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THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON MARCH 31, 2000
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-18700
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PRIME CELLULAR, INC.
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(Name of Exact Registrant as Specified in Its Charter)
Delaware 13-3570672
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
580 Marshall Street, Phillipsburg, New Jersey 08865
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (908) 387-1673
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
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. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant on March 7, 2000 (based upon the closing sale price on such date
as reported by the OTC Bulletin Board) was approximately $25,833,533.50.
As of March 7, 2000, 6,078,700 shares of the registrant's Common Stock, par
value $.01 per share were outstanding.
Documents Incorporated By Reference: None
PART I
ITEM 1. BUSINESS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. The statements contained herein which
are not historical facts are forward-looking statements that involve known and
unknown risks and uncertainties that could significantly affect actual results,
performance or achievements of the Company in the future and, accordingly, such
actual results, performance or achievements may materially differ from those
expressed or implied in any forward-looking statements made by or on behalf of
the Company. These risks and uncertainties include, but are not limited to,
risks associated with the Company's future growth and operating results; the
ability of the Company to successfully integrate newly acquired business
operations and personnel into its operations; changes in customer preferences;
the ability to hire and retain key personnel; compliance with federal or state
environmental laws and other laws and changes in such laws and the
administration of such laws; risks associated with government grants and funding
of the Company's clients' projects; dependence on certain significant customers;
protection of trademarks and other proprietary rights, technological change;
competitive factors; unfavorable general economic conditions. These risks are
included in "Item 1. Business," "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in "Exhibit 99: Risk Factors"
included in this Form 10-K. Actual results may vary significantly from such
forward-looking statements. The words "believe," "expect," "anticipate,"
"intend" and "plan" and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date the statement was made.
General
Prime Cellular, Inc. ("Prime"), acting through two divisions of its
wholly-owned subsidiary, Cell & Molecular Technologies, Inc. ("CMT" and,
together with Prime, collectively sometimes hereinafter referred to as the
"Company"), is engaged in (1) the provision of contract research and development
services to the biotechnology and pharmaceutical industries ("Contract R&D
Services"), through its Molecular Cell Science Division ("MCS") and (2) the
manufacture and direct and wholesale distribution of cell culture media and
reagents, as well as other research products, for the biotechnology and
pharmaceutical industries, through its Specialty Media Division ("SM").
Prime was incorporated under the laws of the State of Delaware in May 1990
and, after having engaged in the acquisition and operation of different business
entities subsequent to its initial public offering in August 1990, commenced its
current business operations when it acquired CMT, by a reverse merger, in May
1998. CMT was incorporated on May 6, 1997 to acquire all of the outstanding
stock in each of Specialty Media, Inc. and Molecular Cell Science, Inc., two
entities operating in the biotechnology and pharmaceutical industries since 1987
and 1991, respectively. Since the reverse merger in May, 1998, CMT has been the
sole operating entity of the Company.
From June 1996 to November 1997, Bern Communications, Inc., a wholly-owned
subsidiary of Prime formed pursuant to a merger between Prime and Bern
Associates, Inc. consummated in mid-1996, was the sole operating entity of
Prime. Bern Communications, Inc. engaged in the design, installation,
maintenance, service and support of computer systems enabling companies to
provide Internet access to their subscribers. Prime discontinued the operations
of Bern Communications, Inc. during the quarter ended November 30, 1997.
The Company maintains its executive offices, together with laboratory,
manufacturing and office/warehouse facilities, at 580 Marshall Street,
Phillipsburg, New Jersey 08865 (the "Phillipsburg Facility").
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Molecular Cell Science, Contract Research and Development Division
CMT provides contract research services in molecular and cellular biology,
protein biochemistry and bioprocessing to customers in the biopharmaceutical
research and development ("R&D") industry, designing and performing
sophisticated experiments for the customer's particular project.
CMT utilizes a flexible approach, based on collaborative discussions of the
customer's research and development goals, between representatives of the
customer's and CMT's scientific staffs. Such discussions lead to detailed,
milestone-based research proposals that are capable of being periodically
modified based on the data collected during each experimental phase. In this
manner, the Company believes its dynamic approach augments and complements the
customer's own R&D efforts in a cost- and time-effective manner.
All Contract R&D Services are performed on a fee-for-service basis,
providing for payments only after certain research milestones are reached by CMT
pursuant to the specific research goals arrived at between CMT and its customer.
CMT does not receive residual or royalty payments for future discoveries or uses
involving the materials or services provided by CMT to its contract customers.
The scientific areas in which CMT offers its Contract R&D Services include
the following areas: (1) molecular biology; (2) cell biology and gene
expression; (3) mouse genetics; and (4) bioproduction and reagent preparation.
CMT also performs assay services for its R&D customers as well as other
customers in the biotechnology and pharmaceutical industries, as described
below.
Molecular Biology - CMT engages in state-of-the-art techniques in molecular
biology to isolate and characterize genes in order to isolate proteins in
connection with the discovery, testing and validation of potential drug
candidates. Services performed by CMT range from construction of standard gene
libraries (i.e. compilation of the genes contained in an individual cell) to the
cloning and expression of novel genes (i.e. identification of specific functions
with particular genes or gene sequences). CMT's staff scientists are experts in
modern techniques of molecular biology, including without limitation,
construction of cDNA expression libraries, single cell cDNA libraries, genomic
DNA libraries, size selected, normalized, subtraction libraries and other custom
gene libraries. In addition, CMT's expertise includes molecular cloning and
related functions, including the cloning of novel and known cDNAs, the cloning
of promoters and enhancers and the isolation of genomic loci and gene trapping.
Cell Biology and Gene Expression - CMT's facilities and techniques generate
cell cultures for use in connection with today's "high throughput" screening
assays, which testing utilizes automation or robotics to test large quantities
of cells very rapidly. Employing increasingly sophisticated and sensitive
molecular biology techniques being developed in the industry, CMT's staff
scientists design and engineer highly unique cell lines for drug-screening
assays and the expression of novel genes. Engineered cell lines are used
throughout the biotechnology and pharmaceutical industries to determine the
function of genes and to screen, identify and develop potential drug candidates.
CMT's services include (i) cDNA expression cloning systems, (ii) expression of
recombinant proteins in each of Eschenchia coli, yeast, Mammalian Cells and
Insect Cells and Baculovirus, (iii) preparation of cell-based assays involving
receptor binding, transcriptional activation--reporter genes, signal
transduction pathways and transcription factor translocation assays, and (iv)
affinity purification of epitope-tagged proteins.
Mouse Genetics - CMT engineers animal models of human diseases for use in
the identification and validation of potential drug candidates. The advent of
transgenic mouse technology has allowed biologists to study the impact of gene
deletions, mutations, and additions in a whole-animal system whose genetics are
well understood and can be easily manipulated. CMT builds upon this foundation
by constructing sophisticated gene deletion and gene insertion models that can
be used to study normal and abnormal gene functions by altering or mutating a
specific gene in the animal.
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CMT is proficient in all aspects of applied mouse genetics, including (i)
gene targeting, involving generation of Murine Embryonic Stem Cell lines, of
gene deletion mice and gene insertion mice and (ii) cultivation of Transgenic
mice and mice with specific mutations for use as disease models.
Bioproduction and Reagent Preparation - CMT possesses multifaceted cell
culture and fermentation capabilities and expertise, enabling CMT to produce
whole cells, cellular fractions or biological molecules for research and assay
purposes. These materials are used by companies in the biotechnology and
pharmaceutical industries in "high throughput" screening assays to sort through
chemical libraries for potential drug candidates and to identify and validate
probable new drug candidates.
CMT has developed bioproduction techniques and processes to move research
cell lines to the manufacturing floor. Incorporating cell banking through
upstream and downstream process development (including without limitation Cell
Culture Scale-Up and Protein Purification), CMT delivers a well-characterized
process.
Using its flexible cell culture facility, CMT prepares reagents derived
from a broad range of host cell types (including whole cells, cellular
fractions, or purified biomolecule proteins) properly formatted for further
characterization or for use in screening assays. CMT's facilities give CMT both
adherent (flasks, roller bottles, cell factories) and suspension (spinners,
bioreactors) culture capabilities as well as bioreactor capacity to 150 liters,
fractionation and purification capabilities. Its facilities are well-equipped
with dynamic loop process water system (including ultrafiltration, carbon
adsorption, multiple rounds of ion exchange, and double distillation), warm/cold
rooms, laminar-flow hoods, centrifuges and cellular cryopreservation and
storage.
Assay Services - Accurate determination of biological activity, measured
using assays based on cellular substrates, is an increasingly important tool in
biopharmaceutical discovery, development, and quality control. Assays performed
by CMT include, without limitation, (i) Enzyme- Linked Immuno-Sorbtion Assays,
(ELISA) (ii) Ligand Binding Assays, (iii) Transcriptional Activation Assays,
(iv) Cell Proliferation Assays and (v) Custom Reporter Gene Cell Assays. These
assays are used for a variety of purposes including but not limited to
monitoring the production of specific biomolecules, determining the biological
function of specific genes and screening and identifying small chemical
compounds as potential drug candidates.
Specialty Media Division
The SM Division of CMT develops, manufactures, and markets high quality
research products, providing custom-formulated cell culture media, products for
gene transfer and expression, and media and reagents for serum-free cell
cultures, mouse embryo cultures, and mouse embryonic stem cells. The SM Division
also identifies and develops research products and reagents in response to
customer feedback and as a result of the Company's activities in connection with
its Contract R&D Services as well as in collaboration with academic research
institutions through the National Institute of Health (NIH) funded grant
support.
CMT manufactures and distributes media and reagents in the following
principal areas:
Mouse Embryo Media - The genetic manipulation of early stage mouse embryos
allows research scientists to develop animal models for disease states for the
purpose of elucidating the function of genes which have similarities to human
functions. CMT manufactures media and reagents to support the growth of mouse
embryos. In addition to "standard" formulations, CMT has developed novel media
formulations working in collaboration with Harvard University under NIH funded
grants. While mouse embryo media have been traditionally manufactured as
liquids, CMT has also developed a powder format greatly extending the shelf life
and opening the possibility for overseas shipment and distribution.
4
Unique Products for General Cell Cultures - A significant portion of the
sales revenue of the SM Division is derived from several unique products
developed by CMT. Cell culture freezing media allows research scientists to
cryogenically archive important cell lines for future use. CMT's line of enzyme
free cell dissociation solutions allow researchers to remove cells from the
vessels on which they are grown while retaining the functionality of the
proteins on their surface. This enables the cells to be used in assays which
rely on cell surface receptors. CMT also markets a kit containing all of the
reagents necessary to introduce foreign genes into cells, genetically altering
the cell line. These unique products are directly marketed by SM and are also
sold by other companies under private label.
Custom Media Manufacture - CMT actively engages in the production of custom
formulations, with a minimum volume of only 2 liters. It is frequently the case
that research scientists need to vary the components of the nutrient broths in
which cells are grown. This need is met by CMT through its ability to formulate
complex media in a timely fashion and in low volumes. CMT believes that its low
minimum volume requirements have enabled it to enter a niche not otherwise
occupied by the several larger companies advertising such custom capabilities.
Customers
Molecular Cell Science, Contract Research and Development Division
CMT provides its Contract R&D Services to manufacturers in the
biotechnology and pharmaceutical industries and to hospitals, universities and
other research institutions. For the years ended December 31, 1999 and 1998,
Merck & Co., Inc. accounted for approximately 35% and 11% of the Company's total
annual revenues, respectively. For the year ended December 31, 1999, Merck & Co.
and Meyer Pharmaceuticals, LLP, accounted for approximately 39% and 13% of the
Company's total receivables at December 31, 1999, respectively. Management
believes that such customers will continue to account for a significant portion
of the Company's revenues in the 2000 fiscal year. There can be no assurance,
however, that these customers will continue to generate significant revenues and
the loss of these, or any other significant customers of CMT's Contract R&D
Services could have a material adverse effect on the Company's business.
Specialty Media Division
CMT provides specialty media to manufacturers in the biotechnology and
pharmaceutical industries and to hospitals, universities and other research
institutions. For the year ended December 31, 1998, Life Technologies, Inc.
accounted for approximately 13% of the Company's total annual revenues. Although
there were no customers whose revenue accounted for more than 10% of the
Company's total revenue for the year ended December 31, 1999, management
believes that such customers will account for a significant portion of the
Company's revenues in the 2000 fiscal year. There can be no assurance, however,
that these customers will continue to generate significant revenues and the loss
of these or any other significant customers of CMT's SM Division could have a
material adverse effect on that segment of the Company's business.
