SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended May 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period of _________________to ______________
Commission file number:0-18700
PRIME CELLULAR, INC.
(exact name of Registrant as specified in its charter)
Delaware 13-3570672
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 First Stamford Pl., Stamford, CT 06902
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (203)327-3620
Securities registered pursuant to Section 12(b) of the Act
None.
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
On July 31, 1996, the aggregate market value of the shares of voting stock of
the Registrant held by non-affiliates was approximately $21,447,000, based on
the average of the bid and ask prices as reported by the OTC Bulletin Board of
$5.25.
As of July 31, 1996, 8,400,000 shares of the Registrant's common stock were
outstanding.
<PAGE>
Documents incorporated by reference: Certain portions of the Registrant's
definitive Proxy Statement relating to the Registrant's 1996 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A of the Securities Exchange
Act of 1934 with the Securities and Exchange Commission, are incorporated by
reference into Part III of this Report.
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<PAGE>
TABLE OF CONTENTS
PART I PAGE
- ------ ----
Item 1 Business .................................................. 3
Item 2 Properties ................................................ 4
Item 3 Legal Proceedings ......................................... 4
Item 4 Submission of Matters to a Vote of Stockholders ........... 5
PART II
- -------
Item 5 Market for Registrant's Common Stock and
Related Stockholder Matters ............................... 5
Item 6 Selected Financial Data ................................... 6
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 6
Item 8 Financial Statements and Supplementary Data ............... 8
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................... 8
PART III
- --------
Item 10 Directors and Executive Officers of the Registrant ........ 9
Item 11 Executive Compensation .................................... 9
Item 12 Security Ownership of Certain Beneficial Owners
and Management ........................................... 9
Item 13 Certain Relationships and Related Transactions ............ 9
PART IV
- -------
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ............................................... 9
Exhibit Index ........................................................... 10
Signatures .............................................................. 11
Index to Consolidated Financial Statements .............................. F-1
-3-
<PAGE>
Item 1. BUSINESS
Prime Cellular, Inc. (together with its wholly-owned subsidiary, "the
Company") was organized in May 1990 to provide management services, including
business planning, marketing, engineering, design and construction consulting
services, to rural service area ("RSA") cellular telephone licensees. The
Company intended to serve RSA markets characterized by both population growth
potential and proximity to metropolitan statistical area ("MSA") markets,
primarily in the Northeast, Southeast and Midwest. The Company anticipated that
it would enter into management agreements in such markets, and receive certain
fixed and incentive management fees, construction consulting and service fees,
and a termination fee based upon market value of a particular system upon sale.
The Company intended to assist RSA licensees in constructing and operating
cellular systems, which in certain cases might have entailed providing
construction and equipment financing. The Company also considered acquiring
interests in cellular licenses.
Preferences of owners of construction permits and the deterioration in
general economic conditions subsequent to the Company's initial public offering
in early August 1990 negatively impacted the Company's business plan. The
Company found that RSA owners interested in retaining management services were
unwilling to enter into management contracts on terms which, in management's
opinion, were economically viable for the Company. Several RSA owners required
significant capital injections by the Company as a condition to entering into a
management contract. The Company further encountered many RSA owners who were
unwilling to enter into management contracts and build the cellular system for
their RSA until all possibilities for the sale of their RSA were exhausted. The
difficulties the Company encountered were compounded by the general downturn in
economic conditions and tightening credit markets which limited sale options
available to RSA owners, especially given their unrealistic valuation
expectations, and made acceptable financing for construction and operation
difficult to obtain as well. At the same time, the tight credit markets
adversely affected the Company's ability to obtain the financing necessary to
make capital injections required by certain RSA owners as a condition to
obtaining management contracts or to acquire interests in cellular licenses.
Accordingly, the Company determined that it was prudent for it to explore
other uses for the Company's funds. The Company initially analyzed potential
investments in debt and equity instruments of entities involved in either the
cellular or related industries and subsequently expanded its search to include
entities involved in non-cellular operations. Since 1991, the Company has
retained an outside consultant, who is also a shareholder, under an agreement
renewable each July to assist it in finding new business opportunities for the
Company. Fees paid to this consultant included in general and administrative
costs totaled $75,000 for each of the years ended May 31, 1996, 1995 and 1994.
This agreement was renewed in June 1995 and the consultant was elected President
of the Company as well as a board member.
On June 11, 1996 (the "Closing"), the Company's wholly-owned subsidiary
consummated the merger with Bern Associates, Inc. pursuant to that certain
Merger Agreement, dated May 14, 1996 (the "Merger Agreement"), by and among the
Company, Prime Cellular Acquisition Corp.,
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a wholly-owned subsidiary of the Company (the "Subsidiary"), Bern Associates,
Inc. ("Bern") and all of the stockholders of Bern (the "Bern Stockholders").
