SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(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, 1998
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ 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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
580 Marshall Street,
Phillipsburg, New Jersey 08865
(Address of Principal Executive (Zip Code)
Offices)
(908) 387-1673
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
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
<PAGE>
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 April 9, 1999 (based upon the average of the bid and ask
prices as reported by the OTC Bulletin Board was approximately $2,688,967.
As of April 9, 1999, 6,108,700 shares of the registrant's Common Stock, par
value $.01 per share were outstanding.
Documents Incorporated By Reference: Certain portions of the required
information under Part III of this Form 10-K will be filed by amendment under
cover of Form 10-K/A within 120 days after the end of the fiscal year covered by
this Form 10-K pursuant to the Securities Exchange Act of 1934, and are
incorporated herein by reference.
<PAGE>
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 and regulatory 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; "Year
2000" compliance and other factors. 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") and (2) the manufacture and wholesale distribution of cell culture
media and reagents, as well as other research products, for the biotechnology
and pharmaceutical industries ("Specialty Media").
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 pubic 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 11, 1996 to November 30, 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").
-3-
<PAGE>
Molecular Cell Science, Contract Research and Development Division
CMT provides contract research services in molecular and cellular biology
and protein purification 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 research and development goals between representatives of the customer
and CMT's staff scientists. 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's 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
expression of clone 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
-4-
<PAGE>
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.
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 biomolecules 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.
CMT has developed low-enzyme and no-enzyme cell dissociation treatments,
which it has sold both directly and via private label arrangements with other
companies supplying products in this market. Such dissociation techniques
involve the removal and transfer of cells from solid substrates (such as the
surface of a tissue culture flask or plate) to a new substrate in order that the
cultured cells can continue to grow normally and avoid the use of enzymes (such
as trypsin) that may over time and overuse sever the protein complexes binding
the cell to its substrate and hamper new attachment.
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 Specialty Media 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 culture, mouse embryo culture, and mouse embryonic stem cells. The
Specialty Media Division also identifies and develops research products and
-5-
<PAGE>
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. These formulations are licensed to CMT by Harvard pursuant to a license
agreement expiring in October 1999. CMT believes that such license can be
renewed at such time, however, there can be no assurances that it will be
renewed. 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.
Unique Products for General Cell Cultures - A significant portion of the
sales revenue of the Specialty Media Division are 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 Specialty
Media 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, 1998 and 1997,
Merck & Co., Inc. accounted for approximately 11% and 24% of the Company's total
annual revenues, respectively. In addition, research projects with Columbia
University accounted for approximately 5% of the Company's total receivables at
December 31, 1998. Management believes that such customers will continue to
account for a significant portion of the Company's revenues in the 1999 fiscal
year, although there can be no assurance. The loss of these or any other
significant customers of the 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 years ended December 31, 1998 and 1997, Life Technologies,
Inc. accounted for approximately 13% and 11% of the Company's total annual
revenues, respectively. In addition, specialty media sold to Sigma Biosciences,
Life Technologies, Inc., NIH and Columbia University
-6-
<PAGE>
accounted for approximately 20%, 14%, 12% and 5% of the Company's total
receivables at December 31, 1998, respectively. Management believes that such
customers will continue to account for a significant portion of the Company's
revenues in the 1999 fiscal year, although there can be no assurance. The loss
of these or any other significant customers for CMT's Specialty Media 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 research &
development projects. Such outsourcing is due to (i) the quantity of research
and development projects necessary to stay competitive in the industry, (ii)
reduced "in-house" staffs as a result of corporate down-sizing, (iii) the
expense and risk inherent in conducting research and development internally and
(iv) the expanded capabilities and flexibility offered by third party research
companies without the associated overhead.
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 research &
development. 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 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 research and development, 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
Molecular Cell Science Division of CMT, whose duties include client contact and
the preparation and submission of project proposals.
Specialty Media Division
CMT's Specialty Media Division has directed its products to specialized
aspects of the cell culture market. The Company believes that, while the overall
available revenues from these areas is less than other areas of the market, the
potential margin 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, 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 Specialty Media 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
-7-
<PAGE>
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 marketing needs.
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 research and development 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 and 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 the research and development 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 research and development 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 research and development 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.
-8-
<PAGE>
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
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 Specialty Media 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 is 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
-9-
<PAGE>
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.
Permits - In connection 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, Federal 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, 1998, no material expenditures by the Company
were necessary with respect to such matters.
Trademarks, Proprietary Information and Patents
CMT utilizes various proprietary information in connection with the
providing of its services and the manufacture and sale of its products. In that
connection, CMT has a trademark application currently pending before the United
States Patent and Trademark Commission with respect to one of its products. CMT
has also developed 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.
Product Liability
As a manufacturer of certain products, the Company may be exposed to
product liability claims by consumers. Although the Company has obtained product
liability insurance coverage in the aggregate amount of $2.0 million, ($1
million per occurrence), and is in the process of procuring an umbrella policy,
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
-10-
<PAGE>
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 April 9, 1999, the Company had twenty-one (21) full-time and two (2)
part-time employees. Of such employees, five (5) are executive employees, two
(2) are engaged in customer support, nine (9) are engaged in research and
development and media production, one (1) is engaged in sales and marketing, two
(2) are engaged in warehouse, shipping and receiving, and four (4) (including
the two part-time employees) are engaged in accounting and administration. None
of the Company's employees are covered by collective bargaining agreements. The
Company believes that it has a good relationship with its employees.
History of Prime Cellular, Inc.
Prime was organized 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. Since 1991, Prime has retained an outside consultant,
who is also a shareholder and currently a director and officer of the Company,
under an agreement renewable each July to assist it in finding new business
opportunities for the Company.
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. During the year ended May 31, 1997 Bern
Communications was the sole operating entity of Prime.
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 cancelled, 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
-11-
<PAGE>
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 "CMT
Agreement"), 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
31, 1999, the balance due under the note is $275,974.
During the 1998 fiscal year, the Company ceased using the office space
located at 100 First Stamford Place, Stamford CT 06902 (the "Stamford Office")
and the administration offices and executive research laboratory located at 406
Grand Central Avenue, Lavallette, NJ 08735 (the "Lavallette Facility"). The
Lavallette Facility is leased from a stockholder of the Company pursuant to a
sublease. The underlying lease does not expire until November, 1999. The Company
has nonetheless entered into an oral agreement with the landlord to terminate
the lease at April 30, 1999. Until the lease is terminated, the Company is
continuing to pay rent. The monthly rent for the Lavallette Facility is $1,200.
Payments of rent are made directly to the landlord on behalf of the sublessor.
Item 3. Legal Proceedings
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
-12-
<PAGE>
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.
High Low
---- ---
Year Ended December 31, 1998
First Quarter.......................... $ 3.875 $ 0.625
Second Quarter......................... 3.50 1.25
Third Quarter.......................... 2.75 1.00
Fourth Quarter......................... 1.50 0.25
Year Ended December 31, 1997
First Quarter.......................... $ 4.25 $ 2.00
Second Quarter......................... 4.75 1.00
Third Quarter.......................... 1.50 0.50
Fourth Quarter......................... 0.75 0.375
On April 9, 1999, the average of the bid and ask prices for the Company's
Common Stock was $1.1875, as reported by the OTC Bulletin Board. As of April 9,
1999, there were 6,108,700 shares of Common Stock outstanding. The Company
believes that there are in excess of 450 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.
Recent Sales of Unregistered Shares
In connection with the CMT Merger consummated 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 the Company's Common Stock. The exchange of shares by the
Company was made in reliance upon Section 3(a)(9) of the Securities Act of 1933,
as amended (the "Act").
-13-
<PAGE>
Item 6. Selected Financial Data
The following selected financial data at and for the years ended December
31, 1998, 1997, 1996, 1995 and 1994 has been derived from the Company's audited
financial statements for each of the years other than the year ended December
31, 1994. 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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue ......................... $ 2,127,233 $ 2,180,190 $ 1,471,221 $ 1,526,391 $ 1,021,840
=========== =========== =========== =========== ===========
Net income (loss) ............... (698,674) (209,621) (62,617) $ 56,709 $ 22,068
=========== =========== =========== =========== ===========
Income (loss) per share
Basic and Diluted ............... $(.16) $(.17) $(.07) $ .06 $ .02
===============================================================================
<CAPTION>
Balance Sheet Data:
At December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets.................... 11,825,683 2,028,457 706,964 443,191 460,600
Long-Term debt.................. 826,024 748,738 3,872 120,152 168,614
</TABLE>
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
-14-
<PAGE>
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, 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.
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 $148,765 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.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Revenue for the year ended December 31, 1997 was $2,180,190 as compared to
$1,471,221 for the year ended December 31, 1996. This 48% or $708,969 increase
in revenue was a result of $523,019 or 87% increase in contract revenue. The
increase in contract revenue was due to management's decision to aggressively
market the Company's Contract R&D Services to the biotechnology and
pharmaceutical industries.
