulting from
merger 1,586,187 15,862 (15,862) -0-
Recapitalization resulting from
merger 4,299,600 42,996 6,356,265 6,399,261
Net loss for the year ended
May 31, 1997 (474,120) (474,120)
--------- ------- ---------- --------- ------- ----------
BALANCE - May 31, 1997
(Consolidated) 5,936,187 $59,362 $6,447,163 $(816,662) $ -0- $5,689,863
--------- ------- ---------- --------- ------- ----------
The accompanying notes are an integral part of these financial statements.
F-6
PRIME CELLULAR, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
For the Period
For the Year For the Year February 22, 1995
Ended Ended (Inception) to
May 31, 1997 May 31, 1996 May 31, 1995
------------ ------------ -------------
(Consolidated)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(474,120) $(324,000) $(18,542)
--------- --------- --------
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization 33,891 12,240 -0-
Compensation recognized in satisfaction
of stock subscription receivable -0- 22,260 -0-
Reserve for doubtful accounts -0- 15,000 -0-
Decrease (increase) in accounts
receivable 249,452 (309,196) -0-
Decrease (increase) in inventory 268,707 (268,707) -0-
(Increase) in other receivables (108,966) -0- -0-
Decrease (increase) in prepaid expenses
and other assets 12,717 (13,586) (1,039)
(Decrease) increase in accounts payable
and accrued expenses (281,218) 586,900 28,125
Increase in deferred revenue 37,638 -0- -0-
--------- --------- --------
TOTAL ADJUSTMENTS 212,221 44,911 27,086
--------- --------- --------
NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES (261,899) (279,089) 8,544
--------- --------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES
Increase in property and equipment, net (91,515) (131,336) -0-
Increase in investments, net (10,716) -0- -0-
Cash acquired in connection with the
merger 960,223 -0- -0-
--------- --------- --------
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES $ 857,992 $(131,336) $-0-
--------- --------- --------
The accompanying notes are an integral part of these financial statements.
F-7
PRIME CELLULAR, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS, Continued
For the Period
For the Year For the Year February 22, 1995
Ended Ended (Inception) to
May 31, 1997 May 31, 1996 May 31, 1995
------------ ------------ -------------
(Consolidated)
CASH FLOWS FROM FINANCING
ACTIVITIES
(Decrease) increase in due to officers $ (76,561) $ 73,785 $ 2,776
Proceeds from sale of stock 75,000 -0- 4
Proceeds from note payable, related party -0- 500,000 -0-
Proceeds from stock subscriptions -0- 10,000 -0-
---------- --------- ---------
NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES (1,561) 583,785 2,780
---------- --------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 594,532 173,360 11,324
CASH AND CASH EQUIVALENTS -
Beginning 184,684 11,324 -0-
---------- --------- ---------
CASH AND CASH EQUIVALENTS -
Ending $ 779,216 $ 184,684 $ 11,324
========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $2,367 $-0- $-0-
Noncash investing and financing activities:
Capital Stock Issued for Stock
Subscription Receivable and unearned compensation -0- -0- $ 32,260
In connection with the merger on June 11, 1996, the following assets
(liabilities) were acquired by the acquiring entity for accounting
purposes:
Cash $ 960,223
Investment in U.S. Treasury bonds 4,958,796
Other current assets 512,885
Accounts payable and accrued expenses (32,643)
----------
$6,399,261
==========
The accompanying notes are an integral part of these financial statements.
F-8
PRIME CELLULAR, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
Nature of Business
Prime Cellular, Inc. ("Prime") was incorporated in Delaware on May 10, 1990
to provide management and consulting services to rural service area
cellular telephone licensees. Prime is no longer in the development stage
as a result of a merger with Bern Associates, Inc.
Business Combination
On June 11, 1996, Prime consummated a merger with Bern Associates, Inc.
Bern Associates, Inc. merged with Prime Cellular Acquistion Corp.