Sales and Marketing
Molecular Cell Science, Contract Research and Development Division
The Molecular Cell Science Division has focused on providing basic and
pre-clinical contract research and development. Given the rapid development of
molecular biology techniques and pace of drug discovery, the Company believes
that biotechnology and pharmaceutical companies are now focusing on drug
discovery as opposed to basic research and that there is an increasing trend
among companies in the pharmaceutical industry to outsource their R & D
projects. Such outsourcing is due to (i) the quantity of R & D projects
necessary to stay competitive in the industry, (ii) the reduced "in-house"
staffs resulting from corporate down-sizing, (iii) the expense and risk inherent
in conducting R & D internally and (iv) the expanded capabilities and
flexibility offered by third party research companies without the associated
overhead.
5
The pattern for outsourcing among the large pharmaceutical companies has
been to expand from pre- and post- approval activities (including clinical trial
management, manufacturing, quality control, packaging, etc.) toward R & D. At
the front end of the development process, drug discovery based on
rapid-throughput synthesis and screening technologies is typically effected by
very large companies. On the other end, smaller technology companies tend to
provide access to "enabling" technologies that facilitate the process of target
identification and lead compound synthesis and identification. CMT intends to
address the perceived opportunity for a combination of these high-throughput
discovery technologies and the relatively mature market for pre- and
post-approval services. Because of the broad, multi-disciplinary range of
customer needs during this phase of R & D, the Company believes that CMT's
synthesis of multiple biologically based capabilities makes it well positioned
in the industry.
The Company believes that, through rapid growth by expanding
state-of-the-art facilities, recruiting world class scientists, and developing
and acquiring new technologies, CMT can benefit from the growing contract
research market.
CMT's sales efforts are coordinated by the management staff of the MCS
Division of CMT, whose duties include client contact and the preparation and
submission of project proposals. Direct mailings and listings on web based
reference services (such as Verticalnet and Bioserviceindex) as well as the
company's own website are the principal forms of advertising.
Specialty Media Division
CMT's SM Division has directed its products to specialized aspects of the
cell culture market. The Company believes that, while the overall available
revenues from this area is less than other areas of the market, the potential
margins are greater. Moreover, in serving these areas, CMT has built up
significant customer loyalty and name recognition, despite relatively minimal
marketing activities.
CMT's sales efforts are coordinated by the Vice President of Research
Products of CMT, whose duties include oversight of production development,
direct sales and distributor arrangements. The Company also utilizes the
services of PGC Scientifics and VWR Scientific, national distributors of
research products, as well as e-commerce sales organizations such as Sciquest
and Chemdex, which are responsible primarily for sales to customers not serviced
regularly by management. Such distributors are compensated through sales
commissions.
Manufacturing, Suppliers and Inventory
The manufacturing as well as order fulfillment and shipping functions with
respect to the SM Division are accomplished at the Phillipsburg Facility. The
raw materials used in the manufacturing process are purchased from a variety of
third-party suppliers. The Company believes that CMT has numerous alternative
sources of supplies with respect to all critical components used in the
manufacturing process. CMT maintains adequate inventory at the Phillipsburg
Facility to support its direct sales needs.
6
Competition
Generally, CMT competes with a combination of national and regional
companies ranging from large companies engaging in contract research and
development or reagent services to companies specializing in one particular
aspect of R & D or media production. Some of these companies have captured a
significant, and in certain cases controlling, share of the research products
and the transgenic mouse outsourcing markets. Many of such competitors have
achieved significant national, regional and local brand name and product
recognition as well as engage in frequent and extensive advertising and
promotional programs, both generally and in response to efforts by other
competitors entering the market or existing competitors introducing new
products. Many of these companies have substantially greater financial,
technical, marketing, personnel and other resources than CMT.
The Company believes that entry barriers to these markets are significant,
involving the high costs of specialized scientific equipment, the need to
recruit highly trained professional scientific staff with industrial and
academic experience, and the ability to offer a wide range of services and
expertise. The ability to compete successfully in the industry is affected by
these and other factors, including without limitation price of services, ease of
use, reliability, customer support, geographic coverage and industrial and
general economic trends. In addition, much of the R & D work involves customers
dependent on government grants and other institutional funding.
The Company believes that CMT can compete effectively based on its ability
to provide its customers with both (i) Contract R&D Services for early
stage/pre-clinical R & D in the pharmaceutical and biotechnology industries and
(ii) the preparation of reagents for cell culture, molecular biology, and mouse
genetics in the international academic and industrial research markets. The
Company believes that, although there are a number of large competitors that
have substantially greater resources than CMT, such competitors have well
established businesses in only one of these two areas. Available contract
research services have for the most part focused on delivering routine
technology at low cost. These services have flourished because by maximizing the
load on their equipment and labor resources, they can reduce the customer's
in-house cost. However, such economies of scale are achieved at a cost to the
customer who remains for the most part responsible for defining protocol and
overseeing its implementation to insure that the results are useable to the
customer's in-house projects. In contrast, CMT offers, in addition to the full
range of R & D services, complete experimental design and consultation
throughout the performance of the Contracted R&D Services.
Molecular Cell Science, Contract Research and Development Division
The Company believes that the Contract R&D Service business can be divided
into four markets, consisting of the (i) low end R&D, (ii) specialty R&D, (iii)
high end R&D and (iv) technology platform R&D, as follows:
Low End R&D - Services performed in this market are characterized by low
margins and strong competition and are technical and mechanical in nature. These
services tend not to lead to higher end, more complex projects. This market is
comprised of small local vendors, some of which have grown to cover larger
markets. CMT offers a wide range of services in this area, including those
offered by its competitors.
Specialty R&D - Services performed in this market tend to be technically
and/or target focused. These services seldom lead to new and more complex
projects. While a number of CMT's services touch upon this market, CMT tends to
offer a broader focus with its services.
High End R&D - Services performed in this market tend to be high margin,
highly skilled technical and mechanical matters, requiring significant
intellectual input and problem solving and access to well recognized academics.
These services often require the development of new high end technologies and
lead to more complex projects. Such projects can be used as a launch pad for
7
developing proprietary technologies. The Company believes that CMT is well
positioned to participate in this market, offering expert research services,
consultation at all stages of the project and problem solving abilities.
Technology Platform R&D - This market is comprised of companies which have
based their business on performing drug screening and/or licensing their
proprietary technology to companies for their in-house screening programs. These
relationships are generally associated with significant licensing costs and
downstream royalties. The application and/or licensing of such proprietary
technology platforms involve large contracts and is highly competitive.
Competition arises from the development of alternative and competing
technologies designed to yield results ever more quickly and inexpensively. CMT
is active in this market as well, developing novel technology platforms through
research performed for its own account, licensing arrangements as well as
through collaborative small business research grants. CMT's proprietary
technologies are principally focused on the rapid identification, expression and
characterization of genes and proteins for use in the screening and discovery
efforts of potential drug candidates in the biotechnology and pharmaceutical
industries.
Specialty Media Division
The Company believes that the SM market is dominated by a few very large
companies with a number of minor participants. Historically, the revenue
producers in the Specialty Media market have been a limited number (fewer that
20) of manufacturers of public-domain media formulations (mostly developed in
the 1960's) and the Fetal Bovine Serum (FBS) which has been used to supplement
media. The Company believes that competition in this area is mostly on a price
basis.
Government Regulation
The Company and its business operations are subject to many laws and
governmental regulations and changes in these laws and regulations, or their
interpretation by agencies and the courts, occur frequently.
Environmental Regulation - The Company's operations are subject to various
evolving federal, state and local laws and regulations relating to the
protection of the environment, which laws govern, among other things, emissions
to air, discharges to ground, surface water, and groundwater, and the
generation, handling, storage, transportation, treatment and disposal of a
variety of hazardous and non-hazardous substances and wastes. Federal and state
environmental laws and regulations often require manufacturers to obtain permits
for these emissions and discharges. Failure to comply with environmental laws or
to obtain, or comply with, the necessary state and federal permits can subject
the manufacturer to substantial civil and criminal penalties. CMT operates a
manufacturing facility. Although the Company believes that such facility is in
substantial compliance with all applicable material environmental laws, it is
possible that there are material environmental liabilities of which the Company
is unaware. If the costs of compliance with the various existing or future
environmental laws and regulations, including any penalties which may be
assessed for failure to obtain necessary permits, exceed the Company's budgets
for such items, the Company's business could be adversely affected. In
additions, liability to third parties could have a material adverse effect on
the Company's business.
Potential Environmental Cleanup Liability - The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Furthermore, certain business operations of CMT also
involve shipping hazardous waste off-site for disposal. As a result, the Company
could be subject to liability under these statutes. Furthermore, there can be no
assurance that Prime or CMT will not be subject to liability relating to
manufacturing facilities owned or operated by them currently or in the past.
8
Permits - In connections with its business operations, CMT has obtained
permits from the New Jersey Department of Environmental Protection (NJDEP) as
both a hazardous waste and medical waste generator. CMT believes that its
compliance with such regulations, however, is on a voluntary basis inasmuch as
its operations produce insufficient levels of chemical waste. The Company
further believes that none of its medical waste is deemed infectious. In
addition, CMT has obtained a permit from the Nuclear Regulatory Commission for
the use of radioisotopes in connection with CMT's research functions.
Other Regulations - In addition to the foregoing, the Company may be
subject to various other federal, state and local regulatory and licensing
requirements as the same are promulgated from time to time by the Environmental
Protection Agency, Food and Drug Administration, Nuclear Regulatory Commission,
the New Jersey Department of Environmental Protection and other federal, state
and local regulatory agencies. Failure of the Company to comply with any of
these requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants.
The Company has made, and will continue to make, capital and other
expenditures necessary to monitor and to comply with any applicable regulations.
For the year ended December 31, 1999, no material expenditures by the Company
were necessary with respect to such matters.
Trademarks, Proprietary Information and Patents
CMT utilizes certain proprietary information in connection with the
providing of its services and the manufacture and sale of its products,
including processes and formulas with respect to cell and embryo culture media
and reagents, and gene expression systems that it believes are proprietary to
it. The Company relies on customary principles of "work-for-hire" as well as
technical measures to establish and protect the ideas, concepts, and
documentation of its proprietary technology and know-how and, in certain
instances, has entered into non-disclosure agreements with its employees. Such
methods, however, may not afford complete protection, and there can be no
assurance that third parties will not independently develop such know-how or
obtain access to the Company's know-how, ideas, concepts, and documentation.
Although the Company believes that its technology has been developed
independently and does not infringe on the proprietary rights of others, there
can be no assurance that the technology does not and will not so infringe or
that third parties will not assert infringement claims against the Company in
the future. In the case of infringement, the Company would, under certain
circumstances, be required to modify its products or obtain a license. There can
be no assurance that the Company will have the financial or other resources
necessary to defend successfully a patent infringement or other proprietary
rights infringement action or that it could modify its products or obtain a
license if it were required to do so. Failure to do any of the foregoing could
have a material adverse effect on the Company. If the Company's products or
technologies are deemed to infringe upon the rights of others, the Company could
be liable for damages, which could have a material adverse effect on the
Company.
During 1999, CMT was awarded a trademark, EMBRYOMAX(R) by the United States
Patent and Trademark Office with respect to one of its products. The
EMBRYOMAX(R) trademark pertains to SM's mouse embryo culture media and reagents
offered by SM to support the generation of transgenic mice. It is anticipated
that during the year 2000, the EMBRYOMAX(R) trademark will encompass a number of
new products including mouse embryonic stem cell lines (used in gene targeting
technologies), mouse primary fibroblast feeder cells (used to support the
culture of mouse embryonic stem cells), a mouse cloning kit (reagents used in
mouse cloning technology) and cryopreserved mouse embryos (used in the
generation of transgenic or genetargeted mice).
9
Product Liability
As a manufacturer of certain products, the Company may be exposed to
product liability claims by consumers. The Company has obtained product
liability insurance coverage in the aggregate amount of $2.0 million ($1.0
million per occurrence), and an umbrella policy that provides a $10.0 million
coverage (per occurrence or aggregate) that is excess over the scheduled
underlying policies. Although the appropriate coverage is in place, there can be
no assurance that such insurance will provide coverage for any claim against the
Company or will be sufficient to cover all possible liabilities. In the event a
successful suit is brought against the Company, unavailability or insufficiency
of insurance coverage could have a material adverse effect on the Company.
Moreover, any adverse publicity arising from claims made against the Company,
even if such claims were not successful, could adversely affect the reputation
and sales of the Company's products and services.