Income after direct costs for the year ended December 31, 1997 was $838,476
as compared to $537,983 for the year ended December 31, 1996. This $300,493 or
56% increase in income after direct costs was a result of a $95,598 or 30%
increase from sales of goods plus a $204,895 or 91% increase from contract
revenue. The increase in contract revenue was due to the aggressive marketing of
this segment's services to the pharmaceutical and biotechnology industries while
controlling direct costs.
Corporate activities for the year ended December 31, 1997 resulted in a net
income of $9,897 as compared to a net expense of $42,449 for the year ended
December 31, 1996. This net increase in income resulted from $44,375 of other
income for the year ended December 31, 1997 whereas other income for the year
ended December 31, 1996 was a net expense of $36,554. This net increase was
reduced by an increase of interest expense to $47,427 for the year ended
December 31, 1997 as compared to $7,077 for the year ended December 31, 1996 as
a result of increased borrowings in 1997.
-15-
<PAGE>
Net loss for the year ended December 31, 1997 was ($209,621) as compared to
a net loss of ($62,617) for the year ended December 31, 1996. The increase in
net loss was the result of other operating expenses - contract revenue
increasing to $610,388 or 123% for the year ended December 31, 1996 as a result
of the contract revenue segment expanding its support structure to sustain a
larger volume of business.
Liquidity and Capital Resources
At December 31, 1998, the Company had approximately $5,400,000 in cash and
short term investments. Although the Company had a working capital deficit of
approximately $100,000, the Company had, as of March 1999, readily marketable
investment securities of approximately $5,000,000 in other assets.
Net cash used by/provided by operating activities aggregated ($746,523) and
$359,684 for the years ended December 31, 1998 and 1997, respectively. The
$1,106,207 increase in cash used by operating activities was principally
attributable to increased losses for the year ended December 31, 1998 as
compared to 1997 as well as due to a reduction in customer deposits partially
offset by an increase in accounts payable and accrued expenses.
Net cash used in investing activity aggregated ($746,523) for the year
ended December 31, 1998 as compared with ($447,936) for the year ended December
31, 1997. The increase in cash used was attributable to the purchase of
approximately $5,200,000 in investments and certificate of deposits reduced by
approximately $546,000 of cash acquired in connection with the CMT Merger and a
decrease of approximately $100,000 of purchased fixed assets for the year ended
December 31, 1998.
Cash flow from financing activities aggregated $5,102,253 for the year
ended December 31, 1998 as compared to $698,213 for the year ended December 31,
1997. The increase was due primarily to the $5,000,000 proceeds of a
collateralized investment loan in 1998 offset by approximately $500,000 in loans
from stockholders in 1997 which was not repeated in 1998.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Year 2000
The Company continues to explore new operations and financial software
packages that are Year 2000 compliant and intends to install such software
during the second and third quarters of the 1999 fiscal year with respect to
CMT. The system for Prime was updated prior to the end of the 1998 fiscal year.
The Company is also currently assessing the compatibility with third party
suppliers and customers of any proposed software package to minimize or
eliminate any adverse effect on the Company's business in the event customers or
suppliers systems have a Year 2000 problem. Although the Company does not expect
significant costs or disruptions to its operations as a result of the inability
of any of its suppliers and customers to achieve Year 2000 compliance, the
Company cannot predict what effect such noncompliance may have upon the
operations of the Company.
The Company does not expect expenditures relating to the year 2000 issues
to be material and does not expect costs associated with the year 2000 to have a
significant impact on the Company's results of operations or financial position.
However, there can be no assurance that the Company will not experience
unexpected difficulties in connection with the year 2000 or that the systems of
other companies on which the Company's systems rely will be timely converted.
-16-
<PAGE>
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.
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure.
Information with respect to matters set forth in Item 304 of Regulation S-K
was previously reported by the Company in its reports on Forms 8-K and 8-K/A for
the event dated December 23, 1998, filed with the Securities & Exchange
Commission pursuant to Section 13 of the Securities Exchange Act of 1934.
-17-
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The required information under this Item 10 will be filed by amendment
under cover of Form 10-K/A within 120 days after the end of the fiscal year
covered by this Form 10-K pursuant to the Securities Exchange Act of 1934, and
is incorporated herein by reference.
Item 11. Executive Compensation
The required information under this Item 11 will be filed by amendment
under cover of Form 10-K/A within 120 days after the end of the fiscal year
covered by this Form 10-K pursuant to the Securities Exchange Act of 1934, and
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The required information under this Item 12 will be filed by amendment
under cover of Form 10-K/A within 120 days after the end of the fiscal year
covered by this Form 10-K pursuant to the Securities Exchange Act of 1934, and
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The required information under this Item 13 will be filed by amendment
under cover of Form 10-K/A within 120 days after the end of the fiscal year
covered by this Form 10-K pursuant to the Securities Exchange Act of 1934, and
is incorporated herein by reference.
-18-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits
Exhibit No.
3.1 Certificate of Incorporation, as amended, incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement
on Form S-18 (Registration No. 33-35537-NY)
3.2 By-laws of the Company, incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form S-18 (Registration
No. 33-35537-NY)
10.1 1990 Stock Option Plan, incorporated by reference to Exhibit 10.1
of the Company's Registration Statement on Form S-18 (Registration
No. 33-35537-NY)
10.2 Consulting Agreement, dated July 2, 1991, among the Company, Prime
Cellular of Florida, Inc. and Joseph K. Pagano (the "Consulting
Agreement") (1)
10.3 Amendment to Consulting Agreement (1)
10.4 Agreement and Plan of Merger, dated as of May 14, 1996, by and
among the Company, Prime Cellular Acquisition Corp., Bern
Associates, Inc. and the stockholders of Bern (2)
10.5 Registration Rights Agreement, dated June 10, 1996, between
Registrant and the Bern Stockholders (2)
10.6 Escrow Agreement, dated June 10, 1996, between Registrant and the
Bern Stockholders (2)
10.7 Indemnification Agreement, dated June 10, 1996 between Registrant
and the Bern Stockholders (2)
10.8 Amendment to Merger Agreement, dated October 1, 1996 (3)
10.9 Settlement Agreement, dated August 28, 1997 (3)
10.10 Agreement and Plan of Merger, dated as of May 29, 1998, by and
among the Company, CMT Acquisition Corp., Cell & Molecular
Technologies, Inc. and the stockholders of Cell & Molecular
Technologies, Inc. (4)
10.11 Mortgage dated February 6, 1997, with respect to premises located
at 580 Marshll Street, Phillipsburg, NJ 08865, assumed by the
Company in connection with the CMT Merger (*)
10.12 Form of Employment Agreement dated May 22, 1997 between Cell &
Molecular Technologies, Inc. and Thomas Livelli (*)
-19-
<PAGE>
27 Financial Data Schedule (for SEC use only)
- ----------
(1) Incorporated by reference to the comparable exhibit contained in the
Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1992.
(2) 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.
(3) Incorporated by reference to the applicable exhibit contained in the
Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1997.
(4) 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 for the event dated May 29, 1998.
(*) Filed herewith
(b) Report on Form 8-K.
Form 8-K with respect to the event dated December 23, 1998 was filed by the
Company during its fiscal quarter ended December 31, 1998 (and followed by Form
8-K/A in the first quarter of 1999) to report on the change in the Company's
principal independent accountants.
-20-
<PAGE>
PRIME CELLULAR, INC. AND SUBSIDIARIES
Table of Contents
================================================================================
Page
----
Independent Auditors' Report F-1
Consolidated Financial Statements
Balance Sheets
December 31, 1998 and 1997 F-2 - F-3
Statements of Operations
For the Years Ended December 31, 1998, 1997 and 1996 F-4
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-22
<PAGE>
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, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1998, 1997 and 1996. 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, 1998 and 1997 and the results of its
operations and its cash flows for the years ended December 31, 1998, 1997 and
1996, in conformity with generally accepted accounting principles.