Bern was merged with and into the Subsidiary and all of the outstanding shares
of common stock of Bern were converted into an aggregate of 4,100,000 shares of
Common Stock, par value $.01 per share, of Registrant (the "Merger"),
representing approximately 49.3% (after consummation of the transaction) of the
Company issued and outstanding Common Stock (the "Merger Shares"). Bern
Communications is the sole operating entity of the Company. Following the
Merger, the Subsidiary changed its name to "Bern Communications, Inc." ("Bern
Communications"). This transaction is being accounted for as a reverse
acquisition whereby Bern is the acquirer for financial reporting purposes. In
connection with the Merger, the Company is investigating possible breaches of
certain representations and warranties of the Bern Stockholders in connection
with the Merger and otherwise. In the event the Company concludes that such
breaches have occurred the Company may seek to reduce the consideration paid in
the Merger or pursue other remedies available to it including an action for
damages, rescission or other equitable relief.
Bern Communications designs, installs, maintains, services and supports
computer systems to enable regional telephone companies to provide Internet
access to their subscribers. Bern Communications offers its customers an
integrated Internet access solution comprised of off the shelf computer hardware
and accessories, systems integration, billing software and twenty-four hour
subscriber support. Bern Communications will also provide network management
services to regional telephone companies already offering Internet access. Bern
Communications strategy consists of the following key elements:
1. Provide an integrated Internet access solution;
2. Offer twenty-four hour seven day a week service to the telephone
company subscribers;
3. Provide regional telephone companies with billing solutions and
revenue enhancing projects;
4. Monitor and test new hardware to make available to customers on an
on-going basis;
5. Expand marketing and distributions channels for all of its products
and services.
CUSTOMERS
Bern Communications has decided to focus its initial marketing efforts on
regional telephone companies. To those companies that do not yet offer a
Internet solution to their subscribers, Bern Communications will offer its
design and installation services. To those regional telephone companies which
already provide Internet access or who are just entering that business, Bern
Communications intends to offer its network management and help desk services.
Bern Communications will market its Internet service provider program, an
integrated turn-key solution providing Internet access, to regional telephone
companies which do not currently provide Internet service or which currently
resell the service and would like to become
5
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direct providers. The products and services offered in connection with this
package include network design, specification and ordering of equipment, network
integration, installation of hardware, initial training of employees and help
desk solutions. Bern Communications will also offer network management services.
These services will monitor utilization and performance of the network providing
Internet access and modify the system as necessary. A wide variety of additional
services can be offered to those customers selecting Bern Communications'
network management service, including, testing and integrating system software
upgrades for all network equipment and home page installation.
In addition, Bern Communications also intends to offer help desk service to
regional telephone companies currently providing Internet access. Bern
Communications currently provides help desk service twenty-four hours a day
seven days a week for the benefit of the telephone company subscribers of the
telephone companies which are existing customers. The help desk provides
specific information regarding the Internet access provided by the regional
telephone company as well as general information regarding the Internet.
Currently Bern Communications has three contracts to provide Internet
access and/or network management to regional telephone companies, one of which
(with Century Service Group, Inc.) accounted for approximately 86% of Bern
Communications' revenues for the year ended May 31, 1996.
MARKETING AND DISTRIBUTION
Bern Communications intends to focus on providing Internet access services
to regional telephone companies. Bern Communications' strategy is to sell its
services by providing regional telephone companies with total solutions to
Internet access as well as state of the art network management and help desk
services. Bern Communications currently markets and sells its products and
services through its employees and is expected to expand its sales force in the
1997 fiscal year. Bern Communication's products and services include Bern
Communications' billing software which forms part of the integrated Internet
access solution for regional telephone companies.
SUPPLIER
Bern Communications has no key suppliers; its design solutions for Internet
access utilize off-the-shelf hardware and software as well as Bern
Communication's billing software.
COMPETITION
The market for Internet access services is extremely competitive. There are
no substantial barriers to entry, and Bern Communications expects the
competition in this market will intensify in the future. The Company's current
and prospective competitors include many large companies that have substantially
greater market presence and financial, technical, marketing and other resources
than Bern Communications. Bern Communications competes or expects to compete
directly or indirectly with other national, regional, commercial Internet
service providers. Most
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of these established on-line service companies and telecommunications companies
currently offer Internet access. In addition, Bern Communications believes that
new competitors including large computer and hardware and software media and
telecommunications companies will enter the Internet access market resulting in
even greater competition for Bern Communications.