Employees
As of February 15, 2000, the Company had twenty- eight (28) full-time and
four (4) part-time employees. Of such employees, five (5) are executive
employees, two (2) are engaged in customer support, sixteen (16) (including 1
part-time employee) are engaged in research and development and media
production, two (2) (including 1 part-time employee) are engaged in sales and
marketing, two (2) are engaged in warehouse, shipping and receiving, and five
(5) (including two of the part-time employees) are engaged in accounting and
administration. None of the Company's employees are covered by col-lective
bargaining agreements. The Company believes that it has a good relationship with
its employees.
History of Prime Cellular, Inc.
Prime was incorporated under the laws of the State of Delaware in May 1990
to provide management services, including business planning, marketing,
engineering, design and construction consulting services, to rural service area
cellular telephone licensees. However, preferences of owners of construction
permits and the deterioration in general economic conditions subsequent to
Prime's initial public offering in early August 1990 negatively impacted Prime's
business plan and Prime soon determined that it was prudent for it to explore
other uses for Prime's funds.
Prime 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. From 1991 until May 1999, Prime retained an outside
consultant, who is also a shareholder and currently a director and officer of
the Company, to assist it in finding new business opportunities for the Company.
Such consultant is now an employee of Prime under an employment agreement.
On June 11, 1996, a wholly-owned subsidiary of Prime consummated a merger
(the "Bern Merger") with Bern Associates, Inc. ("Bern") pursuant to that certain
Merger Agreement, dated May 14, 1996 (the "Bern Agreement"), by and among Prime,
its subsidiary, Bern and all of the stockholders of Bern. Bern's 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 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 also provided network
management services to regional telephone companies already offering Internet
access. After the Bern Merger, Prime's subsidiary changed its name to "Bern
Communications, Inc." ("Bern Communications"). The Merger was accounted for as a
reverse acquisition whereby Bern Communications was treated as the acquirer for
financial reporting purposes. From June 11, 1996 until November 30, 1997, Bern
Communications was the sole operating entity of Prime.
10
On August 28, 1997, Prime entered into a settlement (the "Settlement") with
former stockholders of Bern ("Bern Stockholders") for alleged breaches of
certain representations and warranties made by the Bern Stockholders with
respect to the Bern Merger as well as for on-going disputes concerning the
operations and direction of the business of Bern Communications. Pursuant to the
Settlement, Prime (i) purchased all of the shares of common stock in Prime held
by the Bern Stockholders as a result of the Prime Merger, at a purchase price of
$.50 per share (the market price on the date of such purchase), aggregating
676,937 shares of common stock for an aggregate amount of $338,469, (ii)
transferred to certain Bern 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. In
exchange, such Bern Stockholders signed a general release and, to the extent
applicable, confirmed their prior resignations as officers and/or directors of
the Company and/or Bern Communications as well as terminated their respective
options to purchase the Company's Common Stock. All shares acquired by the
Company pursuant to the settlement were canceled, effective as of August 28,
1997.
Following the Settlement, Bern Communications ceased soliciting further
opportunities or engaging in any further consulting services in connection with
its integrated Internet access system. Moreover, all sales of computer hardware
and/or software of Bern Communications were discontinued effective as of the
Settlement. Bern Communications did nevertheless continue to provide help desk
functions as well as network management services pursuant to its existing
contractual arrangements. All such contractual arrangements were terminated on
or about November, 1997.
On May 29, 1998, a newly formed wholly-owned subsidiary of Prime acquired,
by merger, CMT. Pursuant to the Merger Agreement, dated May 29, 1998, the
subsidiary was merged into CMT and all of the outstanding shares of capital
stock of CMT were converted into an aggregate of 1,611,000 shares of Common
Stock, par value $.01 per share, of Prime (the "CMT Merger"), representing
approximately 26.4% (after consummation of the Merger) of Prime's issued and
outstanding Common Stock. The CMT Merger was accounted for as a reverse
acquisition whereby CMT was treated as the acquirer for financial reporting
purposes. Since the CMT Merger, CMT has been the sole operating entity of Prime.
In connection with the CMT Merger, the Company changed its fiscal year end
from May 31, to December 31, which year end corresponds with the fiscal year end
for CMT.
On December 22, 1998, each of Prime Cellular of Florida, Inc. and Bern
Communications, Inc., as wholly-owned subsidiaries of Prime no longer conducting
business, merged with and into Prime pursuant to a short-form affiliate merger.
ITEM 2. PROPERTIES
Since June 1998, the Company's executive offices have been located at 580
Marshall Street, Phillipsburg, New Jersey 08865, which property consists of
approximately 6,651 square feet of laboratory, manufacturing and
office/warehouse space. The property is owned by the Company, having been
acquired in connection with the CMT Merger subject to a mortgage and note, dated
February 10, 1997, in the aggregate principal amount of $287,600. As of March
15, 2000, the balance due under the note is $271,751.
11
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol PCEL. The following table sets forth, for the periods indicated, the high
and low bid quotations for the Company's Common Stock for the last two fiscal
years as reported on the OTC Bulletin Board. The quotations reflect prices among
dealers, do not reflect retail markups, markdowns or other fees or commissions,
and do not necessarily represent actual transactions.
Period High($) Low($)
------- ------- ------
Fiscal 1999
Fourth Quarter 2.125 .750
Third Quarter 2.875 1.500
Second Quarter 2.250 .875
First Quarter .875 .875
Fiscal 1998
Fourth Quarter 1.500 .250
Third Quarter 2.750 1.000
Second Quarter 3.500 1.250
First Quarter 3.875 .625
On March 7, 2000, the average of the bid and ask prices for the Company's
Common Stock was $7.125, as reported by the OTC Bulletin Board. As of March 7,
2000, there were 6,078,700 shares of Common Stock outstanding. The Company
believes that there are in excess of 300 beneficial owners of its Common Stock,
whose shares are held of record or in street name.
Dividend Policy
To date, the Company has not declared or paid any cash dividends on its
Common Stock. The payment of dividends, if any, in the future is within the
discretion of the Board of Directors and will depend upon the Company's
earnings, its capital requirements and financial condition and other relevant
factors. The Company currently intends to retain all earnings, if any, to
finance the Company's continued growth and development of its business and does
not expect to declare or pay any cash dividends in the foreseeable future.
13
Recent Sales of Unregistered Shares
During the year ended December 31, 1999, the Company made the following
sales of unregistered securities:
================ ==================== ============== ============================== ================ ====================
If Option, Warrant
Consideration Received and or Convertible
Description of Underwriting Exemption from Security, Terms of
or Other Discounts to Market Registration Exercise or
Date of Sale Title of Security Number Sold Price Afforded to Purchasers Claimed Conversion
================ ==================== ============== ============================== ================ ====================
1/1/99 Options to 44,250 Options granted under 1990 4(2) Exercisable for 10
purchase Common Stock Plan; no cash years from date of
Stock granted to consideration received by grant with vesting
employees the Company until exercise from 1-5 years at
an exercise price
of $1.00 per share
================ ==================== ============== ============================== ================ ====================
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data at and for the years ended December
31, 1999, 1998, 1997, 1996 and 1995 has been derived from the Company's audited
financial statements for each of the years. Such information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the notes thereto
appearing elsewhere in this Report.
Statement of Income Data:
Fiscal Year Ended December 31
-----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Income Statement Data:
Total revenues $ 3,916,581 $ 2,127,233 $ 2,180,190 $ 1,471,221 $ 1,526,391
--------- --------- --------- --------- ---------
Net income (loss) $ 641,114 $ (698,674) $ (209,621) $ (62,617) $ 56,709
------- -------- --------- -------- ------
Basic earnings
per common share $ .11 $ (.16) $ (.17) $ (.07) $ .06
--- ----- ----- ----- ---
Diluted earnings
per common share $ .10 $ (.16) $ (.17) $ (.07) $ .06
--- ----- ----- ----- ---
Balance Sheet Data:
- ------------------
Total assets $ 7,428,682 $11,825,68 $ 2,028,457 $ 706,964 $ 443,191
--------- --------- --------- ------- -------
Long - Term Debt $ 1,092,095 $ 826,024 $ 748,738 $ 3,872 $ 120,152
--------- ------- ------- ----- -------
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
In conjunction with the consummation of the CMT Merger on May 29, 1998, all
of the outstanding shares of capital stock of CMT were converted into an
aggregate of 1,611,000 shares of common stock, par value of $.01 per share of
Prime, representing approximately 26.4% (after consummation of the Merger) of
Prime's issued and outstanding common stock. This transaction was accounted for
as a reverse acquisition whereby CMT was the acquirer for accounting purposes.
The assets and liabilities were recorded at their historical amounts from the
date of acquisition. The historical consolidated financial statements prior to
May 29, 1998 are those of CMT with all common stock data restated into the
equivalent capital structure of Prime.
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
Revenue for the year ended December 31, 1999 was $3,916,581 as compared to
$2,127,233 for the year ended December 31, 1998. This 84% or $1,789,348 increase
in revenue was a result of a $313,281 or 26% increase in sales of goods, plus by
a $ 1,476,067 or 159% increase in contract revenue. During the year ended
December 31, 1998, MCS was primarily focused on hiring and recruiting personnel
and setting up laboratory space and an internal infrastructure to transition the
majority of the research work from subcontractors to in-house. This staff up and
build out period was completed late in 1998, which allowed the division to focus
on aggressively promoting its services. This anticipated increase in contract
revenue materialized during the year ended December 31, 1999.
Income after direct costs for the year ended December 31, 1999 was
$2,124,638 as compared to $668,976 for the year ended December 31, 1998. This
$1,455,662 or 218% increase in income after direct costs was a result of a
$221,126 or 40% increase from sales of goods, plus a $1,234,536 or 1095%
increase from contract revenue. This increase from the contract revenue division
was attributable to the more efficient utilization of manpower and material
which was achieved as a direct result of a significant increase in research
contracts which resulted in higher margins for the year ended December 31, 1999
as compared to the year ended December 31, 1998. The margins for the SM division
increased for the year ended December 31, 1999 as compared to the year ended
December 31, 1998 as a result of an increase in sales of higher gross profit
items during the year ended December 31, 1999.
Corporate activities for the year ended December 31, 1999 resulted in a net
expense of $382,390 as compared to a net expense of $159,278 for the year ended
December 31, 1998. This $223,112 net increase in expense resulted principally
from increased selling, general and administrative expenses plus interest
expense, partially offset by interest income, all of which resulted from Prime,
and was only included from May 29, 1998 (upon the merger with CMT) for the year
ended December 31, 1998. These income and expense items attributable to Prime
were included from January 1, 1999 for the year ended December 31, 1999
As a result of the foregoing, the net income increased to $641,114 for the
year ended December 31, 1999 as compared to a net loss of ($698,674) for the
year ended December 31, 1998.
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
Revenue for the year ended December 31, 1998 was $2,127,233 as compared to
$2,180,190 for the year ended December 31, 1997. This 2% or $52,957 decrease in
revenue was a result of a $144,212 or 14% increase in sales of goods, reduced by
a $197,169 or 18% decrease in contract revenue. The decrease in contract revenue
was due to the Company's decision in early 1998 to transition the majority of
the research work from subcontractors to in-house. This staffing up of personnel
and building out additional laboratory space was a major focus in 1998.
15
Income after direct costs for the year ended December 31, 1998 was $668,976
as compared to $838,476 for the year ended December 31, 1997. This $169,500 or
20% decrease in income after direct costs was a result of a $147,421 or 36%
increase from sales of goods, reduced by a $316,921 or 74% decrease from
contract revenue. This decrease in income after direct costs for the contract
revenue segment resulted principally from the Company hiring additional
personnel to accommodate an anticipated large increase in contract revenue,
which increase in business did not materialize in 1998.
Corporate activities for the year ended December 31, 1998 resulted in a net
expense of $159,278 as compared to a net income of $9,897 for the year ended
December 31, 1997. This net increase in expense resulted from selling, general
and administrative expenses, partially offset by interest income, realized in
connection with the CMT Merger.
As a result of the foregoing, the net loss increased to ($698,674) for the
year ended December 31, 1998 as compared to a net loss of ($209,621) for the
year ended December 31, 1997.
Liquidity and Capital Resources
At December 31, 1999, the Company had approximately $126,000 in cash and
working capital of approximately $5,380,000.
Net cash provided by/used in operating activities aggregated $371,456 and
($746,523) for the years ended December 31, 1999 and 1998, respectively. The
$1,117,979 increase in cash provided by operating activities was principally
attributable to increased net income for the year ended December 31, 1999 as
compared to 1998 as well as due to a reduction in customer deposits partially
offset by an decrease in accounts payable and accrued expenses and an increase
in accounts receivable.