/s/ RAICH ENDE MALTER LERNER & CO.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
April 1, 1999
F-1
<PAGE>
PRIME CELLULAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Assets
Current Assets
Cash $ 84,146 $ 743,683
Certificate of deposit - restricted 200,000 --
Investment securities 5,096,557 --
Accounts receivable - net of allowance for doubtful
accounts of $20,000 and $10,000 for 1998 and 1997,
respectively 305,575 281,332
Unbilled services 23,799 65,188
Inventory 116,991 135,077
Prepaid expenses 8,728 --
----------- -----------
5,835,796 1,225,280
----------- -----------
Property, Plant and Equipment 1,522,516 1,117,639
Less: Accumulated depreciation and amortization 518,792 321,868
----------- -----------
1,003,724 795,771
----------- -----------
Other Assets
Investment securities receivable 4,978,947 --
Deferred financing costs - net of accumulated amortization
of $365 and $175 for 1998 and 1997, respectively 7,216 7,406
----------- -----------
4,986,163 7,406
----------- -----------
$11,825,683 $ 2,028,457
=========== ===========
</TABLE>
F-2
<PAGE>
================================================================================
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Collateralized investment loan $ 5,000,000 $ --
Note payable - bank 160,000 --
Line of credit -- 31,295
Current maturities of long-term debt 25,533 27,038
Accounts payable and accrued expenses 427,313 263,229
Customer deposits 270,143 614,640
Unearned revenue 42,387 52,648
------------ ------------
5,925,376 988,850
Long-Term Debt - net of current maturities 324,164 351,111
Stockholder Loans - net of unamortized discount
of $37,515 and $116,748 for 1998 and 1997,
respectively 501,860 397,627
------------ ------------
6,751,400 1,737,588
------------ ------------
Stockholders' Equity
Preferred Stock - $.01 par value, 5,000,000 shares
authorized - none issued -- --
Common Stock - $.01 par value, 20,000,000 shares authorized, 6,108,700
and 1,611,000 shares issued
and oustanding in 1998 and 1997, respectively 61,087 16,110
Additional paid-in capital 5,813,710 376,599
Accumulated (deficit) (800,514) (101,840)
------------ ------------
5,074,283 290,869
------------ ------------
$ 11,825,683 $ 2,028,457
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PRIME CELLULAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Revenue
Contract revenue $ 928,686 $ 1,125,855 $ 602,836
Sales of goods 1,198,547 1,054,335 868,385
----------- ----------- -----------
2,127,233 2,180,190 1,471,221
----------- ----------- -----------
Direct Costs
Contract revenue 815,947 696,195 378,071
Sales of goods 642,310 645,519 555,167
----------- ----------- -----------
1,458,257 1,341,714 933,238
----------- ----------- -----------
Income After Direct Costs
Contract revenue 112,739 429,660 224,765
Sales of goods 556,237 408,816 313,218
----------- ----------- -----------
668,976 838,476 537,983
----------- ----------- -----------
Other Operating Expenses
Contract revenue 699,977 610,388 273,133
Sales of goods 434,728 427,606 272,380
----------- ----------- -----------
1,134,705 1,037,994 545,513
----------- ----------- -----------
Research and Development
Contract revenue 38,307 10,000 5,000
Sales of goods 35,360 10,000 5,000
----------- ----------- -----------
73,667 20,000 10,000
----------- ----------- -----------
(Loss) from Segment Operations
Contract revenue (625,545) (190,728) (53,368)
Sales of goods 86,149 (28,790) 35,838
----------- ----------- -----------
(539,396) (219,518) (17,530)
----------- ----------- -----------
Corporate Activities
Selling, general and administrative expenses (267,761) -- --
Other income -- 44,375 (36,554)
Interest income 223,381 12,949 1,182
Interest expense (104,385) (47,427) (7,077)
----------- ----------- -----------
(148,765) 9,897 (42,449)
----------- ----------- -----------
(Loss) Before Provision for Income Taxes (688,161) (209,621) (59,979)
Provision for Income Taxes 10,513 -- 2,638
----------- ----------- -----------
Net (Loss) $ (698,674) $ (209,621) $ (62,617)
=========== =========== ===========
Basic and Diluted Net (Loss) Per Share $ (.16) $ (.17) $ (.07)
=========== =========== ===========
Weighted Average Shares Outstanding 4,308,180 1,255,500 900,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PRIME CELLULAR, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
Common Stock Additional Retained
-------------------------- Paid-In Earnings
Shares Amount Capital (Deficit) Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1996 900,000 $ 9,000 $ (8,990)* $ 170,398 $ 170,408
Net (loss) -- -- -- (62,617) (62,617)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1996 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
=========== =========== =========== =========== ===========
</TABLE>
* 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
<PAGE>
PRIME CELLULAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows Page 1 of 2
================================================================================
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) $ (698,674) $ (209,621) $ (62,617)
Adjustments to reconcile net (loss) to
net cash provided by (used for)
operating activities:
Depreciation 183,959 112,078 68,302
Amortization 190 175 --
Loss on sale of fixed assets -- -- 41,258
Increase in allowance for doubtful accounts 10,000 10,000 --
Accrued interest on stockholder loans 45,324 17,826 --
Stock-based compensation -- 22,500 --
(Increase) decrease in:
Accounts receivable (34,243) (16,428) (99,581)
Unbilled services 41,389 (31,578) (33,610)
Inventory 18,086 (57,375) (20,542)
Prepaid expenses (765) 14,713 (9,967)
Increase (decrease) in:
Accounts payable 42,969 (44,374) 245,192
Customer deposits (344,497) 614,640 --
Taxes payable -- (800) (13,394)
Unearned revenue (10,261) (72,072) 124,720
----------- ----------- -----------
(746,523) 359,684 239,761
----------- ----------- -----------
Cash Flows from Investing Activities
Acquisitions of property and equipment (347,173) (447,936) (100,774)
Proceeds from sale of fixed assets -- -- 21,675
Cash acquired in connection with merger 546,484 -- --
Purchase of certificate of deposit (200,000) -- --
Purchase of investment securities (5,014,578) -- --
----------- ----------- -----------
(5,015,267) (447,936) (79,099)
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PRIME CELLULAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows Page 2 of 2
================================================================================
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net borrowings (repayments) on line of credit $ (31,295) $ 5,605 $ 2,591
Proceeds of notes payable 160,000 100,000 --
Payment of deferred financing costs -- (7,581) --
Repayments of notes payable (28,452) (16,754) (42,799)
Loans from stockholders -- 517,150 --
Repayments of loans from stockholders -- (150,207) (30,806)
Issuance of stock -- 250,000 --
Proceeds of collateralized investment loan 5,000,000 -- --
Options exercised 2,000 -- --
----------- ----------- -----------
5,102,253 698,213 (71,014)
----------- ----------- -----------
Increase (Decrease) in Cash (659,537) 609,961 89,648
Cash - beginning 743,683 133,722 44,074
----------- ----------- -----------
Cash - end $ 84,146 $ 743,683 $ 133,722
=========== =========== ===========
Supplemental Disclosures Cash paid during the year:
Interest $ 58,742 $ 9,565 $ 7,077
=========== =========== ===========
Income taxes $ 11,935 $ -- $ 2,638
=========== =========== ===========
Non-cash investing and financing activities:
Land and building acquired with mortgage $ -- $ 287,600 $ --
=========== =========== ===========
Inconnection 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
===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
PRIME CELLULAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
================================================================================
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, 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 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.
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.
Continued
F-8
<PAGE>
e. Property, Plant and Equipment - Property, plant and equipment are
stated at cost. Depreciation is provided on the straight-line method
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.
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 1998, 1997 and 1996
were approximately $213,000, $20,000 and $10,000, respectively, of
which approximately $140,000 was refunded by government agencies for
1998.
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 1998,
1997 and 1996 were $24,099, $12,726, and $56,342.
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.
Continued
F-9
<PAGE>
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 to the extent such conversion
would be dilutive. Common stock equivalents, consisting of stock
options, were excluded from the computation for the years ended
December 31, 1998 and 1997 because of their anti-dilutive effect.
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, results of operations or cash flows.
o. 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,
-------------------------
1998 1997
-------------------------
Finished Goods $ 55,784 $ 74,469
Packaging Materials 31,566 32,458
Raw Materials 29,641 28,150
-------- --------
$116,991 $135,077
======== ========
Continued
F-10
<PAGE>
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.
5 - Investment Securities
At December 31, 1998, the Company held investments in securities which were
classified as held-to-maturity. These securities included both a security
due within one year and a security receivable pursuant to a repurchase
agreement with a maturity date beyond one year. The security with a
maturity date within one year is classified as Investment securities and is
included within Current Assets at amortized cost plus accrued interest. The
security with a maturity date beyond one year is classified as a
non-current Investment security receivable and is stated at amortized cost
plus accrued interest.
The held-to-maturity securities at December 31, 1998 included the
following:
Amortized
Cost Fair Value
-------------------------
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
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
Net Book Value - held-to-maturity securities $10,075,504
===========
Continued
F-11
<PAGE>
6 - Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31,
---------------------- Estimated
1998 1997 Useful Lives
--------------------------------------
Land $ 90,000 $ 90,000 --
Building and Improvements 325,480 270,392 39-40 years
Machinery and Equipment 934,544 594,600 5-17 years
Leasehold Improvements 90,338 90,338 Lease life
Furniture and Fixtures 82,154 72,309 5-10 years
---------- ----------
1,522,516 1,117,639
Less: Accumulated depreciation
and amortization 518,792 321,868
---------- ----------
$1,003,724 $ 795,771
========== ==========
Depreciation and amortization expense charged to operations is $184,149,
$112,253 and $68,302 for the years ended December 31, 1998, 1997 and 1996,
respectively.