("Acquisition Corp.")an inactive subsidiary of Prime which was formed to
complete the merger and simultaneously Acquisition Corp. changed its name
to Bern Communications, Inc. ("Bern"). Under the merger agreement, all of
the outstanding shares of common stock of Bern were exchanged for 1,586,187
shares of Prime. This transaction was accounted for as a reverse
acquisition whereby Bern was the acquirer for accounting purposes. The
historical financial statements prior to June 1, 1996 are those of Bern
Associates, Inc.
Bern designs, installs, maintains, services and supports computer systems
to enable companies to provide Internet access to their subscribers as well
as develops Internet software. Bern is the sole operating entity of Prime
Cellular, Inc. and subsidiaries (collectively the "Company").
In connection with the merger, the Company entered into a settlement
agreement on August 28, 1997 with certain former shareholders as a result
of claims made by the Company for possible breaches of certain
representations and warranties of the Bern Associates Inc. stockholders
with respect to the merger and otherwise (see Note 9).
Proforma Operating Results (unaudited)
The following are proforma results for the year ended May 31, 1996, as if
the acquisition as described above had occurred on June 1, 1995.
For the Year Ended
May 31, 1996
------------------
TOTAL REVENUES $ 2,690,039
NET LOSS $ (343,780)
LOSS PER SHARE
STOCK OUTSTANDING $ (.22)
WEIGHTED AVERAGE COMMON
STOCK OUTSTANDING 1,586,187
The pro forma results or operations are not necessarily indicative of the
actual operating results that would have occurred had the merger been
consumated at the beginning of the year.
Principles of Consolidation
The accompanying consolidated financial statements for the year ended May
31, 1997 include the accounts of Prime Cellular, Inc. and its wholly-owned
subsidiaries, Bern Communications, Inc. and Prime Cellular of Florida,
Inc., an inactive subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation. For the year ended May
31, 1996, and the period February 22, 1995 (inception) to May 31, 1995, the
accompanying financial statements reflect the accounts of Bern Associates,
Inc., prior to the merger.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or less to
be cash equivalents.
Inventory
Inventory, which consists of computer equipment, is stated at the lower of
cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
Property and Equipment
Property and equipment are stated at cost and are being depreciated or
amortized using accelerated and straight-line methods over the estimated
useful lives of the related assets.
F-9
PRIME CELLULAR, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies, continued
Revenue Recognition
Equipment revenue is recognized upon delivery to and acceptance by the
customer. Service revenue consists of consulting and help desk revenue.
Consulting revenue is recognized ratably over the applicable contract
period. Help desk revenue is recognized as earned on a monthly basis.
Fair Value of Financial Instruments
The carrying amount of financial instruments including cash and cash
equivalents, other receivables, and accounts payable approximated fair
value as of May 31, 1997 and 1996 because of the relatively short maturity
of these instruments.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash
investments and trade accounts receivable with companies primarily located
in the United States. The Company's cash investments are placed with high
credit quality financial institutions and may exceed the amount of federal
deposit insurance. The Company reviews a customer's credit history before
extending credit. The Company establishes an allowance for possible losses
based on factors surrounding the credit risk of specific customers
historical trends and other information.
Income Taxes
Deferred income taxes, when applicable, are provided on differences between
the financial reporting and income taxes bases of assets and liabilities
based upon statutory tax rates enacted for future periods.
Per Share Data
Loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding throughout the period. For the year
ended May 31, 1996 and the period February 22, 1995 (inception) to May 31,
1995, loss per share of common stock is based on the shares issued by Prime
as a result of the Merger (see Note 1). Common stock equivalents consisting
of shares subject to stock options and warrants do not have a significant
impact on net loss per share.