Net cash provided by/used in investing activities aggregated $4,531,181 for
the year ended December 31, 1999 as compared with ($5,015,267) for the year
ended December 31, 1998 respectively. The increase in cash provided by investing
activities was primarily attributable to the sale of $5,000,000 in investment
securities in 1999 and the purchase of approximately $5,000,000 of investment
securities in 1998.
Net cash used in/provided by financing activities aggregated ($4,860,829)
for the year ended December 31, 1999 as compared to $5,102,253 for the year
ended December 31, 1998 respectively. The increase in cash used was due
primarily to the approximately $5,200,000 in payments of collateralized
investment loan, note payable and long term debt in 1999 offset by $350,000 in
the proceeds from new long term debt in 1999.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in a separate section of this report following
Part IV.
16
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Information with respect to matters set forth in Item 304 in Regulation S-K
was previously reported by the Company in its reports on Form 8-K and 8-K/A for
the event dated December 23, 1998, filed with the Securities and Exchange
Commission pursuant to Section 13 of the Securities Exchange Act of 1934 on
December 31, 1998 and January 7, 1999, respectively.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and executive officers of the Company are as follows:
Name Age Position
Joseph K. Pagano 54 President and Chairman of the Board
Robert A. Reinhart 50 Vice-President of Finance, Chief Financial
Officer, Treasurer, Secretary
Frederick R. Adler 74 Director
Thomas Livelli 47 Director
Richard Malavarca 47 Director
Samuel A. Rozzi 54 Director
Brett Fialkoff 33 Director
Joseph K. Pagano has served as President of the Company since June 1994 and
as a director since 1991. He also served as Chief Financial Officer from June
1994 until July 1996. From 1991 until April 1999, he was engaged as a consultant
to the Company. Mr. Pagano has been a private investor for more than the past
five years. Since May 1999, Mr. Pagano has been serving as an employee of the
Company under an employment agreement.
Robert A. Reinhart is a certified public accountant. Mr. Reinhart has
served as Chief Financial Officer and Vice President - Finance of the Company
since July 1996, and as Treasurer/Secretary since May 1997. Mr. Reinhart served
as Vice President, Finance and Chief Executive Officer for Bern Communications,
Inc. from July 1996 until its dissolution in 1998. Prior thereto, Mr. Reinhart
served as the Chief Operating Officer and Chief Financial Officer of DeBoles
Nutritional Foods, Inc. from 1992 until 1996. Prior to being engaged by De Boles
Nutritional Foods, Inc. in 1992, Mr. Reinhart was a senior manager/engagement
executive with a certified public accounting firm located on Long Island, New
York.
Frederick R. Adler has been a director of the Company since May 1996. Mr.
Adler is Managing Director of Adler & Company, a venture capital management firm
he organized in 1968, and a general partner of its related investment funds.
Since January 1, 1996, Mr. Alder has been of counsel to the law firm of
Fulbright & Jaworski L.L.P. and, for more than five years prior thereto, was a
senior partner in the firm. Mr. Adler is also Chairman of the Executive
Committee and a director of Data General Corporation, Chairman and director of
Shells Seafood Restaurants, Inc., and a director of USA Detergents, Inc., as
well as a director of various private companies. Mr. Adler is the Chairman of
Intercoastal Health Systems, Inc. (Palm Beach, FL) and a member of the Board of
Managers of Memorial Sloan-Kettering Cancer Center (New York, NY). Mr. Adler is
also a member of the Dean's Advisory Board of the Harvard Law School (Cambridge,
MA).
Thomas Livelli has been a director of the Company since June 1998. He was
President of CMT's predecessor companies, from 1987 until 1997, when he became
President of CMT. He is currently the President and Chief Executive Officer of
CMT. Mr. Livelli was the founder of MCS, Inc., the predecessor to the Molecular
Cell Science Division of CMT, and the co-founder of the SM Division of CMT. From
January 1986 until July 1997, Mr. Livelli was a Laboratory Manager at the Howard
Hughes Medical Institute at Columbia University. Prior to 1986, Mr. Livelli
worked at Merck Research Laboratories ("Merck") and Cistron Biotechnology
("Cistron"), directing their respective gene expression programs. While at
Cistron, Mr. Livelli was a Visiting Scholar at Columbia University. Mr. Livelli
has also served in the capacity of a scientific consultant for Merck, Cistron,
Synaptic Pharmaceutical, and Life Technologies, Inc. In addition to his duties
as President and Chief Executive Officer of CMT, Mr. Livelli maintains a
part-time faculty appointment at Columbia University College of Physicians &
Surgeons in the Department of Neurobiology and Behavior.
18
Richard Malavarca has been a director of the Company since June 1998. He
was Vice President of CMT and its predecessor companies from 1987 until 1997,
when he became Vice President of CMT. He is currently the Vice President -
Research Products of CMT, where he is responsible for the day to day operations,
product development and marketing for the SM Division of CMT. In January 2000,
Mr. Malavarca also became Chief Operating Officer of CMT. Mr. Malavarca was a
co-founder of Specialty Media, Inc., the predecessor to the SM Division of CMT
where he served as Vice President from 1987 until May 1997. Mr. Malavarca has
also worked at the Harvard Medical School, The Roche Institute for Molecular
Biology, Merck Research Laboratories and Cistron in basic research involving
developmental biology, molecular and cell biology. He left Cistron in 1987 to
start Specialty Media, Inc.
Samuel A. Rozzi has been a director of the Company most recently since
January 1997. He previously served as a director of the Company from 1991 until
June 1996. Mr. Rozzi has been the President of Corporate National Realty, Inc.,
a corporate real estate brokerage and services firm, since September 1988.
Brett Fialcoff has been a director of the Company since February 2000. From
1993 until 1996, Mr. Fialkoff was a securities analyst with Performance Capital,
LP and Performance Capital II, LP. Since 1997, Mr. Fialkoff has been a member of
Performance Capital LLC, the General Partner of Performance Capital LP, a public
equity investment fund. Mr. Fialkoff has also been a member of Performance
Management LLC, the general partner of Performance Capital II, LP, which is also
a public equity investment fund. Mr. Fialkoff is also an officer of Performance
Offshore Holdings Corp., the General Partner of Performance Offshore Limited,
which is also a public equity investment fund. Mr. Fialkoff graduated with a
B.A. from Bard College in 1988.
Directors are elected annually by the stockholders. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board of
Directors.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that
Company's officers and directors, and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities, file certain
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than 10 percent beneficial
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by the Company, or representations obtained from certain reporting persons, the
Company believes that during the year ended December 31, 1999 all filing
requirements applicable to its officers, directors, and greater than 10 percent
beneficial stockholders were complied with, except that Mr. Pagano, a director
and officer of the Company, filed a Form 4 late.
19
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses the compensation awarded by the Company to
(i) each of the President and Chief Financial Officer of the Company (the
"Company Executives") for the twelve (12) month period ended December 31, 1999,
for the period from June 1, 1998 until December 31, 1998 (the "Stub Period") and
for the twelve (12) month period ended May 31 in each of the two fiscal years
May 31, 1998 and 1997, and (ii) the President of CMT (the "CMT Executive" and,
together with the Company Executives, hereinafter collectively referred to as
the "Named Executives") for the twelve (12) month period ended December 31 in
each of the three fiscal years ended December 31, 1999, 1998 and 1997. During
the most recent twelve (12) month period ended December 31, 1999, no other
officer of the Company or CMT, as the case may be, received a total salary and
bonus that exceeded $100,000 during such twelve (12) month period.
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------- Long-Term and Other
Name and Principal Position Year Salary ($) Bonus ($) Compensation
- -------------------------------------- ---------------- ------------------------------- --------------------------------
Joseph K. Pagano 1999 $51,495(1) -- $ 29,638(1)
President and Chairman of Stub Period -- -- 43,750(2)
the Board 1998 -- -- 75,000
1997 -- -- 75,000
- -------------------------------------- ---------------- ---------------- -------------- --------------------------------
Robert A. Reinhart 1999 $128,887 -- --
Chief Financial Officer, Vice Stub Period 70,369(2) -- --
President, Treasurer and 1998 125,000 -- Options(3)
Secretary 1997 86,000(4) $ 25,000 Options(5)
- -------------------------------------- ---------------- ---------------- -------------- --------------------------------
Thomas Livelli 1999(7) $151,885 - --
President and Chief 1998(7) 138,462(8) - --
Executive Officer (6) 1997(7) 63,462 $181,000 --
- -------------------------------------- ---------------- ---------------- -------------- --------------------------------
Richard Malavarca 1999(7) $ 101,769 - --
Vice President and Chief 1998(7) 88,961 - --
Operating Officer 1997(7) 80,444 - --
- -------------------------------------- ---------------- ---------------- -------------- --------------------------------
Michael J. Tocci 1999(7) $ 121,154 - --
Vice President 1998(7) 115,385 - --
1997(7) 32,692 - Options(9)
- -------------------------------------- ---------------- ---------------- -------------- --------------------------------
- ---------------------------
(1) Mr. Pagano, who was elected President of the Company on June 15, 1994,
received a consulting fee of $75,000 per annum until May 1999, at which
time he became an employee of the Company at a salary of $85,000 per annum.
Mr. Pagano also received reimbursement of documented expenses incurred on
behalf of the Company.
21
(2) Reflects the respective compensation or consulting fee, as the case may be,
of the Named Executive, prorated for the seven-month Stub Period. Following
the CMT Merger, the Company adopted the calendar fiscal year of CMT. The
Company previously operated under a fiscal year ended May 31st.
(3) On April 20, 1998, the Company granted Mr. Reinhart incentive stock options
to purchase up to 25,000 shares of the Common Stock of the Company at $2.25
per share, which options vest in two equal installments on each of April
20, 1999 and April 20, 2000.
(4) Reflects Mr. Reinhart's salary rate of $100,000 for the year ended May 31,
1997, prorated from July 22, 1996, when he was elected Chief Financial
Officer of the Company.
(5) On October 25, 1996, the Company granted Mr. Reinhart incentive stock
options to purchase up to 40,000 shares of the Common Stock of the Company
at $2.50 per share, which options became immediately exercisable on the
date of grant. Such options were subsequently re-priced on January 16,
1998, to an exercise price of $0.75 (the fair market value of the Common
Stock at such time).
(6) Mr. Livelli is President and Chief Executive Officer of CMT, a wholly-owned
subsidiary of Prime.
(7) Reflects salary paid for the calendar years ended December 31, 1998 and
1997. Because the Company adopted as its fiscal year CMT's calendar year at
the time of the CMT Merger, no Stub Period calculation is required when
disclosing the compensation paid to CMT's executive officers.
(8) Reflects Mr. Livelli's (i) effective salary rate of $135,000 (as amended at
May 29, 1998 following the CMT Merger) for the year ended December 31,
1998, prorated from May 29, 1998, when he was elected President of CMT in
conjunction with the CMT Merger, and (ii) effective salary rate of $150,000
for the year ended December 31, 1998, prorated for the five months ended
May 29, 1998.
(9) On May 29, 1998, the Company granted Mr. Tocci stock options to purchase up
to 72,000 shares of Common Stock of the Company at $.278 per share, which
options vest 20% upon grant, 20% on each of October 1, 1998, October 1,
1999, October 1, 2000 and October 1, 2001.
The following table sets forth information concerning the number of options
owned by the Named Executives and the value of any in-the-money unexercised
options as of December 31, 1999. No options were exercised by the Named
Executives during fiscal 1999.
- --------------------------------------------------------------------------------------------------------------------
AGGREGATED FISCAL YEAR END OPTION VALUES
- --------------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Dollar Value of Unexercised in-the-Money
Unexercised Options at December 31, 1999: Options at December 31, 1999 (1):
---------------------------------------- ---------------------------------------
Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($)
Name
- -------------------------- ------------------- ------------------------ ------------------- ------------------------
Joseph K. Pagano 217,000(2) -0- 81,375 -0-
- -------------------------- ------------------- ------------------------ ------------------- ------------------------
Robert A. Reinhart 52,500(3) 12,500(4) 50,000 -0-
- -------------------------- ------------------- ------------------------ ------------------- ------------------------
Michael J. Tocci 43,200(5) 28,800 (5) 74,390 49,594
- -------------------------- ------------------- ------------------------ ------------------- ------------------------
21
- -----------------------------
(1) Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year-end
market value of the common stock. An Option is `in-the-money" if the fiscal
year-end fair market value of the Common Stock exceeds the option exercise
price. At December 31, 1999, the closing price per share of the Common
Stock as reported by the OTC Bulletin Board was $2.00.