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 is collateralized by a
$200,000 certificate of deposit as well as a personal guarantee by one of
the officers of the Company.
8 - Line of Credit
At December 31, 1997, the Company had an outstanding balance of $31,295 on
a $75,000 line of credit issued by a bank. The line of credit had expired
in September, 1997 and was paid in full in January, 1998.
Continued
F-12
<PAGE>
9 - Long-Term Debt
Long-term debt consists of the following:
December 31,
--------------------------
1998 1997
--------------------------
Mortgage Payable - payable in
240 monthly installments of
$2,610 to February, 2017,
including a variable interest
rate which is adjusted
annually (1998 rate was 9%) -
secured by the Company's
building in Phillipsburg, New
Jersey $ 277,488 $ 284,972
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 71,863 89,303
Other 346 3,874
----------- -----------
349,697 378,149
Less: Current maturities 25,533 27,038
----------- -----------
$ 324,164 $ 351,111
=========== ===========
Principal maturities of long-term debt over the next five years are as
follows:
December 31, 1999 $ 25,533
2000 28,492
2001 31,029
2002 16,037
2003 9,016
Thereafter 239,590
-----------
$ 349,697
===========
10 - Stockholder Loans
Six stockholders advanced $500,000, in aggregate, to CMT 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%.
Continued
F-13
<PAGE>
As a result of the merger, the above loans' maturity dates have been
accelerated to May 1, 2000. The imputed interest has been adjusted 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. At December 31, 1998, the balance of
stockholder loans, net of unamortized discount of $37,515 is $501,860. The
interest, including imputed amounts, totaled $17,826, from July 15, 1997
through December 31, 1997 and $45,142 for 1998.
11 - Related Party Transactions and Leases
During 1996, the Company sold certain automobiles to stockholders and
incurred an aggregate loss of approximately $41,000 on the sales.
In May, 1997, the Company entered into an employment agreement with CMT's
President/CEO. The agreement is for an initial term of three years and
contains a provision for an automatic one-year extension, unless written
notice is received by either party.
The Comapny has a consulting agreement with its President/CEO which
provides for monthly consulting fees and expenses and allows him to
participate in employee benefit plans and receive fringe benefits generally
provided to senior management.
The Company has, from time to time, received various other loans from its
stockholders to fund operations.
The Company subleases its former administrative office and executive
research laboratory from a stockholder of the Company. The underlying lease
expires in November, 1999. However, the Company has entered into an oral
agreement with the landlord to terminate the lease effective April 30,
1999. Rent payments are made directly to the landlord on behalf of the
officer of the Company. Rental expense of $15,840, $17,444 and $14,000 was
incurred under sublease for the years ended December 31, 1998, 1997 and
1996, respectively. The future minimum lease payments to be made for these
premises are $13,200 for the year ending December 31, 1999.
The Company subleases executive office space from the Company's president
on a month-to-month basis. Rental expense was $10,500 for the year ended
December 31, 1998.
12 - Income Taxes
The components of the provision for income taxes for the years ended are as
follows:
December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Current $10,513 $ -- $ 2,638
Deferred -- -- --
------- ------- -------
$10,513 $ -- $ 2,638
======= ======= =======
Continued
F-14
<PAGE>
Deferred taxes reflect the tax effects of temporary differences between the
amount 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:
December 31,
-------------------------------
1998 1997 1996
-------------------------------
Net Operating Loss Carryforward $444,000 $ 64,000 $ --
Depreciation and Other Temporary Differences 21,000 11,000 --
-------- -------- ---------
465,000 75,000 --
Less: Valuation allowance 465,000 75,000 --
-------- -------- ---------
$ -- $ -- $ --
======== ======== =========
The provision for income taxes differs from the amount using the statutory
federal income tax rate (34%) as follows:
December 31,
-----------------------------------
1998 1997 1996
-----------------------------------
At Statutory Rates $(238,000) $ (64,000) $ (20,000)
Loss for which no benefit was recorded 238,000 75,000 --
Loss of Net Operating Loss Carryforward
Benefit Related to S Corporation -- -- 16,900
No Federal Income Tax on S Corporation -- (17,000) --
Other - primarily state taxes 10,513 6,000 5,738
--------- --------- ---------
$ 10,513 $ -- $ 2,638
========= ========= =========
The Company has available to offset future income taxes a net operating
loss of approximately $907,000 expiring in 2013 that is subject to separate
return loss year restrictions.
Continued
F-15
<PAGE>
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,
----------------------
1998 1997
----------------------
Contract Receivables
Billed: Contracts in progress $ 114,814 $ 66,187
Unbilled 23,799 65,188
--------- ---------
138,613 131,375
Less: Allowance for doubtful collections -- --
--------- ---------
$ 138,613 $ 131,375
========= =========
Unearned Revenue
Costs incurred on uncompleted contracts $ 131,150 $ 197,207
Estimated earnings 48,642 223,847
--------- ---------
179,792 421,054
Less: Billings to date 198,380 408,514
--------- ---------
$ (18,588) $ 12,540
========= =========
Included in the accompanying balance sheets
under the following captions:
Unbilled services $ 23,799 $ 65,188
Unearned revenue (42,387) (52,648)
--------- ---------
$ (18,588) $ 12,540
========= =========
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-16
<PAGE>
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:
1998 1997
------------------------
Assumptions
Expected life of options 5 years 5 years
Risk free interest rate 5% 5.5%
Volatility of stock 172% -
Expected dividend yield - -
Options granted in 1997, when the Company was privately-held were valued in
accordance with SFAS 123 which does not consider expected volatility for
nonpublic entities.
The weighted average fair value of the options granted during 1998 and 1997
was $287,390 and $5,500, 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:
1998 1997
------------------------------
Net (Loss)
As reported $ (698,674) $ (209,621)
Pro forma (914,045) (210,721)
Earnings Per Share
As reported (.16) (.17)
Pro forma (.21) (.17)
Continued
F-17
<PAGE>
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 shareholders commensurately.
Presented below is a summary of stock option plan activity for the years
shown:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Options Exercise
Options Price Exercisable Price
-----------------------------------------------------------
<S> <C> <C> <C> <C>
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
===========
</TABLE>
The following summarizes information for options currently outstanding and
exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Number Life Price Number Price
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Range of Prices
$ .28 108,000 3 years $ .28 43,200 $ .28
.75 290,000 3 years .95 190,000 .75
1.63 217,000 2 years 1.63 217,000 1.63
2.00 18,000 4 years 2.00 18,000 2.00
2.25 25,000 3 years 2.25 -- --
---------- ----------
658,000 $1.00 468,200 $ 1.16
========== ==========
</TABLE>
Continued
F-18
<PAGE>
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 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,
-----------------------------------------
1998 1997 1996
-----------------------------------------
Contract Revenue and Sales
MCS $ 930,686 $ 1,125,855 $ 602,836
SM 1,238,343 1,054,335 868,385
----------- ----------- -----------
$ 2,169,029 $ 2,180,190 $ 1,471,221
=========== =========== ===========
(Loss) Before Taxes
MCS $ (678,341) $ (190,728) $ (53,368)
SM 138,945 (28,790) 35,838
----------- ----------- -----------
$ (539,396) $ (219,518) $ (17,530)
=========== =========== ===========
Continued
F-19
<PAGE>
December 31,
------------------------------------
1998 1997 1996
------------------------------------
Depreciation and Amortization
MCS $ 137,795 $ 82,502 $ 41,265
SM 41,383 29,751 27,037
---------- ---------- ----------
$ 179,178 $ 112,253 $ 68,302
========== ========== ==========
Segment Assets
MCS $ 811,313 $1,520,920 $ 433,047
SM 639,248 507,537 273,917
---------- ---------- ----------
$1,450,561 $2,028,457 $ 706,964
========== ========== ==========
Expenditures for Segment Assets
MCS $ 264,896 $ 368,778 $ 99,154
SM 82,277 366,758 1,620
---------- ---------- ----------
$ 347,173 $ 735,536 $ 100,774
========== ========== ==========
Essentially all revenue earned for the years ended December 31, 1998, 1997
and 1996 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:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Contract Revenues and Sales
Total contract revenues and sales for
reportable segments $ 2,169,029 $ 2,180,190 $ 1,471,221
Elimination of intersegment revenues
and sales (41,796) -- --
----------- ----------- -----------
$ 2,127,233 $ 2,180,190 $ 1,471,221
=========== =========== ===========
</TABLE>
Continued
F-20
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
(Loss) Before Taxes
Total (loss) for reportable segments $ (539,396) $ (219,518) $ (17,530)
Corporate income and expenses
unallocated to segments (148,765) 9,897 (42,449)
------------ ------------ ------------
$ (688,161) $ (209,621) $ (59,979)
============ ============ ============
Depreciation and Amortization
Total depreciation and amortization for
reportable segments $ 179,178 $ 112,253 $ 68,302
Corporate depreciation and amortization
unallocated to segments 4,971 -- --
------------ ------------ ------------
$ 184,149 $ 112,253 $ 68,302
============ ============ ============
Assets
Total assets for reportable segments $ 1,450,561 $ 2,028,457 $ 706,964
Corporate assets unallocated to segments 10,375,122 -- --
------------ ------------ ------------
$ 11,825,683 $ 2,028,457 $ 706,964
============ ============ ============
</TABLE>
F-21
<PAGE>
16 - Significant Customers and Concentrations of Credit Risk
For the years ended December 31, 1998, 1997 and 1996, the Company had
significant sales and receivable balances from major customers in the
pharmaceutical and biotechnology industries and academia as follows:
<TABLE>
<CAPTION>
Approximate Year-to- Date
-------------------------------------------------------------------------------
December 31, 1998 December 31, 1997 December 31, 1996
-------------------------------------------------------------------------------
Percentage Percentage Percentage
Sales of Total Sales of Total Sales of Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Significant Customer
A - segment MCS $241,000 11% $528,000 24% $345,000 23%
B - segment SM 280,000 13 229,000 11 189,000 13
-------- -------- -------- -------- -------- --------
$521,000 24% $757,000 35% $534,000 36%
======== ======== ======== ======== ======== ========
</TABLE>
Approximate Value at Year End
---------------------------------------------------
December 31, 1998 December 31, 1997
---------------------------------------------------
Accounts Accounts
Receivable Percentage Receivable Percentage
(Net) * of Total (Net) * of Total
---------------------------------------------------
Significant Customer
A $ 46,000 14% $ 48,000 16%
B -- -- 37,000 13
C -- -- 36,000 12
D 40,000 12 -- --
E 33,000 10 -- --
F 66,000 20 -- --
-------- -------- -------- --------
$185,000 56% $121,000 41%
======== ======== ======== ========
*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.