Stock-Based Compensation
In October 1995, Financial Accounting Standards Board issued Statements of
Financial Accounting Standards. No. 123 "Accounting for Stock Based
Compensation" ("SFAS No. 123"). SFAS No. 123 requires compensation expense
to be recorded (i) using the new fair value method or (ii) using existing
accounting rules prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations with pro forma disclosure of what net income and earnings
per share would have been had the Company adopted the new fair value
method. The Company intends to continue to account for its stock based
compensation plans in accordance with the provision of APB 25. Had the
Company elected to recognize compensation costs based on the fair value of
the options at the date of grant as prescribed by SFAS No. 123, there would
be no material effect from that recognized under APB 25 for the years ended
May 31, 1997, 1996 and for the period February 22 (inception) to May 31,
1995.
Advertising
Advertising costs are expensed as incurred.
Software Development
All costs associated with internally developed software are expensed as
incurred.
Reclassifications
Certain amounts have been reclassified in the 1996 and 1995 Financial
Statements to be comparable to the Financial Statements presented for 1997.
F-10
PRIME CELLULAR, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies, continued
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE 2 - Investments
The Company's investments were classified as held-to-maturity and reported
at amortized cost which approximates fair value. Investments
held-to-maturity are summarized as follows:
Gross
Amortized Unrealized Fair
Cost Gains Value
---------- ---------- ----------
May 31, 1997:
Debt securities issued by the
U.S. Treasury $4,969,512 $ 8,613 $4,978,125
NOTE 3 - Property and Equipment
Property and equipment at May 31, 1997 and 1996 consist of the following:
Estimated
1997 1996 Useful Lives
---------- ---------- ------------
Computer equipment $222,342 $130,827 5-7 years
Furniture and fixtures 509 509 5-7 years
---------- ----------
222,851 131,336
Less: accumulated depreciation 46,074 12,183
---------- ----------
Total Property and Equipment, Net $176,777 $119,153
========== ==========
Depreciation expense amounted to $33,891 and $12,183 for the years ended
May 31, 1997 and 1996, respectively.
F-11
PRIME CELLULAR, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - Note Payable, Related Party
On May 15, 1996, Bern Communications, Inc. entered into a revolving credit
agreement with Prime Cellular, Inc. in the amount of $1,000,000, payable on
demand at the prime rate. At May 31, 1996 the balance outstanding under
this note was $500,000. Subsequent to the merger which took place on June
11, 1996, the note was converted to contributed capital and accordingly,
has been eliminated in consolidation at May 31, 1997.
NOTE 5 - Stock Options
The 1990 Stock Option Plan (the "Plan") provides for the granting of either
stock options intended to qualify as "incentive stock options" under the
Internal Revenue Code or "non-statutory stock options" for up to an
aggregate of 1,000,000 shares of common stock. Options may be granted for
terms of up to ten years and are exercisable as determined by the Company's
Board of Directors (the "Board"). The option price under the plan must be
no less than fair market value of the shares on date of grant, except that
the term of an incentive stock option granted under the Plan to a
stockholder owning more than 10% of the outstanding common stock may not
exceed five years and its exercise price may not be less than 110% of the
fair market value of the common stock on the date of the grant.
On June 12, 1996, the Company granted options to purchase 40,000 shares at
$2.50 per share and on July 5, 1996 granted options to purchase an
aggregate of 1,025,000 shares at $8.00 per share. The options granted on
July 5, 1996 were subsequently canceled pursuant to the Settlement
Agreement signed on August 28, 1997 (see Note 9).
The following is a summary of transactions for shares under option as of
May 31, 1997:
Amount Exercise
of Shares Price
---------- --------------
Outstanding, beginning of year 267,000 $1.50 to $1.67
Granted during the year 1,065,000 $2.50 to $8.00
Canceled (see Note 9) (1,025,000) $8.00
Exercised during the year (50,000) $1.50
----------
Outstanding, end of year 257,000
==========
At May 31, 1997 there were 50,000 shares reserved for future grants.