(2) Stock options granted by the board of directors as of May 14, 1996, under
the Company's 1990 Stock Option Plan, having an exercise price of $1.625
per share, which options became immediately vested and exercisable from the
date of grant and, as amended, expire May 14, 2004.
(3) Incentive stock options granted pursuant to Agreements dated October 25,
1996 and April 20, 1998 of which 40,000 options have an exercise price of
$2.50 per share and 12,500 of which are exercisable at $2.25 per share.
Options to purchase 40,000 shares of common stock became immediately vested
and exercisable from the date of grant and expire October 25, 2001. Such
options were subsequently re-priced on January 16, 1998, to $0.75 per share
(the fair market value of the Common Stock at such time). The remaining
12,500 options became exercisable one year from the grant date and expire
five (5) years after the grant date.
(4) Incentive stock options granted pursuant to Agreement dated April 20, 1998,
having an exercise price of $2.25 per share, which options vest on April
20, 2000 and expire five (5) years after the date of grant.
(5) Incentive stock options granted pursuant to Agreement dated May 29, 1998,
having an exercise price of $.278 per share, which vest 20% upon grant, 20%
on each of October 1, 1998, October 1, 1999, October 1, 2000 and October 1,
2001.
No options were granted to the Named Executives during the fiscal year
ended December 31, 1999.
Employment Agreements
In conjunction with the CMT Merger, the Company assumed the employment
agreement with Thomas J. Livelli, pursuant to which Mr. Livelli serves as
President and Chief Executive Officer of CMT through May 2000. The employment
agreement provides for an annual base compensation of $135,000. The employment
agreement provides for Mr. Livelli's employment on a full-time basis and
contains a provision that the employee will not compete or engage in a business
competitive with the current or anticipated business of the Company during the
term of the employment agreement and for a period of one year thereafter.
In May 1999, Prime entered into an employment agreement with Joseph K.
Pagano to serve as the President of Prime. This replaces the consulting
agreement that Prime had with Mr. Pagano which was terminated at the same time.
The agreement is for an initial term of one year, contains a provision for an
automatic one year extension and provides for an annual base compensation of
$85,000.
In connection with the employment agreement, the termination date of
217,000 options previously granted to Mr. Pagano under the Company's 1990 Stock
Option Plan were extended an additional three years to May 24, 2004.
Director Compensation
Directors receive no cash compensation for serving on the Board of
Directors or for attending Board or Committee (if any) meetings. However,
non-employee directors are eligible to be granted non-qualified stock options
under the Company's 1990 Stock Option Plan and the 2000 Performance Equity Plan.
22
Nonqualified stock options may be exercised for up to 10 years from the date of
grant at such exercise prices as the Board of Directors may determine.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company did not have a Compensation Committee of its Board of Directors
during fiscal 1999. Decisions as to compensation during fiscal 1999 were made by
the Company's Board of Directors. Mr. Pagano, who is an officer of the Company,
and Messrs. Livelli and Malavarca, who are officers of CMT, served as members of
the Board of Directors during fiscal 1999. None of the other executive officers
of the Company served on the Board of Directors or the compensation committee of
any other entity during fiscal 1999.
Stock Option Plans
The Company adopted the 1990 Stock Option Plan (the "Stock Option Plan"),
which provides for grants of options to purchase up to 1,000,000 shares of
Common Stock and the 2000 Performance Equity Plan (the "Performance Equity
Plan"), which provides for grants of options to purchase up to 2,000,000 shares
of Common Stock. Under the Stock Option Plan and the Performance Equity Plan
options may be granted to employees, consultants, agents and other persons
deemed valuable to the Company or any of its subsidiaries. The Stock Option Plan
and the Performance Equity Plan permit the Board of Directors or the Committee
of the Stock Option Plan or Performance Equity Plan, as the case may be, to
issue incentive stock options ("ISOs"), as defined in Section 422 of the
Internal Revenue Code (the "Code"), and stock options that do not conform to the
requirements of that Code section ("non-ISOs"). The exercise price of each ISO
may not be less than 100% of the fair market value of the Common Stock at the
time of grant, except that in the case of a grant to an employee who owns
(within the meaning of Code Section 422) 10% or more of the outstanding stock of
the Company or any subsidiary (a "10% Stockholder"), the exercise price may not
be less than 110% of such fair market value. The exercise price of each non-ISO
also may not be less than 100% of the fair market value of the Common Stock at
the time of grant.
Under the Stock Option Plan, options may not be exercised prior to the
first anniversary, or on or after the tenth anniversary (fifth anniversary in
the case of an ISO granted to a 10% Stockholder) of their grant. Options may not
be transferred during the lifetime of the option holder. No stock options may be
granted under the Stock Option Plan after May 2000.
Under the Performance Equity Plan, the Committee may award stock
appreciation rights, restricted stock, deferred stock, stock reload options and
other stock-based awards in addition to stock options. The Stock Option Plan and
the Performance Equity Plan are administered by the Board of Directors and may
be administered by a Committee chosen by the Board of Directors. Subject to the
provisions of the Stock Option Plan and the Performance Equity Plan, the Board
of Directors or such Committee, as applicable, have the authority to determine
the individuals to whom the stock options are to be granted, the number of
shares to be covered by each option, the option price, the type of option, the
option period, the restrictions, if any, on the exercise of the option, the
terms for the payment of the option price and other terms and conditions.
Payment by option holders upon exercise of an option may be made (as determined
by the Board of Directors or the Committee) in cash, or, in certain instances,
by shares of Common Stock. Under the Performance Equity Plan, no more than
200,000 shares in the aggregate may be granted to any one holder in any one
calendar year.
Under the terms of the CMT Merger, the Company issued options to purchase
144,000 shares of its Common Stock under the Stock Option Plan to holders of
options to purchase shares of CMT's stock, which options had been granted under
the stock option plan of CMT. In addition, the Company reserved shares of its
Common Stock with respect to options to purchase up to an additional 273,800
shares of Common Stock for future grant under the Stock Option Plan for
employees of CMT. Of these reserved shares, options to purchase up to an
aggregate of 44,250 shares of Common Stock were granted January 1, 1999 under
the 1990 Plan to fourteen (14) employees of CMT. The terms of such options
23
provide for a five (5) year vesting period by which all the options shall become
exercisable. To the extent not exercised, the options shall expire on December
31, 2008. On January 1, 2000, options to purchase up to an aggregate of 22,850
shares of Common Stock were granted to eleven (11) employees of CMT. The terms
of such options provide for a five- (5) year vesting period by which all the
options shall become exercisable. To the extent not exercised or terminated, the
options shall expire on December 31, 2009.
At the year ended December 31, 1999, options to purchase an aggregate of
384,630 shares of the Company's Common Stock were outstanding under the Stock
Option Plan. At the year ended December 31, 1999, no options were outstanding
under the Performance Equity Plan.
The Company from time to time has also granted non-plan options to certain
officers, employees and consultants. Options to purchase an aggregate of 308,000
shares of the Company's Common Stock were outstanding at December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 7, 2000 (except as
otherwise noted in the footnotes), regarding the beneficial ownership of the
Company's Common Stock of: (i) each person or group known by the Company to own
beneficially more than five percent of the outstanding shares of the Company's
Common Stock; (ii) each director of the Company; (iii) the Named Executives; and
(iv) all directors and executive officers of the Company as a group. Except as
otherwise specified, the Company believes that all persons named in the chart
have sole voting and investment power over the shares listed.
Amount and Nature of Beneficial Percent of Class
Name of Beneficial Owner Ownership of Voting Securities
- -------------------------------------------- ------------------------------------ ----------------------------------
Frederick R. Adler 704,673(1) 11.31%
Joseph K. Pagano 1,313,950(2) 20.87%
Samuel A. Rozzi 467,525 7.69%
D.H. Blair Investment Banking Corp. 1,124,859(3) 18.50%
Robert A. Reinhart 52,500(4) *
Thomas Livelli 276,000 4.54%
Richard Malavarca 180,000 2.96%
Brett Fialkoff 0 *
All directors and officers as a group 2,994,648(5) 46.08%
(seven persons)
- ------------------------------
(*) Less than 1%.
(1) Includes options to purchase up to 150,000 shares of the Company's Common
Stock, at an exercise price of $0.75 per share.
(2) Includes options to purchase up to 217,000 shares of the Company's Common
Stock, at an exercise price of $1.625 per share.
24
(3) J. Morton Davis is an investment banker and sole shareholder of D.H. Blair
Investment Banking Corp. ("Blair"). The amount reported includes 8,500
shares owned by Mr. Davis' wife. Mr. Davis disclaims beneficial ownership
of the 8,500 shares owned by his wife. The information with respect to D.H.
Blair Investment Banking Corp. ("Blair") and J. Morton Davis is based upon
Amendment No. 7, dated May 1, 1996, to the Schedule 13D, dated January 31,
1992, filed by such persons with the Securities and Exchange Commission.
The Schedule 13D states that Blair shares voting and investment power over
1,124,859 shares, and Mr. Davis has sole voting and investment power over
such 1,124,859 shares.
(4) Includes options to purchase up to 52,500 shares of the Company's Common
Stock (of which 40,000 shares have an exercise price of $0.75 per share and
12,500 shares have an exercise price of $2.25 per share). Excludes options
to purchase 12,500 shares of Common Stock which are not presently
exercisable.
(5) Includes options to purchase up to an aggregate of 419,500 shares of the
Company's Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1998, the Company entered into a 180-day note payable agreement
with a bank for a maximum of $200,000, which note is collateralized by a
$200,000 certificate of deposit as well as a personal guarantee of Joseph K.
Pagano, the President and Chairman of the Board of the Company. In December
1998, the bank advanced the Company $160,000 under this agreement. During 1999,
the note was completely repaid.
On May 29, 1998, the Company consummated the CMT Merger pursuant to which a
wholly owned subsidiary of Prime merged with and into CMT. Under the terms of
the CMT Merger, all of the outstanding shares of capital stock of CMT were
converted into an aggregate of 1,611,000 shares of Common Stock, par value $.01
per share, of the Company, representing approximately 26.4% (after consummation
of the CMT Merger) of the Company's issued and outstanding Common Stock. Of the
shares issued pursuant to the CMT Merger, 393,000 and 202,500 shares of the
Company's Common Stock were issued to Joseph K. Pagano, the President and
Chairman of the Board of the Company, and Frederick R. Alder, a director of the
Company, respectively, each of whom was a stockholder of CMT at the time of the
CMT Merger.
At the time of the CMT Merger, there were loans outstanding from CMT to six
of its shareholders, in the aggregate principal amount of $500,000, as evidenced
by promissory notes from CMT to each such shareholder. Messrs. Pagano and Adler
were among these shareholders and, at the time of the CMT Merger, held
promissory notes in the principal amounts of $218,333 and $112,500,
respectively. These notes currently bear interest at a rate of 5% and mature May
1, 2001 (as adjusted in connection with the CMT Merger and subsequently).
25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
See Exhibit Index appearing later in this Report
(b) Report on Form 8-K.
None.