17 - Fourth Quarter Adjustment
For the three months ended December 31, 1998, the Company recorded an
adjustment totaling $125,350 to reclassify the results of operations of the
legal acquirer for the period January 1, 1998 through May 29, 1998, the
date of the merger, to additional paid in capital. A reconciliation of the
effect of this adjustment follows:
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------------------------------------
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
========================================================
<S> <C> <C> <C> <C>
Net (Loss) - as previously reported $(240,633) $(322,314) $(173,952) $ (87,125)
Adjustment described above -- -- 45,590 79,760
--------- --------- --------- ---------
Net (Loss) - as restated $(240,633) $(322,314) $(128,362) $ (7,365)
========= ========= ========= =========
Net (Loss) Per Share - as previously
reported $ (.04) $ (.05) $ (.05) $ (.05)
Adjustment described above -- -- (.02) (.05)
--------- --------- --------- ---------
Net (Loss) Per Share - as restated $ (.04) $ (.05) $ (.03) $ (.00)
========= ========= ========= =========
</TABLE>
F-22
<PAGE>
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.
April 14, 1999 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Joseph K. Pagano
- ----------------------- Director, President April 14, 1999
Joseph K. Pagano (principal executive officer)
/s/ Robert A. Reinhart
- ----------------------- Chief Financial Officer, Treasure, April 14, 1999
Robert A. Reinhart Secretary and Vice President (principal
financial and principal accounting officer)
- ----------------------- Director April __, 1999
Frederick R. Adler
/s/ Samuel Rozzi
- ----------------------- Director April 14, 1999
Samuel Rozzi
/s/ Richard Malavarca
- ----------------------- Director April 14, 1999
Richard Malavarca
/s/ Thomas Livelli
- ----------------------- Director April 14, 1999
Thomas Livelli
/s/ Paul A. Marks
- ----------------------- Director April 14, 1999
Paul A. Marks
</TABLE>
MORTGAGE
THIS MORTGAGE IS DATED FEBRUARY 6, 1997, between 580 MARSHALL STREET LLC,
whose address is 580 MARSHALL STREET, PHILLIPSBURG, NJ 08865-9999 (referred to
below as "Grantor"); and THE PHILLIPSBURG NATIONAL BANK & TRUST COMPANY, whose
address is 115 SOUTH MAIN STREET, P. 0. BOX 5360, PHILLIPSBURG, NJ 08865-5360
(referred to below as "Lender").
GRANT OF MORTGAGE. For valuable consideration, Grantor mortgages and
conveys to Lender all of Grantor's right, title, and interest in and to the
following described real property, together with all existing or subsequently
erected or affixed buildings, improvements and fixtures; all easements, rights
of way, and appurtenances; all water, water rights, watercourses and ditch
rights (including stock in utilities with ditch or irrigation rights); and all
other rights, royalties, and profits relating to the real property, including
without limitation all minerals, oil, gas, geothermal and similar matters,
located in WARREN County, State of New Jersey (the "Real Property"):
SEE ATTACHED SCHEDULE "A"
The Real Property or its address is commonly known as 580 MARSHALL STREET,
PHILLIPSBURG, NJ 08865-9999. The Real Property tax identification number is
BLOCK 1005 LOT 2.
Grantor presently assigns to Lender all of Grantor's right, title, and
interest in and to all leases of the Property and all Rents from the Property.
In addition, Grantor grants to Lender a Uniform Commercial Code security
interest in the Personal Property and Rents.
DEFINITIONS. The following words shall have the following meanings when
used in this Mortgage. Terms not otherwise defined in this Mortgage shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Grantor. The word "Grantor" means 580 MARSHALL STREET LLC. The Grantor is
the mortgagor under this Mortgage.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with the Indebtedness.
Improvements. The word "Improvements" means and includes without limitation
all existing and future improvements, buildings, structures, mobile homes
affixed on the Real Property, facilities, additions, replacements and other
construction an the Real Property.
<PAGE>
Indebtedness. The word "Indebtedness" means all principal and interest
payable under the Note and any amounts expended or advanced by Lender to
discharge obligations of Grantor or expenses incurred by Lender to enforce
obligations of Grantor under this Mortgage, together with interest on Such
amounts as provided in this Mortgage.
Lender. The word "Lender" means THE PHILLIPSBURG NATIONAL BANK & TRUST
COMPANY, its successors and assigns. The Lender is the mortgagee under this
Mortgage.
Mortgage. The word "Mortgage" means this Mortgage between Grantor and
Lender, and includes without limitation all assignments and security interest
provisions relating to the Personal Property and Rents.
Note. The word "Note" means the promissory note or credit agreement dated
February 6, 1997, in the original principal amount of $287,600.00 from Grantor
to Lender, together with all renewals cf. extensions of, modifications of,
refinancings of, consolidations of, and substitutions for the promissory note or
agreement. NOTICE TO GRANTOR: THE NOTE CONTAINS A VARIABLE INTEREST RATE.
Personal Property. The words "Personal Property" mean all equipment,
fixtures, and other articles of personal property now or hereafter owned by
Grantor, and now or hereafter attached or affixed to the Real Property; together
with all accessions, parts, and additions to, all replacements of, and all
substitutions for, any of such property; and together with all proceeds
(including without limitation all insurance proceeds and refunds of premiums)
from any sale or other disposition of the Property.
Property. The word "Property" means collectively the Real Property and the
Personal Property.
Real Property. The words "Real Property" mean the property, interests and
rights described above in the "Grant of Mortgage" section.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
Rents. The word "Rents" means all present and.future rents, revenues,
income, issues, royalties, profits, and other benefits derived from the
Property.
-2-
<PAGE>
THIS MORTGAGE, INCLUDING THE ASSIGNMENT OF RENTS AND THE SECURITY INTEREST
IN THE RENTS AND PERSONAL PROPERTY, IS GIVEN TO SECURE (1) PAYMENT OF THE
INDEBTEDNESS AND (2) PERFORMANCE OF ALL OBLIGATIONS OF GRANTOR UNDER THIS
MORTGAGE AND THE RELATED DOCUMENTS. THIS MORTGAGE IS GIVEN AND ACCEPTED ON THE
FOLLOWING TERMS:
PAYMENT AND PERFORMANCE. Except as otherwise provided in this Mortgage.
Grantor shall pay to Lender all amounts secured by this Mortgage as they become
due, and shall strictly perform all of Grantor's obligations under this
Mortgage.
POSSESSION AND MAINTENANCE OF THE PROPERTY. Grantor agrees that Grantor's
possession and use of the Property shall be governed by the following
provisions:
Possession and Use. Until in default, Grantor may remain in possession and
control of and operate and manage the Property and called the Rents from the
Property.
Duty to Maintain. Grantor shall maintain the Property in tenantable
condition and promptly perform all repairs, replacements, and maintenance
necessary to preserve its value.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Mortgage, shall
have the same meanings as set forth in the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et
seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub.