EMPLOYEES
Prime Cellular, Inc. has one employee at July 31, 1996. Bern Communications
currently employs 14 employees full-time and 11 part-time; of which 11 are
engaged in the development and sales of products and 13 are employees of the
help desk.
EXECUTIVE OFFICERS OF THE REGISTRANT
The sole executive officer of the Company is Joseph K. Pagano, President
and Chief Financial Officer. Mr. Pagano is 50 years old and has been President
and Chief Financial Officer of the Company since June 1994. Prior thereto, Mr.
Pagano was and continues to be a consultant to the Company. Mr. Pagano has been
a private investor for more than the last 5 years. Raphael Collado is the
President of Bern Communications.
Item 2. PROPERTIES
The Company's executive offices are located at 100 First Stamford Place,
Third Floor, Stamford, CT 06902. The Bern Communications help desk is currently
located in Teaneck, New Jersey, pursuant to a month-to-month lease in the amount
of $1,000 per month.
Item 3. LEGAL PROCEEDINGS
On July 25, 1996 a stockholder who is a former officer and employee of Bern
Communications, Inc. attempted to serve a summons on the Company seeking the
release of the shares of the Company's Common Stock received by such stockholder
in the Merger or alternatively claiming damages of $2,500,000. The Company has
demanded a complaint which has not yet been served. The Company believes that
the claim of such stockholder is without merit and that the Company has
counterclaims against such stockholder.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
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PART II
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Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol PCEL. Until August 18, 1994, the Company's Common Stock was quoted by the
NASDAQ Small-Cap Market System. Effective August 18, 1994, NASDAQ delisted the
Company's common stock from its NASDAQ Small-Cap Market System. As of July 1,
1996, there were 8,400,000 shares of Common Stock outstanding held of record by
approximately 32 stockholders. The following table sets forth, for the periods
indicated, the high and low bid quotations for the Company's Common Stock since
June 1, 1994 as reported on the NASDAQ Small-Cap Market System and the OTC
Bulletin Board. The quotations reflect prices among dealers, do not reflect
retail markups, markdowns or other fees or commissions, and do not necessarily
represent actual transactions.
Year High Low
- ---- ---- ---
Fiscal 1996
First quarter 2 1/2 15/16
Second quarter 2 1 1/2
Third quarter 2 1 5/8
Fourth quarter 8 1/2 1
Year High Low
- ---- ---- ---
Fiscal 1995
First quarter 2 1/4 1 5/8
Second quarter 1 3/4 1 7/16
Third quarter 2 1/4 1 1/2
Fourth quarter 2 1/2 1 1/2
On July 31, 1996 the average of the bid and ask prices for the Company's
Common Stock was $5.25 as reported by the OTC Bulletin Board.
The payment of dividends on the Common Stock is within the discretion of
the Company's Board of Directors. The Company has not paid cash dividends on its
Common Stock and does not expect to declare cash dividends on the Common Stock
in the foreseeable future.
8
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Item 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial data for the years ended
May 31, 1996, 1995, 1994, 1993 and 1992. This information should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Total revenues $ 358,865 $ 356,044 $ 306,312 $ 249,098
Income (loss) before
extra-ordinary item ($ 19,780) $ 70,816 $ 7,301 ($ 75,433) $ 23,736
Net income (loss) ($ 19,780) $ 70,816 $ 7,301 ($ 75,433) $ 39,560
Income (loss) before
extra-ordinary item per
common share ($ .00) $ .02 $ .00 ($ .02) $ .01
Net income (loss) per
common share ($ .00) $ .02 $ .00 ($ .02) $ .01
Weighted average number
of shares outstanding 4,108,200 4,100,000 4,100,000 4,100,000 4,100,000
Balance Sheet Data:
Total Assets $ 6,431,904 $ 6,143,233 $ 6,096,370 $ 6,034,978 $ 6,109,868
Stockholders' Equity $ 6,399,261 $ 6,094,041 $ 6,023,225 $ 6,015,924 $ 6,091,357
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The year ended May 31, 1996 was the Company's sixth full year of
operations. The Company was organized in May 1990 to provide management services
to rural service area ("RSA") cellular telephone licensees.
The Company has not generated any operating revenue from any agreements or
arrangements with respect to the management or acquisition of any RSAs. The
Company identified approximately 200 target RSAs out of the total of 428 RSAs to
provide its services and assistance. Essentially all the target RSAs with valid
construction permits issued by the Federal Communications Commission were
contacted. Company employees subsequently met with representatives of 76 target
RSAs. This resulted in the Company performing consulting and other services for
seven RSAs for which it received fees totalling $115,000 and $107,000 in the
years ended May 31, 1992 and 1991, respectively, and/or reimbursement of costs.