26
PRIME CELLULAR, INC. AND SUBSIDIARIES
Table of Contents
- ------------------------------------------------------------------------------
Page
Independent Auditors' Report F-1
Consolidated Financial Statements
Balance Sheets
December 31, 1999 and 1998 F-2 - F-3
Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997 F-4
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997 F-5
Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-22
Independent Auditors' Report
To the Board of Directors and Stockholders
Prime Cellular, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Prime Cellular,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1999, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Prime Cellular, Inc.
and Subsidiaries as of December 31, 1999 and 1998 and the results of its
operations and its cash flows for the years ended December 31, 1999, 1998 and
1997, in conformity with generally accepted accounting principles.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
February 17, 2000
F-1
PRIME CELLULAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
December 31,
---------------------------------
1999 1998
---------------------------------
Assets
Current Assets
Cash $ 125,954 $ 84,146
Certificate of deposit - restricted - 200,000
Investment securities 5,008,533 5,096,557
Accounts receivable - net of allowance for doubtful
accounts of $20,000 for 1999 and 1998 572,075 305,575
Unbilled services 109,809 23,799
Inventory 151,816 116,991
Prepaid expenses 14,968 8,728
------------- ---------------
5,983,155 5,835,796
------------- ---------------
Property, Plant and Equipment 1,759,290 1,522,516
Less: Accumulated depreciation and amortization 667,659 518,792
------------- ---------------
1,091,631 1,003,724
------------- ---------------
Other Assets
Investment securities 345,932 -
Investment securities receivable - 4,978,947
Security deposits 1,000 -
Deferred financing costs - net of accumulated amortization
of $617 and $365 for 1999 and 1998, respectively 6,964 7,216
------------- ---------------
353,896 4,986,163
------------- ---------------
$ 7,428,682 $ 11,825,683
============= ===============
F-2
PRIME CELLULAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
December 31,
---------------------------------
1999 1998
---------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Collateralized investment loan $ - $ 5,000,000
Note payable - bank - 160,000
Current maturities of long-term debt 88,761 25,533
Accounts payable and accrued expenses 315,433 427,313
Customer deposits 143,842 270,143
Unearned revenue 54,460 42,387
------------- ---------------
602,496 5,925,376
Long-Term Debt - net of current maturities 560,107 324,164
Stockholder Loans - net of unamortized discount
of $32,387 and $37,515 for 1999 and 1998,
respectively 531,988 501,860
------------- ---------------
1,694,591 6,751,400
------------- ---------------
Stockholders' Equity
Preferred Stock - $.01 par value, 5,000,000 shares
authorized - none issued - -
Common Stock - $.01 par value, 20,000,000 shares
authorized, 6,078,700 and 6,108,700 shares issued
and outstanding in 1999 and 1998, respectively 60,787 61,087
Additional paid-in capital 5,832,704 5,813,710
Accumulated (deficit) (159,400) (800,514)
------------- ---------------
5,734,091 5,074,283
------------- ---------------
$ 7,428,682 $ 11,825,683
============= ===============
See notes to consolidated financial statements.
F-3
PRIME CELLULAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
- -------------------------------------------------------------------------------
For the Years Ended
December 31,
-------------------------------------------------
1999 1998 1997
-------------------------------------------------
Revenue
Contract revenue $ 2,404,753 $ 928,686 $ 1,125,855
Sales of goods 1,511,828 1,198,547 1,054,335
------------- ------------- --------------
3,916,581 2,127,233 2,180,190
------------- ------------- --------------
Direct Costs
Contract revenue 1,057,478 815,947 696,195
Sales of goods 734,465 642,310 645,519
------------- ------------- --------------
1,791,943 1,458,257 1,341,714
------------- ------------- --------------
Income After Direct Costs
Contract revenue 1,347,275 112,739 429,660
Sales of goods 777,363 556,237 408,816
------------- ------------- --------------
2,124,638 668,976 838,476
------------- ------------- --------------
Other Operating Expenses
Contract revenue 724,344 699,977 610,388
Sales of goods 367,077 434,728 427,606
------------- ------------- --------------
1,091,421 1,134,705 1,037,994
------------- ------------- --------------
Research and Development
Contract revenue 5,484 38,307 10,000
Sales of goods 4,229 35,360 10,000
------------- ------------- --------------
9,713 73,667 20,000
------------- ------------- --------------
Income (Loss) from Segment Operations
Contract revenue 617,447 (625,545) (190,728)
Sales of goods 406,057 86,149 (28,790)
------------- ------------- --------------
1,023,504 (539,396) (219,518)
------------- ------------- --------------
Corporate Activities
Selling, general and administrative expenses (542,740) (278,274) -
Other income - - 44,375
Interest income 295,890 223,381 12,949
Interest expense (135,540) (104,385) (47,427)
------------- ------------- --------------
(382,390) (159,278) 9,897
------------- ------------- --------------
Income (Loss) Before Provision for Income Taxes 641,114 (698,674) (209,621)
Provision for Income Taxes - - -
------------- ------------- --------------
Net Income (Loss) $ 641,114 $ (698,674) $ (209,621)
============= ============= ==============
Net Income (Loss) Per Share
Basic .11 (.16) (.17)
------------- ------------- --------------
Diluted .10 (.16) (.17)
============= ============= ==============
See notes to consolidated financial statements.
F-4
PRIME CELLULAR, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock
--------------------------- Additional Retained
Shares Amount Paid-In Capital Earnings (Deficit) Total
---------------------------------------------------------------------------------------------
Balance - January 1, 1997 900,000 $ 9,000 $ (8,990)* $ 107,781 $ 107,791
Issuance of stock 900,000 9,000 241,000 - 250,000
Discount on stockholder loan - - 120,199 - 120,199
Contribution of shares back
to the Company (270,000) (2,700) 2,700 - -
Stock grants 81,000 810 21,690 - 22,500
Net (loss) - - - (209,621) (209,621)
------------ ---------- ------------- ------------ -------------
Balance - December 31, 1997 1,611,000 16,110 376,599 (101,840) 290,869
Options exercised 7,200 72 1,928 - 2,000
Recapitalization resulting
from merger 4,490,500 44,905 5,494,092 - 5,538,997
Adjustment of discount on
stockholder loans - - (58,909) - (58,909)
Net (loss) - - - (698,674) (698,674)
------------ ---------- ------------- ------------ -------------
Balance - December 31, 1998 6,108,700 61,087 5,813,710 (800,514) 5,074,283
Contribution of shares back
to the Company (30,000) (300) 300 - -
Adjustment of discount on
stockholder loans - - 18,694 - 18,694
Net income - - - 641,114 641,114
------------ ---------- ------------- ------------ -------------
Balance - December 31, 1999 6,078,700 $ 60,787 $ 5,832,704 $ (159,400) $ 5,734,091
============ ========== ============= ============ =============
* Negative additional paid-in capital results from the restatement of common
stock related to the issuance of shares resulting from the merger.
See notes to consolidated financial statements.
F-5
PRIME CELLULAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows Page 1 of 2
- -------------------------------------------------------------------------------
For the Years Ended
December 31,
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $ 641,114 $ (698,674) $ (209,621)
Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating
activities:
Depreciation 239,205 183,959 112,078
Amortization 252 190 175
Increase in allowance for doubtful accounts - 10,000 10,000
Accrued interest on stockholder loans 48,822 45,324 17,826
Stock-based compensation - - 22,500
(Increase) decrease in:
Accrued interest on investment securities 61,746 - -
Accounts receivable (266,500) (34,243) (16,428)
Unbilled services (86,010) 41,389 (31,578)
Inventory (34,825) 18,086 (57,375)
Prepaid expenses (6,240) (765) 14,713
Increase (decrease) in:
Accounts payable (111,880) 42,969 (44,374)
Customer deposits (126,301) (344,497) 614,640
Taxes payable - - (800)
Unearned revenue 12,073 (10,261) (72,072)
-------------- -------------- -------------
371,456 (746,523) 359,684
-------------- -------------- -------------
Cash Flows from Investing Activities
Acquisitions of property and equipment (327,112) (347,173) (447,936)
Cash acquired in connection with merger - 546,484 -
Purchase of certificate of deposit - (200,000) -
Redemption of certificate of deposit 200,000 - -
Purchase of investment securities (340,707) (5,014,578) -
Proceeds on sale of investment securities 5,000,000 - -
Payment of security deposit (1,000) - -
-------------- -------------- -------------
4,531,181 (5,015,267) (447,936)
-------------- -------------- -------------
See notes to consolidated financial statements.
F-6
PRIME CELLULAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows Page 2 of 2
- -------------------------------------------------------------------------------
For the Years Ended
December 31,
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
Cash Flows from Financing Activities
Net borrowings (repayments) on line of credit $ - $ (31,295) $ 5,605
Proceeds of notes payable - 160,000 100,000
Repayment of notes payable (160,000) - -
Payment of deferred financing costs - - (7,581)
Proceeds of long-term debt 350,000 - -
Repayments of long-term debt (50,829) (28,452) (16,754)
Loans from stockholders - - 517,150
Repayments of loans from stockholders - - (150,207)
Issuance of stock - - 250,000
Proceeds of collateralized investment loan - 5,000,000 -
Payment of collateralized investment loan (5,000,000) - -
Options exercised - 2,000 -
-------------- -------------- -------------
(4,860,829) 5,102,253 698,213
-------------- -------------- -------------
Increase (Decrease) in Cash 41,808 (659,537) 609,961
Cash - beginning 84,146 743,683 133,722
-------------- -------------- -------------
Cash - end $ 125,954 $ 84,146 $ 743,683
-------------- -------------- -------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year:
Interest $ 86,718 $ 58,742 $ 9,565
-------------- -------------- -------------
Income taxes $ 863 $ 11,935 $ -
-------------- -------------- -------------
Non-cash investing and financing activities:
Land and building acquired with mortgage $ - $ - $ 287,600
-------------- -------------- -------------
In connection with the merger on May 29,
1998, the following assets (liabilities) were
acquired by the acquiring entity for
accounting purposes:
Cash $ 546,484
Investment in U.S. Treasury Note 5,060,926
Other current assets 7,963
Property and equipment 57,704
Accumulated depreciation (12,965)
Accounts payable and accrued expenses (121,115)
--------------
$ 5,538,997
---------------
See notes to consolidated financial statements.
F-7
PRIME CELLULAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
1 - Organization of the Company and Nature of its Operations
On May 29, 1998, Prime Cellular, Inc. ("Prime"), a Delaware corporation,
consummated a merger (the "Merger") with Cell & Molecular Technologies,
Inc. and subsidiary, 580 Marshall St., L.L.C. ("CMT"), another Delaware
corporation, pursuant to which a wholly-owned subsidiary of Prime was
merged with and into CMT (collectively, Prime and CMT are referred to
hereinafter as the "Company"). Under the terms of the Merger, all of the
outstanding shares of capital stock of CMT were converted into an aggregate
of 1,611,000 shares of common stock, par value of $.01 per share, of Prime,
representing approximately 26.4% (after consummation of the Merger) of
Prime's issued and outstanding common stock. This transaction was accounted
for as a reverse acquisition under the purchase method of accounting
whereby CMT was the acquirer for accounting purposes. The historical
consolidated financial statements prior to May 29, 1998 are those of CMT
with all common stock data restated into the equivalent capital structure
of Prime.
The Company is comprised of two separate divisions (segments) that provide
goods and services in the domestic biotechnology and pharmaceutical
industries. The Specialty Media Division ("SM") is a manufacturer and
wholesaler of cell culture media and reagents. The Molecular Cell Science
Division ("MCS") provides research services to pharmaceutical companies and
other molecular and cell biology research and development entities.
2- Summary of Significant Accounting Policies
a. Principles of Consolidation - The consolidated financial statements
include the accounts of Prime Cellular, Inc. and its wholly-owned
subsidiaries after elimination of all intercompany accounts and
transactions.
b. Cash and Cash Equivalents - Cash and cash equivalents include liquid
investments with maturities of three months or less at the time of
purchase.
c. Investment Securities - Investment securities consist of U.S. Treasury
Notes and U.S. Treasury Notes Receivable from counter parties in
repurchase agreements. All investment securities are defined as
held-to-maturity under the provisions of Statement of Financial
Accounting Standards 115, Accounting for Certain Investments in Debt
and Equity Securities and, as such, have been reported at amortized
cost plus accrued interest.
d. Inventory - Inventory, consisting of cell culture media, reagents and
related packaging material, is stated at the lower of cost (first-in,
first-out method) or market.
e. Property, Plant and Equipment - Property, plant and equipment are
stated at cost. Depreciation is provided on the straight-line and
accelerated methods over the estimated useful lives of the assets,
which range from three to forty years. Amortization of leasehold
improvements is provided on the straight-line basis over the lesser of
the estimated useful life of the asset or the remaining lease term.
Repairs and maintenance which do not extend the useful lives of the
related assets are expensed as incurred.
Continued
F-8
f. Deferred Financing Costs - Financing costs, principally incurred in
connection with the mortgage on Company premises, are amortized on a
straight-line basis over the duration of the related loan.
g. Revenue Recognition - The Company records revenues from fixed-price
contracts extending over more than one accounting period on a
percentage-of-completion basis. Percentage-of- completion is
determined based on the proportion of completed costs to total
anticipated costs on each contract. If it is determined that a loss
will result from the performance of a contract, the entire amount of
estimated loss is charged against income in the period in which the
determination is made. In general, prerequisites for billings are
established by contractual provisions including predetermined payment
schedules, the achievement of contract milestones or submission of
appropriate billing detail. Unbilled services arise when services have
been rendered but clients have not been billed. Similarly, unearned
revenue represents amounts billed in excess of revenue recognized.
h. Research and Development Costs - Research and development costs are
expensed as incurred unless they are reimbursed under specific grants
in which case the grant reduces the cost of research and development.