L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901, et seq., the New Jersey Industrial Site Recovery Act, NJSA Section
13:1K-6 ("ISRA"), the New Jersey Spill Compensation and Control Act, NJSA
58:10-23.11 et seq., or other applicable state or Federal laws, rules, or
regulations adopted pursuant to any of the foregoing. The terms "hazardous
waste" and "hazardous substance" shall also include, without limitation,
petroleum and petroleum by-products or any fraction thereof and asbestos.
Grantor represents and warrants to Lender that: (a) During the period of
Grantor's ownership of the Property, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened release of any
hazardous waste or substance by any person on, under, about or from the
Property; (b) Grantor has no knowledge of, or reason to believe that there has
been, except as previously disclosed to and acknowledged by Lender in writing,
(i) any use, generation, manufacture, storage, treatment, disposal, release, or
threatened release of any hazardous waste or substance on, under, about or from
the Property by any prior owners or occupants of the Property or (ii) any actual
or threatened litigation or claims of any kind by any
-3-
<PAGE>
person relating to such matters; and (c) except as previously disclosed to and
acknowledged by Lender in writing, (i) neither Grantor nor any tenant,
contractor, agent or other authorized user of the Property shall use, generate,
manufacture, store, treat, dispose of, or release any hazardous waste or
substance on, under, about or from the Property and (ii) any such activity shall
be conducted in compliance with all applicable federal, state, and local laws,
regulations and ordinances, including without limitation those laws,
regulations, and ordinances described above. Grantor authorizes Lender and its
agents to enter upon the Property to make such inspections and tests, at
Grantor's expense, as Lender may deem appropriate to determine compliance of the
Property with this section of the Mortgage. Any inspections or tests made by
Lender shall be for Lender's purposes only and shall not be construed to create
any responsibility or liability on the part of Lender to Grantor or to any other
person. The representations and warranties contained herein are based on
Grantor's due diligence in investigating the Property for hazardous waste and
hazardous substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor becomes liable
for cleanup or other costs under any such laws, and (b) agrees to indemnify and
hold harmless Lender against any and all claims, losses, liabilities, damages,
penalties, and expenses which Lender may directly or indirectly sustain or
suffer resulting from a breach of this section of the Mortgage or as a
consequence of any use, generation, manufacture, storage, disposal, release or
threatened release occurring prior to Grantor's ownership or interest in the
Property, whether or not the same was or should have been known to Grantor. The
provisions of this section of the Mortgage, including the obligation to
indemnify, shall survive the payment of the Indebtedness and the satisfaction
and reconveyance of the lien of this Mortgage and shall not be affected by
Lender's acquisition of any interest in the Property, whether by foreclosure or
otherwise.
Nuisance, Waste. Grantor shall not cause, conduct or permit any nuisance
nor commit, permit, or suffer any stripping of or waste on or to the Property or
any portion of the Property. Without limiting the generality of the foregoing,
Grantor will not remove. or grant to any other party the right to remove, any
timber, minerals (including oil and gas), soil, gravel or rock products without
the prior written consent of Lender.
Removal of Improvements. Grantor shall not demolish or remove any
improvements from the Real Property without the prior written consent of Lender.
As a condition to the removal of any improvements, Lender may require Grantor to
make arrangements satisfactory to Lender to replace such improvements with
improvements of at least equal value.
-4-
<PAGE>
Lender's Right to Enter. Lender and its agents and representatives may
enter upon the Real Property at all reasonable times to attend to Lender's
interests and to inspect the Property for purposes of Grantor's compliance with
the terms and conditions of this Mortgage.
Compliance with Governmental Requirements. Grantor shall promptly comply
with all laws, ordinances, and regulations, now or hereafter in effect, of all
governmental authorities applicable to the use or occupancy of the Property,
including without limitation, the Americans With Disabilities Act. Grantor may
contest in good faith any such law, ordinance, or regulation and withhold
compliance during any proceeding, including appropriate appeals, so long as
Grantor has notified Lender in writing prior to doing so and so long as, in
Lender's sole opinion, Lender's interests in the Property are not jeopardized.
Lender may require Grantor to post adequate security or a surety bond,
reasonably satisfactory to Lender, to protect Lender's interest.
Duty to Protect. Grantor agrees neither to abandon nor leave unattended the
Property. Grantor shall do all other acts, in addition to those acts set forth
above in this section, which from the character and use at the Property are
reasonably necessary to protect and preserve the Property.
DUE ON SALE - CONSENT BY LENDER. Lender may, at its option, declare
immediately due and payable all sums secured by this Mortgage upon the sale or
transfer, without the Lenders prior written consent, of all or any part of the
Real Property, or any interest in the Real Property. A "sale or transfer" means
the conveyance of Real Property or any right, title or interest therein; whether
legal, beneficial or equitable; whether voluntary or involuntary; whether by
outright sale, deed, installment sale contract, land contract, contract for
deed, leasehold interest with a term greater than three (3) years, lease-option
contract, or by sale, assignment, or transfer of any beneficial interest in or
to any land trust holding title to the Real Property, or by any other method of
conveyance of Real Property interest. If any Grantor is a corporation,
partnership or limited liability company, transfer also includes any change in
ownership of more than twenty-five percent (25%) of the voting stock,
partnership interests or limited liability company interests, as the case may
be, of Grantor. However, this option shall not be exercised by Lender if such
exercise is prohibited by federal law or by New Jersey law.
TAXES AND LIENS. The following provisions relating to the taxes and liens
on the Property are a part of this Mortgage.
Payment. Grantor shall pay when due (and in all events prior to
delinquency) all taxes, payroll taxes, special taxes, assessments, water charges
and sewer service charges
-5-
<PAGE>
levied against or on account of the Property, and shall pay when due all claims
for work done on or for services rendered or material furnished to the Property.
Grantor shall maintain the Property free of all liens having priority over or
equal to the interest of Lender under this Mortgage, except for the lien of
taxes and assessments not due, and except as otherwise provided in the following
paragraph.
Right To Contest. Grantor may withhold payment of any tax, assessment, or
claim in connection with a good faith dispute over the obligation to pay, as
long as Lender's interest in the Property is not jeopardized. If a lien arises
or is filed as a result of nonpayment, Grantor shall within fifteen (15) days
after the lien arises or, if a lien is filed, within fifteen (15) days after
Grantor has notice of the filing, secure the discharge of the tier, or if
requested by Lender, deposit with Lender cash or a sufficient corporate surety
bond or other security satisfactory to Lender in an amount sufficient to
discharge the lien plus any costs and attorneys' fees or other charges that
could accrue as a result of a foreclosure or sale under the lien. In any
contest, Grantor shall defend itself and Lender and shall satisfy any adverse
judgment before enforcement against the Property. Grantor shall name Lender as
an additional obligee under any surety bond furnished in the contest
proceedings.
Evidence of Payment. Grantor shall upon demand furnish to Lender
satisfactory evidence of payment of the taxes or assessments and shall authorize
the appropriate governmental official to deliver to Lender at any time a written
statement of the taxes and assessments agaInst the Property.
Notice of Construction. Grantor shall notify Lender at least fifteen (15)
days before any work is commenced, any services are furnished, or any materials
are supplied to the Property, if any constructIon lion could be asserted on
account of the work, services, or materials. Grantor will upon request of Lender
furnish to Lender advance assurances satisfactory to Lender that Grantor can and
will pay the cost of such improvements.
No Claim For Credit For Taxes. Grantor will not make deduction from or
claim credit an the principal or interest secured by this Mortgage by reason of
any governmental taxes, assessments or charges. Grantor will not claim any
deduction from the taxable value of the Property by reason of this Mortgage.
PROPERTY DAMAGE INSURANCE. The following provisions relating to insuring
the Property are a part of this Mortgage.
Maintenance of Insurance. Grantor shall procure and maintain policies of
fire insurance with standard extended coverage endorsements on a replacement
basis for the full insurable value covering all improvements on the Real
Property in
-6-
<PAGE>
an amount sufficient to avoid application of any coinsurance clause, and with a
standard mortgagee clause in favor of Lender. Grantor shall also procure and
maintain comprehensive general liability insurance in such coverage amounts as
Lender may request with Lender being named as additional insureds in such
liability insurance policies. Additionally, Grantor shall maintain such other
insurance, including but not limited to hazard, business interruption and boiler
insurance as Lender may require. Policies shall be written by such insurance
companies and in such form as may be reasonably acceptable to Lender. Grantor
shall deliver to Lender certificates of coverage from each insurer containing a
stipulation that coverage will not be cancelled or diminished without a minimum
of ten (10) days' prior written notice to Lender and not containing any
disclaimer of the insurer's liability for failure to give such notice. Each
insurance policy also shall include an endorsement providing that coverage in
favor of Lender will not be impaired in any way by any act, omission or default
of Grantor or any other person. Should the Real Property at any time become
located in an area designated by the Director of the Federal Emergency
Management Agency as a special flood hazard area, Grantor agrees to obtain and
maintain Federal Flood Insurance for the full unpaid principal balance of the
loan, up to the maximum policy limits set under the National Flood Insurance
Program, or as otherwise required by Lender, and to maintain such insurance for
the term of the loan.