One of the RSAs for which consulting work was performed was owned by a person
who was at the time a director of the Company, for which the Company received
$6,000 in fees and certain reimbursements of actual costs incurred during the
year ended May 31, 1991. A director of the Company (who was elected a director
at the 1991 Annual Meeting of Stockholders in October 1991) was a shareholder in
corporations owning two RSAs for which consulting work was performed. The
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Company received fees of $115,000 and $90,000 in 1992 and 1991, respectively,
for these services as well as certain reimbursements of actual expenses. All
work performed by the Company was billed in accordance with the Company's stated
rates for such services. All consulting services were completed by July, 1991.
Preferences of owners of construction permits and the deterioration in
general economic conditions subsequent to the Company's initial public offering
in early August 1990 negatively impacted the Company's business plan. The
Company found that RSA owners interested in retaining management services were
unwilling to enter into management contracts on terms which, in management's
opinion, were economically viable for the Company. Several RSA owners also
required significant capital injections by the Company as a condition to
entering into a management contract. The Company further encountered many RSA
owners who were unwilling to enter into management contracts and to build the
cellular system for their RSA until all possibilities for the sale of their RSA
were exhausted. The difficulties the Company encountered were compounded by the
general downturn in economic conditions and tightening credit markets which
limited sale options available to RSA owners, especially given their unrealistic
valuation expectations, and made acceptable financing for construction and
operation difficult to obtain as well. At the same time, the tight credit
markets adversely affected the Company's ability to obtain the financing
necessary to make capital injections required by certain RSA owners as a
condition to obtaining management contracts or to acquire interests in cellular
licenses.
Accordingly, the Company determined that it was prudent for it to explore
other uses for the Company's funds. The Company initially analyzed potential
investments in debt and equity instruments of entities involved in either the
cellular or related industries and subsequently expanded its search to include
entities involved in non-cellular operations. Since 1991, the Company has
retained an outside consultant, who is also a shareholder, under an agreement
renewable each July to assist it in finding new business opportunities for the
Company. Fees paid to this consultant included in general and administrative
costs totaled $75,000 for each of the years ended May 31, 1996, 1995 and 1994.
This agreement was renewed in June 1995 and the consultant was elected President
of the Company as well as a board member.
The Company pursued a number of new business acquisition opportunities
during the 1996 fiscal year which culminated in the acquisition of Bern
Associates.
1996 vs. 1995
The Company receives interest income from its short term investment of the
net proceeds of its initial public offering (received in August 1990), and the
private placement of securities in May 1990. Such interest income was
approximately $359,000 and $356,000 for the years ended May 31, 1996 and 1995,
respectively. Interest income for the year ended May 31, 1996 and 1995 includes
approximately $45,800 and $29,700, respectively, relating to the amortization of
a discount on investments. The $16,000 (54%) increase in discount amortization
was due to the purchase of a $5,000,000 90 day treasury bill which was purchased
in May 1996 following the maturity of the company's two year treasury notes.
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Expenses for the years ended May 31, 1996 and 1995 consist primarily of
salaries, consulting fees, travel and administrative costs. The $93,000 (33%)
increase in general and administrative costs for the year ended May 31, 1996 as
compared to May 31, 1995 is due primarily to higher rent and consulting costs in
connection with the search and acquisition of Bern Associates and fluctuations
in several expense categories.
1995 vs. 1994
Interest income was approximately $356,000 and $208,000 for the years ended
May 31, 1995 and 1994, respectively. The $148,000 (71%) increase in interest
income was due primarily to the purchase of two year treasury notes at a higher
rate of interest during the year ended May 31, 1995 as compared to the prior
year. Interest income for the year ended May 31, 1995 and 1994 included
approximately $29,700 and $7,400, respectively, relating to the amortization of
a discount on investments. The Company sold its investments held at May 31, 1993
during the quarter ended November 30, 1993 and recognized a gain of
approximately $98,000 for the year ended May 31, 1994.
Expenses for the years ended May 31, 1995 and 1994 consist primarily of
salaries, consulting fees, travel and administrative costs. The $14,000 (5%)
decrease in general and administrative cost for the year ended May 31, 1995 as
compared to May 31, 1994 is due primarily to lower payroll costs and
fluctuations in several expense categories.
Liquidity and Capital Resources
The Company received approximately $6.1 million in cash from the net
proceeds of its initial public offering in August 1990 and capital raised from
the private placement of securities in May 1990. Additionally, the Company
received $261,000 in September 1990 from the underwriter of that offering
exercising 100,000 shares of its overallotment option. The company also received
$325,000 in May 1996 from the sale of 200,000 shares of common stock to private
investors. At May 31, 1996 the Company had approximately $960,000 in cash and
cash equivalents and an additional $4,959,000 in investments consisting of 90
day treasury notes which mature August 1, 1996.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required pursuant to this Item are
included herein commencing on Page F-1.