Total expenditures on research and development for 1999, 1998 and 1997
were approximately $291,000, $213,000 and $20,000, respectively, of
which approximately $281,000 and $140,000 were refunded by government
agencies for 1999 and 1998, respectively.
i. Income Taxes - The Company accounts for certain income and expense
items differently for financial reporting and income tax purposes.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and income tax basis of
assets and liabilities and the tax effect of net operating loss and
tax credit carryforwards applying the enacted statutory tax rates in
effect for the year in which the differences are expected to reverse.
j. Advertising Costs - All costs relating to advertising and marketing
are expensed in the period incurred. Advertising costs during 1999,
1998 and 1997 were $59,539, $24,099 and $12,726.
k. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
l. Earnings Per Share - The accompanying financial statements include
earnings per share calculated as required by Financial Accounting
Standards No. 128 Earnings Per Share which replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Basic earnings per share is calculated by dividing
net income (loss) by the weighted average number of shares of common
stock outstanding. Diluted earnings per share include the effects of
securities convertible into common stock, consisting of stock options,
to the extent such conversion would be dilutive. Potential common
stock was excluded from the computation for the years ended December
31, 1998 and 1997 because of their anti-dilutive effect.
Continued
F-9
The following is a computation of the weighted average shares
outstanding:
1999 1998 1997
--------------------------------------
Basic 6,102,700 4,308,180 1,255,500
Effect of dilutive options 287,166 - -
---------- --------- ---------
Diluted 6,389,866 4,308,180 1,255,500
========== ========= =========
m. Stock-Based Compensation - Statement of Financial Accounting Standards
No. 123 Accounting for Stock-Based Compensation, encourages, but does
not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. APB No. 25 requires no
recognition of compensation expense for the stock-based compensation
arrangements provided by the Company where the exercise price is equal
to the market price at the date of the grants.
n. Segments - The accompanying financial statements include segment
disclosure as required by Financial Accounting Standards No. 131
Disclosures about Segments of an Enterprise and Related Information,
which expands and modifies disclosures but has no impact on
consolidated financial position or results of operations or cash
flows.
o. New Accounting Pronouncement - In June, 1998, the FASB issued SFAS No.
133 Accounting for Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value, with the
potential effect on operations dependent upon certain conditions being
met. The statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Management does not believe there
will be a significant impact on the Company upon adopting this
standard.
p. Reclassification - Certain amounts from the prior years have been
restated to conform to the current year's presentation. These
reclassifications have no effect on previously reported income.
3 - Inventory
Inventory consists of the following:
December 31,
---------------------------
1999 1998
---------------------------
Finished Goods $ 65,075 $ 55,784
Packaging Materials 39,523 31,566
Raw Materials 47,218 29,641
----------- ----------
$ 151,816 $ 116,991
=========== ==========
Continued
F-10
4 - Repurchase Agreement
On November 20, 1998, the Company bought a U.S. Treasury Note for
$4,942,187 plus accrued interest of $11,050 and simultaneously resold it
for $5,000,000 pursuant to a Repurchase Agreement ("Repo") with Goldman,
Sachs & Co. The Repo requires the Company to repurchase the security on
February 26, 1999 for $5,000,000 plus accrued interest at 4.7%. Pursuant to
Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, the Company has accounted for the Repo as collateralized debt
and, therefore, has reported the security as an investment security
receivable and the related $5,000,000 obligation as a collateralized
investment loan. This investment security is currently held by the Company
as of December 31, 1999 and is included in investment securities -
non-current (see Note 5 - Investment Securities).
5 - Investment Securities
At December 31, 1999, the Company held investments in securities, which
were classified as held-to-maturity. Fair values are based on quoted market
prices, including accrued interest.
Amortized Cost Fair Value
--------------------------
December 31, 1999
Investment Securities - current
U.S. Treasury Note - face value of
$5,000,000 - interest at 4% - due
October 31, 2000 $ 4,975,200 $ 4,917,200
Accrued interest 33,333 -----------
-----------
5,008,533
-----------
Investment Securities - non-current
U.S. Treasury Note - face value of
$340,000 - interest at 5.5% - due
August 31, 2001 339,681 $ 335,964
-----------
Accrued interest 6,251
-----------
345,932
-----------
Net Book Value - held-to-maturity
securities $ 5,354,465
------------
Continued
F-11
Amortized Cost Fair Value
-------------------------------------
December 31, 1998
Investment Securities - current
U.S. Treasury Note - face value of $5,000,000 -
interest at 5.875% - due February 28, 1999 $ 4,997,180 $ 5,009,375
--------------
Accrued interest 99,377
---------------
5,096,557
Investment Securities Receivable - non-current
U.S. Treasury Note - face value of $5,000,000 -
interest at 4.0000% - due October 31, 2000 4,945,522 $ 4,946,875
--------------
Accrued interest 33,425
---------------
4,978,947
Net Book Value - held-to-maturity securities $ 10,075,504
---------------
6 - Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31, Estimated
-------------------------------
1999 1998 Useful Lives
--------------------------------------------------
Land $ 90,000 $ 90,000 -
Building and Improvements 325,480 325,480 39-40 years
Machinery and Equipment 1,258,856 934,544 5-17 years
Leasehold Improvements - 90,338 Lease life
Furniture and Fixtures 84,954 82,154 5-10 years
------------- -------------
1,759,290 1,522,516
Less: Accumulated depreciation
and amortization 667,659 518,792
------------- -------------
$ 1,091,631 $ 1,003,724
-------------- --------------
Depreciation and amortization expense charged to operations is $239,205,
$184,149 and $112,253 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Continued
F-12
7 - Note Payable - Bank
In October, 1998, the Company entered into a 180-day note payable agreement
with a bank for a maximum of $200,000. In December, 1998, the bank advanced
$160,000 to the Company under this agreement. Interest is stated at 6 1/4%
and is payable monthly. During February, 1999, $60,000 was repaid. The
principal and any accrued interest were due April 1, 1999 and the note was
renewed for an additional 90 days. This note was collateralized by a
$200,000 certificate of deposit as well as a personal guarantee by one of
the officers of the Company. This note was paid in full in 1999.
8 - Retirement Plan
During 1999, the Company adopted a 401(k) retirement plan for all eligible
employees who meet certain eligibility criteria such as age, term of
employment, etc. Eligible employees may elect to contribute to the plan a
portion of their gross salary (subject to federal tax law). The Company
does not contribute to the plan.
9 - Long-Term Debt
Long-term debt consists of the following:
December 31,
---------------------------
1999 1998
---------------------------
Mortgage Payable - payable in 240 monthly installments of
$2,610 to February, 2017, including a variable interest rate
which is adjusted every three years (1999 rate was 9%) -
secured by the Company's building in Phillipsburg, New Jersey $ 272,864 $ 277,488
Notes Payable - bank - payable in 60 monthly installments of
$2,132 to April, 2002, including interest at 10% - guaranteed by
two stockholders and secured by a stockholder's personal
residence 52,598 71,863
Notes Payable - bank - payable in 60 monthly installments of
$7,223 to August, 2002, including interest at 8.75% - unsecured 323,406 -
Other - 346
----------- -----------
Less: Current maturities 648,868 349,697
88,761 25,533
----------- -----------
$ 560,107 $ 324,164
----------- -----------
Continued
F-13
Principal maturities of long-term debt over the next five years are as
follows;
December 31, 2000 $ 88,761
2001 97,237
2002 88,277
2003 87,835
2004 53,495
Thereafter 233,263
-----------
$ 648,868
-----------
10 - Stockholder Loans
Five stockholders and one of their related parties advanced $500,000, in
aggregate, to the Company during 1997. The promissory notes bear 5% simple
interest, payable at maturity, and had an original due date of July 14,
2002. As the promissory notes bear a below market rate of interest,
additional interest was imputed on the notes to approximate the Company's
current available financing rate of 10%.
As a result of the merger, the above loans' maturity dates have been
accelerated to May 1, 2000. The imputed interest has been adjusted in 1998,
as a result of the maturity date acceleration thereby reducing the discount
by $58,909. This was charged to additional paid-in capital as an adjustment
to the original $120,199 credited to additional paid-in capital in 1997
which related to the purchase of stock.
During 1999, the stockholders agreed to extend the above loans' maturity
date to May 1, 2001. The imputed interest has been adjusted as a result of
the maturity date extension thereby increasing the discount by $18,694.
This amount was added to additional paid-in capital as an adjustment to the
original $120,199 (as adjusted by $58,909 in 1998) credited to additional
paid-in capital in 1997, which related to purchase of stock.
At December 31, 1999, the balance of stockholder loans, net of unamortized
discount of $32,387, is $531,988.
11 - Commitments
In May, 1997, the Company entered into an employment agreement with its
subsidiary's President/CEO. The agreement is for an initial term of three
years at an annual base compensation of $135,000 and contains a provision
for an automatic one-year extension, unless written notice is received by
either party.
The Company has, from time-to-time, received various loans from its
stockholders to fund operations.
Continued
F-14
The Company subleased its former administrative office and executive
research laboratory from a stockholder of the Company. The underlying lease
expired in November, 1999. However, the Company entered into a termination
agreement with the landlord effective April 30, 1999. Rent payments are
made directly to the landlord on behalf of the officer of the Company.
Rental expense of $124 (as adjusted for credits received from the
landlord), $15,840, and $17,444 was incurred under sublease for the years
ended December 31, 1999, 1998 and 1997, respectively.
The Company subleases executive office space from the Company's president
on a month-to- month basis. Rental expense was $26,868 and $10,500 for the
years ended December 31, 1999 and 1998, respectively. The Company entered
into a six-month lease for additional office space on December 1, 1999 at
the rate of $1,000 per month.
In May, 1999, Prime entered into an employment agreement with Joseph K.
Pagano ("Pagano") to serve as the president of Prime. This replaces the
consulting agreement that Prime had with Pagano which was terminated at the
same time. The agreement is for an initial term of one year at an annual
base compensation of $85,000 and contains a provision for an automatic
one-year extension.
In connection with the employment agreement, the termination date of
217,000 options previously granted to Pagano under the Company's 1990 Stock
Option Plan were extended an additional three years to May 24, 2004. In
accordance with SFAS 123, the additional compensation recognized as of the
modification date, if the Company had accounted for its stock option plans
under the fair value method, would have been $45,570, which was estimated
using the Black- Scholes pricing model, with the following weighted average
assumptions:
Before After
Modification Modification
--------------------------------
Expected life of options 2 years 5 years
Risk-free interest rate 5% 5%
Volatility of stock 158% 158%
Expected dividend yield - -
12 - Income Taxes
There was no current or deferred tax provision for the years ended December
31, 1999, 1998 and 1997.
Deferred taxes reflect the tax effects of temporary differences between the
amounts of assets and liabilities for financial reporting and the amounts
recognized for income tax purposes as well as the tax effects of net
operating loss and tax credit carryforwards. The significant components of
deferred tax assets are as follows:
Continued
F-15
December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
Net Operating Loss Carryforward $ 342,000 $ 444,000 $ 64,000
Depreciation and Other Temporary Differences (7,000) 21,000 11,000
------------- ------------ -----------
335,000 465,000 75,000
Less: Valuation allowance 335,000 465,000 75,000
------------ ------------ -----------
$ - $ - $ -
------------ ----------- -----------
Management believes that, it is not more likely than not, that the
remaining deferred tax assets will be realized.
The provision for income taxes differs from the amount using the statutory
federal income tax rate (34%) as follows:
December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
At Statutory Rates $ 218,000 $ (238,000) $ (64,000)
(Benefit) of net operating loss carryforward
not previously recognized (199,000) - -
Decrease in beginning of year valuation
allowance due to changes in circumstances
reflecting on the realization of deferred tax
assets (19,000) - -
Loss for which no benefit was recorded - 238,000 75,000
No Federal Income Tax on S Corporation - - (17,000)
Other - primarily state taxes - - 6,000
------------ ------------ -----------
$ - $ - $ -
------------ ------------ -----------
The Company has available to offset future income taxes a net operating
loss of approximately $1,003,000 as follows:
Expiration Amount Type
------------------------------------------------------------------
May 31, 2009 $ 66,861 SRLY
2010 106,918 SRLY
2011 119,292 SRLY
2012 226,917 SRLY
2012 45,169 Non-SRLY
December 31, 2012 6,328 Non-SRLY
2013 431,684 Non-SRLY
-------------
$ 1,003,169
Continued
F-16
13 - Percentage-of-Completion
The following is a summary of assets and liabilities related to long-term
contracts which are recognized on the percentage-of-completion basis:
December 31,
---------------------------
1999 1998
---------------------------
Contract Receivables
Billed - contracts in progress $ 371,518 $ 114,814
Unbilled 109,809 23,799
---------- -----------
481,327 138,613
Less: Allowance for doubtful collections - -
---------- -----------
$ 481,327 $ 138,613
---------- -----------
Unearned Revenue
Costs incurred on uncompleted contracts $ 329,637 $ 131,150
Estimated earnings 339,412 48,642
---------- -----------
669,049 179,792
Less: Billings to date 613,700 198,380
---------- -----------
$ 55,349 $ (18,588)
---------- -----------
December 31,
---------------------------
1999 1998
---------------------------
Included in the accompanying balance sheets
under the following captions:
Unbilled services $ 109,809 $ 23,799
Unearned revenue (54,460) (42,387)
---------- -----------
$ 55,349 $ (18,588)
---------- -----------
The Company uses estimates of remaining costs to complete each contract to
determine the revenue and profitability on each contract. The estimates are
reevaluated periodically and, as such, reevaluations may, in the future,
lead to changes in the rate of profitability on each contract.