Application of Proceeds. Grantor shall promptly notify Lender of any loss
or damage to the Property. Lender may make proof of loss if Grantor fails to do
so within fifteen (15) days of the casualty. Whether or not Lender's security is
impaired, Lender may, at its election, apply the proceeds to the reduction of
the Indebtedness, payment of any lien affecting the Property, or the restoration
and repair of the Property. If Lender elects to apply the proceeds to
restoration and repair, Grantor shall repair or replace the damaged or destroyed
improvements in a manner satisfactory to Lender. Lender shall, upon satisfactory
proof of such expenditure, pay or reimburse Grantor from the proceeds for the
reasonable cost of repair or restoration if Grantor is not in default hereunder.
Any proceeds which have not been disbursed within 180 days after their receipt
and which Lender has not committed to the repair or restoration of the Property
shall be used first to pay any amount owing to Lender under this Mortgage, then
to prepay accrued interest, and the remainder, if any, shall be applied to the
principal balance of the Indebtedness. If Lender holds any proceeds after
payment in full of the Indebtedness, such proceeds shall be paid to Grantor.
Unexpired Insurance at Sale. Any unexpired insurance shall inure to the
benefit of, and pass to, the purchaser of the Property covered by this Mortgage
at any
-7-
<PAGE>
trustee's sale or other sale held under the provisions of this Mortgage, or at
any foreclosure sale of such Property.
Grantees Report on Insurance. Upon request of Lender, however not more then
once a year, Grantor shall furnish to Lender a report on each existing policy of
insurance showing: (a) the name of the insurer; (b) the risks insured; (c) the
amount of the policy; (d) the property insured, the then current replacement
value of such property, and the manner of determining that value; and (e) the
expiration date of the policy. Grantor shall, upon request of Lender, have an
independent appraiser satisfactory to Lender determine the cash value
replacement cost of the Property.
EXPENDITURES BY LENDER. If Grantor fails to comply with any provision of
this Mortgage, or if any action or proceeding is commenced that would materially
affect Lender's interests in the Property, Lender on Grantees behalf may, but
shall not be required to, take any action that Lender deems appropriate. Any
amount that Lender expends in so doing will bear interest at the rate provided
for in the Note from the date incurred or paid by Lender to the date of
repayment by Grantor. All such expenses, at Lender's option, will (a) be payable
on demand, (b) be added to the balance of the Note and be apportioned among and
to payable with any installment payments to become due during either (i) the
term of any applicable insurance policy or (ii) the remaining term of the Note,
or (c) be treated as a balloon payment which will be due and payable at the
Note's maturity. This Mortgage also will secure payment of these amounts. The
rights provided for in this paragraph shall be in addition to any other rights
or any remedies to which Lender may be entitled an account of the default. Any
such action by Lender shall not be construed as curIng the default so as to bar
Lender from any remedy that it otherwise would have had.
WARRANTY; DEFENSE OF TITLE. The following provisions relating to ownership
of the Property are a part of this Mortgage.
Title. Grantor warrants that: (a) Grantor holds good and marketable title
of record to the Property in fee simple, free and clear of all liens and
encumbrances other than those set forth in the Real Property description or in
any title insurance policy, title report, or final title opinion issued in favor
of, and accepted by, Lender in connection with this Mortgage, and (b) Grantor
has the full right, power, and authority to execute and deliver this Mortgage to
Lender.
Defense of Title. Subject to the exception in the paragraph above, Grantor
warrants and will forever defend the title to the Property against the lawful
claims of all persons. In the event any action or proceeding is commenced that
questions Grantor's title or the interest of Lender under this Mortgage,
-8-
<PAGE>
Grantor shall defend the action at Grantor's expense. Grantor may be the nominal
party in such proceeding, but Lender shall be entitled to participate in the
proceeding and to be represented in the proceeding by counsel of Lender's own
choice, and Grantor will deliver, or cause to be delivered, to Lender such
instruments as Lender may request from time to time to permit such
participation.
Compliance With Laws. Grantor warrants that the Property and Grantor's use
of the Property complies with all existing applicable laws, ordinances, and
regulations of governmental authorities.
CONDEMNATION. The following provisions relating to condemnation of the
Property are a part of this Mortgage.
Application of Net Proceeds. If all or any part of the Property is
condemned by eminent domain proceedings or by any proceeding or purchase in lieu
of condemnation, Lender may at its election require that all or any portion of
the net proceeds of the award be applied to the Indebtedness or the repair or
restoration of the Property. The net proceeds of the award Shall mean the award
after payment of all reasonable costs, expenses, and attorneys' fees incurred by
Lender in connection with the condemnation.
Proceedings. If any proceeding in condemnation is filed, Grantor shall
promptly notify Lender in writing, and Grantor shall promptly take such steps as
may be necessary to defend the action and obtain the award. Grantor may be the
nominal party in such proceeding, but Lender shall be entitled to participate in
the proceeding and to be represented in the proceeding by counsel of its own
choice, and Grantor will deliver or cause to be delivered to Lender such
instruments as may be requested by it from time to time to permit such
participation.
IMPOSITION OF TAXES, FEES AND CHARGES BY GOVERNMENTAL AUTHORITIES. The
following provisions relating to governmental taxes, fees and charges are a part
of this Mortgage:
Current Taxes, Fees and Charges. Upon request by Lender, Grantor shall
execute such documents in addition to this Mortgage and take whatever other
action is requested by Lender to perfect and continue Lender's lien an the Real
Property. Grantor shall reimburse Lender for all taxes, as described below,
together with all expenses incurred in recording, perfecting or continuing this
Mortgage, including without limitation all taxes, fees, documentary stamps, and
other charges for recording or registering this Mortgage.
Taxes. The following shall constitute taxes to which this section applies:
(a) a specific tax upon this type of Mortgage or upon all or any part of the
Indebtedness secured by
-9-
<PAGE>
this Mortgage; (b) a specific tax on Grantor which Grantor is authorized or
required to deduct from payments on the Indebtedness secured by this type of
Mortgage; (c) a tax an this type of Mortgage chargeable against the Lender or
the holder of the Note; and (d) a specific tax on all or any portion of the
Indebtedness or on payments of principal and interest made by Grantor.
Subsequent Taxes. If any tax to which this section applies is enacted
subsequent to the date of this Mortgage, this event shall have the same effect
as an Event of Default (as defined below), and Lender may exercise any or all of
its available remedies for an Event of Default as provided below unless Grantor
either (a) pays the tax before it becomes delinquent, or (b) contests the tax as
provided above in the Taxes and Liens section and deposits with Lender cash or a
sufficient corporate surety bond or other security satisfactory to Lender.
SECURITY AGREEMENT; FINANCING STATEMENTS. The following provisions relating
to this Mortgage as a security agreement are a part of this Mortgage.
Security Agreement. This instrument shall constitute a security agreement
to the extent any of the Property constitutes fixtures or other personal
property, and Lender shall have all of the rights of a secured party under the
Uniform Commercial Code as amended from time to time.
Security Interest. Upon request by Lender, Grantor shall execute financing
statements and take whatever other acton is requested by Lender to perfect and
continue Lender's security interest in the Rents and Personal Property. In
addition to recording this Mortgage in the real property records, Lender may, at
any time and without further authorization from Grantor, file executed
counterparts, copies or reproductions of this Mortgage as a financing statement.
Grantor shall reimburse Lender for all expenses incurred in perfecting or
continuing this security interest. Upon default, Grantor shall assemble the
Personal Property in a manner and at a place reasonably convenient to Grantor
and Lender and make it available to Lender within three (3) days after receipt
of written demand from Lender.
Addresses. The mailing addresses of Grantor (debtor) and Lender (secured
party), from which information concerning the security interest granted by this
Mortgage may be obtained (each as required by the Uniform Commercial Code), are
as stated on the first page of this Mortgage.
FURTHER ASSURANCES; ATTORNEY-IN-FACT. The following provisions relating to
further assurances and attorney-in-fact are a part of this Mortgage.
-10-
<PAGE>
Further Assurances. At any time, and from time to time, upon request of
Lender, Grantor will make, execute and deliver, or will cause to be made,
executed or delivered, to Lender or to Lender's designee, and when requested by
Lender, cause to be filed, recorded, refiled, or rerecorded, as the case may be,
at such times and in such offices and places as Lender may deem appropriate, any
and all such mortgages, deeds of trust, security deeds, security agreements,
financing statements, continuation statements, instruments of further assurance,
certificates, and other documents as may, in the sole opinion of Lender, be
necessary or desirable in order to effectuate, complete, perfect, continue, or
preserve (a) the obligations of Grantor under the Note, this Mortgage, and the
Related Documents, and (b) the liens and security interests created by this
Mortgage as first and prior liens on the Property, whether now owned or
hereafter acquired by Grantor. Unless prohibited by law or agreed to the
contrary by Lender in writing, Grantor shall reimburse Lender for all costs and
expenses incurred in connection with the matters referred to in this paragraph.