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information contained under the heading "Proposal No. 1 - Election of
Directors" in the Company's definitive Proxy Statement (the "Proxy Statement")
relating to the Company's Annual Meeting of Stockholders to be held on or about
November 10, 1996, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 with the Securities and Exchange Commission, is
incorporated herein by reference. For information concerning the executive
officers of the Company, see "Executive Officers of the Registrant" in Part I of
this Report.
Item 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in the
Company's Proxy Statement is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information contained under the heading "Beneficial Ownership of Common
Stock" in the Company's Proxy Statement is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Relationships and
Related Transactions" in the Company's Proxy Statement is incorporated herein by
reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) (1) Financial Statements-See list of Financial Statements on F-1.
(2) Schedules - Not applicable.
(b) Reports on Form 8-K
The Company filed one report on Form 8-K dated June 11, 1996.
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EXHIBITS:
2.1 Merger Agreement, dated as of May 14, 1996, by and among the Company, the
Subsidiary, Bern Associates and the Bern Stockholders.**
2.2 List of Omitted Schedules/Exhibits to Merger Agreement.**
3.1 Certificate of Incorporation of the Company*
3.2 By-laws of the Company*
10.1 Consulting Agreement dated July 2, 1991 among the Company, Prime Cellular
of Florida, Inc. and Joseph K. Pagano*
10.2 Amendment to Consulting Agreement*
10.3 Stock Option Plan*
10.6 Registration Rights Agreement, dated June 10, 1996, between Registrant
and the Bern Stockholders.**
10.7 Escrow Agreement, dated June 10, 1996, between Registrant and the Bern
Stockholders.**
10.7 Indemnification Agreement, dated June 10, 1996, between Registrant and the
Bern Stockholders.**
21 Subsidiaries of the Registrant
27 Financial Data Schedule
- ----------
*Previously filed with the Securities and Exchange Commission as Exhibits
to, and incorporated herein by reference from, the Company's Annual Report on
Form 10-K for the years ended May 31, 1995, May 31, 1994, May 31, 1993, May 31,
1992 or May 31, 1991.
** Previously filed with the Securities and Exchange Commission as Exhibits
to, and incorporated herein by reference from, the Company's Report on Form 8-K
dated June 11, 1996.
The Company will provide, without charge, a copy of these exhibits to each
stockholder of the Company upon the written request of any such stockholder
therefor. All such requests should be directed to Prime Cellular, Inc., 100
First Stamford Place, Third Floor, Stamford, CT 06902, Attention: Joseph K.
Pagano.
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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.
, 1996 By:/s/Joseph K. Pagano
----------------------
Joseph K. Pagano
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Joseph K. Pagano Director, President & , 1996
- ------------------- Chief Financial Officer
Joseph K. Pagano (principal executive officer & principal
financial officer)
/s/ Mark Newman
- ------------------- Director , 1996
L. Mark Newman
/s/ Raphael Collado
- ------------------- Director , 1996
Raphael Collado
/s/ Frederick Adler
- ------------------- , 1996
Frederick R. Adler
/s/ Michael Islek
- ------------------- Director , 1996
Michael Islek
</TABLE>
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PRIME CELLULAR, INC.
(A Corporation in the Development Stage)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES (Item 14(a))
Consolidated Financial Statements:
Report of Independent Certified Public Accountants ..................... F-2
Consolidated Balance Sheets--May 31, 1996 and 1995 ..................... F-3
Consolidated Statements of Operations--
Years Ended May 31, 1996, 1995, 1994, and for the period
May 10, 1990 (Inception) to May 31, 1996 ......................... F-4
Consolidated Statements of Stockholders' Equity--
Years Ended May 31, 1996,
1995, 1994, and for the period
May 10, 1990 (Inception) to May 31, 1996 .......................... F-5
Consolidated Statements of Cash Flows--
Years Ended May 31, 1996, 1995, 1994, and for the period
May 10, 1990 (Inception) to May 31, 1996 ......................... F-6
Notes to Consolidated Financial Statements ............................. F-7
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are either not required
under the related instructions or are inapplicable, and therefore have been
omitted.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Prime Cellular, Inc.