There were no contracts where the expected costs exceeded the contract
price. All contract receivables are due within one year.
Continued
F-17
14 - Stock Option Plan
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 the 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.
The pro forma information required by SFAS 123 regarding net income and
earnings per share has been presented as if the Company had accounted for
its stock option plans under the fair value method. The fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
pricing model with the following weighted average assumptions:
1999 1998
-----------------------------
Assumptions
Expected life of options 5 years 5 years
Risk free interest rate 5% 5%
Volatility of stock 172% 237%
Expected dividend yield - -
The weighted average fair value of the options granted during 1999 and 1998
was $42,038 and $287,390, respectively. Had the fair value of the options
been amortized to expense over the related service period, the pro forma
impact on earnings of the stock-based compensation for the options under
the provision would have been as follows:
1999 1998
-----------------------------
Net Income (Loss)
As reported $ 641,114 $ (698,674)
Pro forma 540,514 (914,045)
Diluted Earnings Per Share
As reported .10 (.16)
Pro forma .08 (.21)
In accordance with SFAS 123, the weighted average fair value of stock
options granted is required to be based on a theoretical statistical model
using the preceding assumptions. In actuality, the Company's stock options
do not trade on a secondary exchange and, therefore, the employees and
directors cannot derive any benefit from holding the stock options under
these plans without an increase in the market price of Company stock. Such
an increase in stock price would benefit all stockholders commensurately.
Continued
F-18
As discussed in Note 11, the Company extended the termination date of
options previously granted to the Company's president.
Presented below is a summary of stock option plan activity for the years
shown:
Weighted Weighted
Average Average
Exercise Options Exercise
Options Price Exercisable Price
-------------------------------------------------------------
Balance - December 31, 1996 - $ -
Granted 144,000 .28
-----------
Balance - December 31, 1997 144,000 $ .28 28,800 $ .28
Granted 293,000 .95
Transferred through merger 257,000 1.49
Exercised (7,200) .28
Canceled (28,800) .28
-----------
Balance - December 31, 1998 658,000 1.05 468,200 1.16
Granted 44,250 1.00
Canceled (9,620) 1.00
-----------
Balance - December 31, 1999 692,630 $ 1.05 539,866 $ 1.12
-----------
The following summarizes information for options currently outstanding and
exercisable at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Number Life Price Number Price
---------------------------------------------------------------------
Range of Prices
$ .28 108,000 2 years $ .28 64,800 $ .28
.75 290,000 2 years .75 223,300 .75
1.00 34,630 9 years 1.00 4,266 1.00
1.63 217,000 4 years 1.63 217,000 1.63
2.00 18,000 3 years 2.00 18,000 2.00
2.25 25,000 2 years 2.25 12,500 2.25
---------- ----------
692,630 3 years $1.05 539,866 $ 1.12
---------- ----------
Continued
F-19
15 - Segment Information
As described in Note 1, the Company has two reportable segments which are
organized along its divisional lines. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on profit or
loss before interest income, expense and income taxes. The Company accounts
for inter- segment sales and transfers, if any, as if the transactions were
to third parties, that is at current market prices.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technologies and marketing strategies.
December 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
Contract Revenue and Sales
MCS $ 2,456,687 $ 930,686 $ 1,125,855
SM 1,529,902 1,238,343 1,054,335
-------------- -------------- --------------
$ 3,986,589 $ 2,169,029 $ 2,180,190
-------------- -------------- --------------
Income (Loss) Before Taxes
MCS $ 599,373 $ (678,341) $ (190,728)
SM 424,131 138,945 (28,790)
-------------- -------------- --------------
$ 1,023,504 $ (539,396) $ (219,518)
-------------- -------------- --------------
Depreciation and Amortization
MCS $ 165,558 $ 137,795 $ 82,502
SM 64,421 41,383 29,751
-------------- -------------- --------------
$ 229,979 $ 179,178 $ 112,253
-------------- -------------- --------------
Segment Assets
MCS $ 1,128,317 $ 811,313 $ 1,520,920
SM 781,124 639,248 507,537
-------------- -------------- --------------
$ 1,909,441 $ 1,450,561 $ 2,028,457
-------------- -------------- --------------
Expenditures for Long-Lived Assets
MCS $ 202,885 $ 264,896 $ 368,778
SM 118,017 82,277 366,758
-------------- -------------- --------------
$ 320,902 $ 347,173 $ 735,536
-------------- -------------- --------------
Continued
F-20
Essentially all revenue earned for the years ended December 31, 1999, 1998
and 1997 by the Company are attributable to the United States, the
Company's country of domicile. All long-lived assets of the Company are
located in the United States.
The following is a reconciliation of the contract revenues and sales, loss,
interest income and expense, depreciation and amortization and assets
segment items disclosed above to the amounts reported on the consolidated
financial statements:
December 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
Contract Revenues and Sales
Total contract revenues and sales for
reportable segments $ 3,986,589 $ 2,169,029 $ 2,180,190
Elimination of intersegment revenues
and sales (70,008) (41,796) -
-------------- -------------- --------------
$ 3,916,581 $ 2,127,233 $ 2,180,190
-------------- -------------- --------------
Income (Loss) Before Taxes
Total income (loss) for reportable segments $ 1,023,504 $ (539,396) $ (219,518)
Corporate income and expenses
unallocated to segments 382,390 (159,278) 9,897
-------------- -------------- --------------
$ 641,114 $ (698,674) $ (209,621)
-------------- -------------- --------------
Depreciation and Amortization
Total depreciation and amortization for
reportable segments $ 229,979 $ 179,178 $ 112,253
Corporate depreciation and amortization
unallocated to segments 9,478 4,971 -
-------------- -------------- --------------
$ 239,457 $ 184,149 $ 112,253
-------------- -------------- --------------
Assets
Total assets for reportable segments $ 1,909,441 $ 1,450,561 $ 2,028,457
Corporate assets unallocated to segments 5,519,241 10,375,122 -
-------------- -------------- --------------
$ 7,428,682 $ 11,825,683 $ 2,028,457
-------------- -------------- --------------
Continued
F-21
16 - Significant Customers and Concentrations of Credit Risk
For the years ended December 31, 1999, 1998 and 1997, the Company had
significant sales and receivable balances from major customers in the
pharmaceutical and biotechnology industries and academia as follows:
................. Approximate Year-to-Date .................
December 31, 1999 December 31, 1998 December 31, 1997
---------------------------------------------------------------------------------------
Percentage Percentage Percentage
Sales of Total Sales of Total Sales of Total
------------------------------------------------------------------------------------
Significant Customer
A - segment MCS $ 1,365,139 35% $ 241,000 11% $ 528,000 24%
B - segment SM - - 280,000 13 229,000 11
----------- ----- ----------- ------ ----------- -----
$ 1,365,139 35% $ 521,000 24% $ 757,000 35%
----------- ----- ----------- ------ ----------- -----
............ Approximate Value at Year End ..............
December 31, 1999 December 31, 1998
-----------------------------------------------------------
Accounts Accounts
Receivable Percentage Receivable Percentage
(Net) * of Total (Net) * of Total
--------------------------------------------------------
Significant Customer
A $ - -% $ 46,000 14%
B 249,205 40 - -
C 87,571 14 - -
D - - 40,000 12
E - - 33,000 10
F - - 66,000 20
----------- ----- ----------- ------
$ 336,776 54% $ 185,000 56%
=========== ===== =========== ======
*Accounts receivable (net) includes billed accounts receivable and unbilled
services less unearned revenue.
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade accounts receivable. The
Company placed its cash with high credit quality institutions. At times,
balances may be in excess of the FDIC insurance limit. The Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk
exposure is limited.
F-22
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.
Dated: March 30, 2000
By: /s/ Robert A. Reinhart
---------------------------------------
Robert A. Reinhart, Chief Financial
Officer and Principal Accounting Officer
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 (Principal Executive March 30, 2000
- ------------------------------------- Officer)
Joseph K. Pagano
/s/ Robert A. Reinhart Chief Financial Officer, Treasurer, March 30, 2000
- ------------------------------------ Secretary and Vice President (Principal
Robert A. Reinhart Financial Officer and Principal Accounting
Officer)
/s/ Frederick R. Adler Director March 30, 2000
- ------------------------------------
Frederick R. Adler
/s/ Samuel Rozzi Director March 30, 2000
- ------------------------------------
Samuel Rozzi
/s/ Richard Malavarca Director March 30, 2000
- ------------------------------------
Richard Malavarca
/s/ Thomas Livelli Director March 30, 2000
- ------------------------------------
Thomas Livelli
/s/ Brett Fialkoff Director March 30, 2000
- ------------------------------------
Brett Fialkoff
50
EXHIBIT INDEX
---------------
Incorporated
Exhibit By Reference from No. in Document
Number Description Document Page
- ------ ----------- -------- ----
3.1 Certificate of Incorporation, as amended A Exhibit 3.1
3.2 By-laws of the Company A Exhibit 3.2
10.1 1990 Stock Option Plan A Exhibit 10.1
10.2 Consulting Agreement dated July 2, 1991, among B Exhibit 10.2
the Company, Prime Cellular of Florida, Inc.
and Joseph K. Pagano (the "Consulting
Agreement")
10.3 Amendment to Consulting Agreement B Exhibit 10.3
10.4 Agreement and Plan of Merger, dated as of May C Exhibit 2.1
14, 1996, by and among the Company, Prime
Cellular Acquisition Corp., Bern Associates,
Inc. and the stockholders of Bern
10.5 Registration Rights Agreement, dated June C Exhibit 10.1
10, 1996, between Registrant and the Bern
Stockholders
10.6 Escrow Agreement, dated June 10, 1996, between C Exhibit 10.2
Registrant and the Bern Stockholders
10.7 Indemnification Agreement, dated June 10, 1996 C Exhibit 10.3
between Registrant and the Bern Stockholders
10.8 Form of Amendment to Merger Agreement, dated D Exhibit 10.9
June 11, 1997
10.9 Form of Settlement Agreement, dated August 28, D Exhibit 10.10
1997
10.10 Agreement and Plan of Merger, dated as of May E Exhibit 2
29, 1998, by and among the Company, CMT
Acquisition Corp., Cell & Molecular
Technologies, Inc. and the stockholders of
Cell & Molecular Technologies, Inc.
10.11 Mortgage dated February 6, 1997, with respect to F Exhibit 10.11
premises located at 580 Marshall Street,
Phillipsburg, NJ 08865, assumed by the Company
in connection with the CMT Merger
10.12 Form of Employment Agreement dated May 22, F Exhibit 10.12
1997 between Cell & Molecular Technologies,
Inc. and Thomas Livelli
10.13 Form of Amendment to Employment Agreement dated G Exhibit 10.13
as of May 29, 1998 between Cell & Molecular
Technologies, Inc. and Thomas Livelli
10.14 Employment Agreement between Joseph K. Pagano Filed
and the Company Herewith
21 List of Subsidiaries Filed
Herewith
27.1 Financial Data Schedule Filed
Herewith
99 Risk Factors Filed
Herewith
A. Company's Registration Statement on Form S-18 (Registration No.
33-35537-NY)
B. Company's Annual Report on Form 10-K for the fiscal year ended May 31,
1992.
C. Company's Report on Form 8-K dated June 11, 1996.
D. Company's Annual Report on Form 10-K for the fiscal year ended May 31,
1997.
E. Company's Report on Form 8-K for the event dated May 29, 1998.
F. Company's Report on Form 10-K for the fiscal year ended December 31, 1998.
G. Company's Report on Form 10-K/A for the fiscal year ended December 31,
1998.