F-12
PRIME CELLULAR, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - Income Taxes
Deferred income taxes are provided for temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. As of May 31, 1997 and 1996, the Company had gross deferred
tax assets of $277,000 and $110,000, respectively. These amounts represent
the approximate tax effects of net operating losses that give rise to the
Company's deferred tax assets. A valuation allowance has been recognized
for the entire deferred tax assets at May 31, 1997 and 1996.
As of May 31, 1997 and 1996 the Company had net operating loss carry
forwards of approximately $794,000 and $320,000, respectively which expire
at various dates through 2012.
NOTE 7 - Commitments and Contingencies
Leasing Commitments
The Company occupies office premises in Stamford, Connecticut; Aspen,
Colorado and Teaneck, New Jersey through various leasing arrangements.
Lease commitments, under non-cancellable lease agreements in the aggregate,
under such leasing arrangements, are as follows:
Year Ending
May 31, Amount
1998 $10,000
=======
Rent expense for the years ended May 31, 1997 and May 31, 1996 and for the
period February 22, 1995 (inception) to May 31, 1995 is $40,607, $12,000
and -0-, respectively.
Litigation
The Company is presently in litigation against former employees seeking
unspecified damages. In December 1996, the Company commenced an action
against one former employee alleging the former employee breached his
obligations as an employee of the Company by, among other things, various
acts of dishonesty, breaches of fiduciary trust and corporate waste. The
former employee filed a separate action against the Company seeking
unspecified amounts pursuant to the purported employment agreement.
In December 1996, Bern commenced an action against a former employee and a
relative of the former employee, alleging false and fraudulent
representations in connection with the merger of Bern and Bern Associates,
Inc. and breach of her obligations as an employee of Bern by, among other
things, various acts of dishonesty, breaches of fiduciary duty and
corporate waste. In the action, Bern is seeking an unspecified amount of
damages and seeks rescission to recover the shares of the Company issued to
the defendants pursuant to the merger. This former employee filed a
counterclaim that seeks unspecified amounts for alleged breach of her
employment agreement.
F-13
PRIME CELLULAR, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - Commitments and Contingencies, continued
Litigation, continued
The Company believes the claims of such former employees are without merit
and that it will prevail in these actions. However, the ultimate outcome of
these matters cannot presently be determined. Accordingly, no provision for
any liability that may result therefrom has been made in the accompanying
financial statements.
NOTE 8 - Economic Dependency
The Company sells a substantial portion of its services and products to one
major customer. Sales to major customers which exceed 10% of sales in the
aggregate and accounts receivable from such customer are as follows:
1997 1996
---------- ----------
Sales to major customers $1,574,000 $2,004,000
Accounts receivable from major customers $ 39,000 $249,000
NOTE 9 - Subsequent Events
Settlement Agreement
On August 28, 1997, pursuant to a Settlement Agreement between Prime,
Prime's wholly-owned subsidiary, Bern and certain former stockholders of
Bern Associates, Inc. (the "Settling Shareholders"), an agreement was
reached whereby Prime purchased all of the shares of common stock from each
Settling Shareholder which in the aggregate amounted to 676,937 shares at
$.50 per share for a total amount of $338,469. In addition, Prime and Bern
transferred their rights, title and interest in certain computer software
programs and certain computer equipment to the Settling Shareholders who
were both former stockholders of Bern Associates, Inc. and officers of
Bern. In exchange, the Settling Shareholders signed a general release with
respect to previous employment contracts, confirmed prior resignations as
officers and/or directors of Prime and/or Bern, as applicable, and the
termination of any options to purchase securities of Prime or Bern.
In connection with the Settlement, Bern ceased soliciting further
opportunities or engaging in any further consulting services in connection
with its integrated Internet access service business. Moreover, all sales
of computer hardware and/or software of Bern were discontinued effective as
of the Settlement. Bern Communications will continue to provide help desk
functions as well as network management services pursuant to its existing
contractual arrangements.
F-14