Stamford, Connecticut
We have audited the accompanying consolidated balance sheets of Prime Cellular,
Inc. (a corporation in the Development Stage) and its subsidiaries as of May 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended May 31, 1996, 1995, and
1994 and for the period May 10, 1990 (inception) to May 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion of 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 7 to the consolidated financial statements, the Company has
executed a merger agreement for the exchange of a certain number of shares of
its stock for the stock of another entity. The Company is investigating possible
breaches of certain representations and warranties in connection with the merger
agreement and otherwise.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Prime
Cellular, Inc. and its subsidiaries as of May 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
ended May 31, 1996, 1995 and 1994 and for the period May 10, 1990 (inception) to
May 31, 1996, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Valhalla, New York
June 25, 1996, except for Note 4(b),
which is as of July 25, 1996.
F-2
<PAGE>
<TABLE>
PRIME CELLULAR, INC.
(A Corporation in the Development Stage)
CONSOLIDATED BALANCE SHEETS
<CAPTION>
May 31,
--------------------------------
ASSETS: 1996 1995
---- ----
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 960,223 $ 239,964
Investments 4,958,796 5,872,789
Due From Related Party 500,000
Accrued Interest, Other Receivables and Prepaid Taxes 12,885 30,480
Total Current Assets 6,431,904 6,143,233
---------- ----------
TOTAL ASSETS: $6,431,904 $6,143,233
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 32,643 $ 49,192
---------- ----------
Total Current Liabilities 32,643 49,192
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, par value $.01- 5,000,000 shares
authorized, none outstanding
Common Stock, par value $.01- 20,000,000 shares
authorized, 4,300,000 shares issued and outstanding at
May 31, 1996 and 4,100,000 shares issued and
outstanding at May 31, 1995 43,000 41,000
Additional Paid-In Capital 6,401,005 6,078,005
Deficit accumulated during the development stage (44,744) (24,964)
Total Stockholders' Equity 6,399,261 6,094,041
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,431,904 $6,143,233
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
PRIME CELLULAR, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
May 10, 1990
(inception) to Year Ended May 31,
--------------------------------------------------
May 31, 1996 1996 1995 1994
------------ ---- ---- ----
REVENUES:
<S> <C> <C> <C> <C>
Fees for services, including
$211,000 for related parties from
inception $ 222,000
Gain on sale of investments 97,930 $ 97,930
Interest income 1,926,399 358,865 356,044 208,382
----------- ----------- ----------- -----------
Total Revenues 2,246,329 358,865 356,044 306,312
EXPENSES:
General & administrative costs 2,282,515 378,645 285,228 299,011
Interest Expense 8,558
----------- ----------- ----------- -----------
Total Expenses 2,291,073 378,645 285,228 299,011
----------- ----------- ----------- -----------
Income (loss) before income taxes (44,744) (19,780) $ 70,816 $ 7,301
Income taxes
----------- ----------- ----------- -----------
NET INCOME (LOSS): $ (44,744) (19,780) 70,816 7,301
=========== =========== =========== ===========
Income (loss) per share of Common
Stock $ 0.00 $ 0.02 $ 0.00
=========== =========== ===========
Weighted Average Common Shares
Outstanding 4,108,200 4,100,000 4,100,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
PRIME CELLULAR, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Paid-In Accumulated
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Issuance of common stock for cash 2,000,000 $20,000 $830,000 $850,000
Net income from the period May 10, 1990
(Inception) to May 31, 1990
--------- ------- ---------- --------- ----------
Balance at May 31, 1990 2,000,000 20,000 830,000 850,000
Issuance of common stock for cash 2,100,000 21,000 5,248,005 5,269,005
Net loss for the year ended May 31, 1991 $(67,208) (67,208)
--------- ------- ---------- --------- ----------
Balance at May 31, 1991 4,100,000 41,000 6,078,005 (67,208) 6,051,797
Net income for the year ended May 31, 1992
--------- ------- ---------- --------- ----------
Balance at May 31, 1992 4,100,000 41,000 6,078,005 (27,648) 6,091,357
Net loss for the year ended May 31, 1993 (75,433) (75,433)
--------- ------- ---------- --------- ----------
Balance at May 31, 1993 4,100,000 41,000 6,078,005 (103,081) 6,015,924
Net income for the year ended May 31, 1994 7,301 7,301
--------- ------- ---------- -------- ----------
Balance at May 31, 1994 4,100,000 41,000 6,078,005 (95,780) 6,023,225
Net income for the year ended May 31, 1995 70,816 70,816
--------- ------- ---------- --------- ----------
Balance at May 31, 1995 4,100,000 41,000 6,078,005 (24,964) 6,094,041
Issuance of common stock for cash 200,000 2,000 323,000 325,000
Net loss for the year ended May 31, 1996 (19,788) (19,788)
--------- ------- ---------- --------- ----------
Balance at May 31, 1996 4,300,000 $43,000 $6,401,005 $ (44,744) $6,399,261
========= ======= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
PRIME CELLULAR, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
May 10, 1990
(inception) to
Year Ended May 31,
-----------------------------------------------
May 31, 1996 1996 1995 1994
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income (loss) ($ 44,744) ($ 19,780) $ 70,816 $ 7,301
Adjustments to reconcile net income (loss) to net cash
provided by (used in)
operating activities:
Amortization of discount on investments (123,955) (45,819) (29,728) (7,352)
Gain on sale of investments (97,030) (97,930)
Changes in operating assets and liabilities:
Decrease (increase) in other receivable (512,885) (509,965) (2,920)
Decrease (increase) in accrued interest receivable 27,560 (49) (5,053)
Increase (decrease) in accounts payable and accrued
expenses 32,643 (16,549) (23,953) 54,091
------------ ------------ ------------ ------------
Total adjustments (702,127) (544,773) (56,650) (56,244)
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (746,871) (564,553) 14,166 (48,943)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (6,068,596) (5,841,094)
Purchase of short-term investments (19,141,548) (4,940,188) (11,204,125)
Proceeds from sale of investments 371,873 371,873
Proceeds from sale of short-term investments 20,101,360 5,900,000 11,204,125
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (4,736,911) 959,812 (5,469,221)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 6,444,005 325,000
------------ ------------ ------------ ------------
Proceeds from subordinated capital notes 400,000
Repayment of subordinated capital notes (400,000)
------------ ------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,444,005 325,000
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 960,223 720,259 14,166 (5,518,164)
CASH AND CASH EQUIVALENTS - BEGINNING 239,964 225,798 5,743,962
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS - ENDING $ 960,223 $ 960,223 $ 239,964 $ 225,798
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 8,558
Cash paid for income taxes
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
PRIME CELLULAR, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS
The Company was incorporated in Delaware on May 10, 1990 to provide
management and consulting services to rural service area cellular telephone
licensees. However, the Company has determined that because of changes in the
industry it would be prudent to explore other uses of the Company's funds, but
has not determined which business it will ultimately be involved in. See Note 7
regarding the Company's acquisition of Bern Associates, Inc.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Prime Cellular, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Per Share Data: Income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding throughout
the period. Common stock equivalents consisting of shares subject to stock
options and warrants do not have a significant impact on net income (loss) per
share for the years ended May 31, 1996, 1995 and 1994.
Cash and Cash Equivalents: Cash equivalents include interest bearing accounts
which are short-term highly liquid investments with an original maturity of
three months or less.
Investments: The Company's investments were classified as held-to-maturity and
reported at amortized cost. Investments held-to-maturity are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
May 31, 1996:
Debt securities issued by the U.S. Treasury $4,958,796 $ 304 $4,959,100
The above securities mature August 1, 1996
May 31, 1995:
Debt securities issued by the U.S. Treasury $5,872,789 $ 9,015 $ 245 $5,881,559
</TABLE>
Revenue Recognition: Revenue is recorded at the time services are rendered.
Use of Estimates: In preparing the financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and revenues and expenses during the reporting
period.
Actual results could differ from those estimates.
Financial Instruments: The carrying amounts of financial instruments including
cash and cash
F-7
<PAGE>
equivalents, other receivables and accounts payable approximated fair value as
of May 31, 1996, because of the relatively short maturity of these instruments.
NOTE 3 - INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. A valuation allowance has been recognized against the entire
balance of the deferred tax assets related to the net operating loss
carryforwards which existed at May 31, 1996. Income taxes of approximately
$13,000 attributable to taxable income for the year ended May 31, 1995, was
offset by the tax benefit from the utilization of net operating loss
carryforwards.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
(a) The Company's executive offices are located at 100 First Stamford
Place, Third Floor, Stamford, CT 06902. During fiscal 1994 and part of fiscal
1993, the Company occupied approximately 600 square feet which was subleased for
$1,000 per month pursuant to a month-to-month sublease arrangement with a
company controlled by a person who was at the time a director of the Company.
Total payments of $12,100 and $8,000 were remitted during the years ended May
31, 1994 and 1993, respectively, under this arrangement. The Company believes
that this arrangement was on terms no less favorable than could be obtained from
an unrelated third party.
(b) On July 25, 1996 a stockholder, who is a former officer of Bern
Associates, Inc., attempted to serve a summons on the Company seeking the
release of the shares of the company Common stock received by such stockholder
in the merger agreement (see Note 7) or alternatively, claiming damages of
$2,500,000. The Company has demanded a complaint which has not yet been served.
The Company believes that such stockholder's claims is without merit, and that
the Company has counterclaims against such stockholder.
NOTE 5 - CAPITAL TRANSACTIONS
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
500,000 shares of common stock. Options may be granted for terms of up to ten
years and are exercisable as determined by the Board of Directors. The option
price under the Plan must be no less than the fair market value of the shares on
date of grant, except that the term of an incentive stock option granted under
the Plan to a stockholder owning more than 10% of the outstanding common stock
may not exceed five years and its exercise price may not be less than 110% of
the fair market value of the common stock on the date of the grant.
At May 31, 1990, options to purchase an aggregate of 50,000 shares of
common stock were granted to an officer of the Company at an exercise price of
$.50 per share (subsequently increased to $1.50 per share), 30,000 of which are
exercisable ratably over a three year period commencing September 30, 1991 and
the balance over a five year period commencing September 30, 1991. Effective
June 15, 1994, this officer resigned as an officer of the
F-8
<PAGE>
Company but remained a director of the Company. At that time, the Board vested
the remaining 8,000 options which would have otherwise vested on September 30,
1994. On July 27, 1990 the Company granted options to purchase 20,000 shares, at
$1.50 per share, to each of two directors of the Company, exercisable ratably
over a five year period commencing September 30, 1991. Neither of these persons
was a director of the Company at May 31, 1994 and these options expired prior to
May 31, 1994.
In July 1991, the Company granted options to purchase an aggregate of
217,000 shares at $1.62 per share to a consultant, who is also a shareholder of
the Company. These shares vested one-third initially and then one-third annually
the following two years thereafter. This consultant is now the President and a
director of the Company.
No options have been exercised under the Plan as of May 31, 1996.
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." SFAS 123 establishes a fair value method for
accounting for stock-based compensation plans which requires either recognition
or pro forma disclosure. The Company expects to adopt the employee stock-based
compensation provisions of SFAS 123 by disclosing the pro forma net income
(loss) and pro forma net income (loss) per share amounts assuming the fair value
method as of June 1, 1996. Accordingly, the adoption of SFAS 123 will not impact
the Company's consolidated results of operations, financial position or cash
flows. Stock arrangements with non-employees, if applicable, will be recorded at
fair value.
During the year ended May 31, 1996, the Company sold 200,000 shares of its
common stock for $325,000.
NOTE 6 - RELATED PARTY TRANSACTIONS
A director of the Company was a shareholder in corporations owning two
rural service area cellular telephone licensees for which consulting work was
performed. All work performed by the Company was billed in accordance with the
Company's stated rates for such services. Fees relating to these services of
$115,000 and $90,000 in 1992 and 1991, respectively, are included in the
consolidated statements of operations.
NOTE 7 - SUBSEQUENT EVENTS
On June 11, 1996, the Company's wholly-owned subsidiary, Prime Cellular
Acquisition Corp. (the "Subsidiary"), consummated a merger with Bern Associates,
Inc. ("Bern"). Bern designs, installs, maintains, services and supports computer
systems to enable regional telephone companies to provide Internet access to
their subscribers. Bern was merged with and into the Subsidiary and all of the
outstanding shares of common stock of Bern were converted into an aggregate of
4,100,000 shares of common stock of the Company. This transaction is being
accounted for as a reverse acquisition whereby Bern is the acquirer for
accounting purposes. In addition, on May 15, 1996, in anticipation of the
Merger, Prime and Bern entered into a revolving credit note in the amount of
$1,000,000. The note is due on demand and bears interest at the prime rate. At
May 31, 1996, Prime advanced Bern $500,000 with interest at
F-9
<PAGE>
8%. In connection with the merger, the Company is investigating possible
breaches of certain representations and warranties of the Bern stockholders in
connection with the merger and otherwise. In the event the Company concludes
that such breaches have occurred the Company may seek to reduce the
consideration paid in the merger or pursue other remedies available to it,
including an action for damages, rescission of other equitable relief.
F-10
Exhibit 21
Subsidiaries of Prime Cellular, Inc.
------------------------------------
Bern Communications, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION
EXTRACTED FROM FORM 10-K AT MAY 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 960,223
<SECURITIES> 4,958,796
<RECEIVABLES> 512,885
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,431,904
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,431,904
<CURRENT-LIABILITIES> 32,643
<BONDS> 0
0
0
<COMMON> 43,000
<OTHER-SE> 6,356,261
<TOTAL-LIABILITY-AND-EQUITY> 6,431,904
<SALES> 0
<TOTAL-REVENUES> 358,865
<CGS> 0
<TOTAL-COSTS> 378,645
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (19,780)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,780)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