Attorney-in-Fact. If Grantor falls to do any of the things referred to in
the preceding paragraph, Lender may do so for and in the name of Grantor and at
Grantor's expense. For such purposes, Grantor hereby irrevocably appoints Lender
as Grantor's attorney-in-fact for the purpose of making, executing, delivering,
filing, recording, and doing all other things as may be necessary or desirable,
in Lender's sole opinion, to accomplish the matters referred to in the preceding
paragraph.
FULL PERFORMANCE. If Grantor pays all the Indebtedness when due, and
otherwise performs all the obligations imposed upon Grantor under this Mortgage,
Lender shall execute and deliver to Grantor a suitable satisfaction of this
Mortgage and suitable statements of termination of any financing statement on
file evidencing Lender's security interest in the Rents and the Personal
Property. Grantor will pay, if permitted by applicable law, any reasonable
termination fee as determined by Lender from time to time.
DEFAULT. Each of the following, at the option of Lender, shall constitute
an event of default ("Event of Default") under this Mortgage:
Default On Indebtedness. Failure of Grantor to make any payment when due on
the Indebtedness.
Default on Other Payments. Failure of Grantor within the time required by
this Mortgage to make any payment for taxes or insurance, or any other payment
necessary to prevent filing of or to effect discharge of any lien.
-11-
<PAGE>
Compliance Default. Failure of Grantor to comply with any other term,
obligation, covenant or condition contained in this Mortgage, the Note or in any
of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Mortgage, the Note or
the Related Documents is false or misleading in any material respect, either now
or at the time made or furnished.
Defective Collateralization. This Mortgage or any of the Related Documents
ceases to be in full force and affect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any time
and for any reason.
Death or Insolvency. The dissolution (regardless of whether election to
continue is made), any member withdraws from the limited liability company, or
any other termination of Grantor's existence as a going business or the death of
any member, the insolvency of Grantor, the appointment of a receiver for any
part of Grantor's property, any assignment for the benefit of creditors, any
type of creditor workout, or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against Grantor.
Foreclosure, Forfeiture, etc. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Grantor or by any governmental agency against
any of the Property. However, this subsection shall not apply in the event of a
good faith dispute by Grantor as to the validity or reasonableness of the claim
which is the basis of the foreclosure or forfeiture proceeding, provided that
Grantor gives Lender written notice of such claim and furnishes reserves or a
surety bond for the claim satisfactory to Lender.
Breach of Other Agreement. Any breach by Grantor under the terms of any
other agreement between Grantor and Lender that is not remedied within any grace
period provided therein, including without limitation any agreement concerning
any indebtedness or other obligation of Grantor to Lender, whether existing now
or later.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender, and,
in doing so, cure the Event of Default.
-12-
<PAGE>
Adverse Change. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Right to Cure. If such a failure is curable and if Grantor has not bean
given a notice of a breach of the same provision of this Mortgage within the
preceding twelve (12) months, it may be cured (and no Event of Default will have
occurred) if Grantor, after Lender sends written notice demanding cure of such
failure, (a) cures the failure within thirty (30) days; or (b) if the cure
requires more than thirty (30) days, immediately initiates steps sufficient to
cure the failure and thereafter continues and completes all reasonable and
necessary steps sufficient to produce compliance as scion as reasonably
practical.
RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of any Event of Default
and at any time thereafter, Lender, at its option, may exercise any one or more
of the following rights and remedies, in addition to any other rights or
remedies provided by law:
Accelerate Indebtedness. Lender shall have the right at its option without
notice to Grantor to declare the entire Indebtedness immediately due and
payable, including any prepayment penalty which Grantor would be required to
pay.
UCC Remedies. With respect to all or any part of the Personal Property,
Lender shall have all the rights and remedies of a secured party under the
Uniform Commercial Code.
Lender In Possession. Upon acceleration of the Indebtedness or abandonment
of the Property, Lender (in person, by agent or by judicially appointed
receiver) shall be entitled to enter upon, take possession of and manage the
Property and to collect the Rents, including those past due. Any Rents collected
by Lender or the receiver shall be applied first to payment of the costs of
management at the Property and collection of Rents, including but not limited to
receiver's fees, premiums an the receiver's bonds and reasonable attorneys' fees
and then to the other Indebtedness secured by this Mortgage.
Appoint Receiver. Lender shall have the right to have a receiver appointed
to take possession of all or any part at the Property, with the power to protect
and preserve the Property, to operate the Property preceding foreclosure or
sale, and to collect the Rents from the Property and apply the proceeds, over
and above the cost of the receivership, against the Indebtedness. The receiver
may serve without bond if permitted by law. Lender's right to the appointment of
a receiver shall exist whether or not the apparent value of the Property exceeds
the Indebtedness by a substantial amount. Employment by Lender shall not
disqualify a person from serving as a receiver.
-13-
<PAGE>
Judicial Foreclosure. Lender may obtain a judicial decree foreclosing
Grantor's interest in all or any part of the Property.
Nonjudicial Sale. If permitted by applicable law, Lender may foreclose
Grantor's interest in all or in any part of the Personal Property or the Real
Property by nonjudicial sale.
Tenancy at Sufferance. If Grantor remains in possession of the Property
after the Property is sold as provided above or Lender otherwise becomes
entitled to possession of the Property upon default of Grantor, Grantor shall
become a tenant at sufferance of Lender or the purchaser of the Property and
shall, at Lender's option, either (a) pay a reasonable rental for the use of the
Property, or (b) vacate the Property immediately upon the demand of Lender.
Other Remedies. Lender shall have all other rights and remedies provided in
this Mortgage or the Note or available at law or in equity.
Sale of the Property. To the extent permitted by applicable law, Grantor
hereby waives any and all right to have the property marshalled. In exercising
its rights and remedies, Lender shall be free to sell all or any part of the
Property together or separately, in one sale or by separate sales. Lender shall
be entitled to bid at any public sale on all or any portion of the Property.
Notice of Sale. Lender shall give Grantor reasonable notice of the time and
place of any public sale of the Personal Property or of the time after which any
private safe or other intended disposition at the Personal Property is to be
made. Reasonable notice shall mean notice given at least ten (10) days before
the time of the sale or disposition.
Waiver; Election of Remedies. A waiver by any party of a breach of a
provision of this Mortgage shall not constitute a waiver of or prejudice the
party's rights otherwise to demand strict compliance with that provision or any
other provision. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or take action
to perform an obligation of Grantor under this Mortgage after failure of Grantor
to perform shall not affect Lender's right to declare a default and exercise its
remedies under this Mortgage.
Attorneys' Fees; Expenses. If Lender institutes any suit or action to
enforce any of the terms of this Mortgage, Lender shall be entitled to recover
such sum as the court may adjudge reasonable as attorneys' fees at trial and on
any appeal. Whether or not any court action is involved, all reasonable expenses
incurred by Lender that in Lender's opinion are
-14-
<PAGE>
necessary at any time for the protection of its interest or the enforcement of
its rights shall become a part of the Indebtedness payable on demand and shall
bear interest from the date of expenditure until repaid at the rate provided for
in the Note. Expenses covered by this paragraph include, without limitation,
however subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including attorneys'
fees for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals and any anticipated post-judgment
collection services, the cost of searching records, obtaining title reports
(including foreclosure reports), surveyors' reports, and appraisal fees, and
title insurance, to the extent permitted by applicable law. Grantor also will
pay any court costs, in addition to all other sums provided by law.
NOTICES TO GRANTOR AND OTHER PARTIES. Any notice under this Mortgage,
including without limitation any notice of default and any notice of sale to
Grantor, shall be in writing, may be sent by telefacsimile, and shall be
effective when actually delivered, or when deposited with a nationally
recognized overnight courier, or, if mailed, shall be deemed effective when
deposited in the United States mail first class, certified or registered mail,
postage prepaid, directed to the addresses shown near the beginning of this
Mortgage. Any party may change its address for notices under this Mortgage by
giving formal written notice to the other parties, specifying that the purpose
of the notice is to change the party's address. All copies of notices of
foreclosure from the holder of any lien which has priority over this Mortgage
shall be sent to Lender's address, as shown near the beginning of this Mortgage.
For notice purposes, Grantor agrees to keep Lender informed at all times of
Grantor's current address.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Mortgage:
Amendments. This Mortgage, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Mortgage. No alteration of or amendment to this Mortgage shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.
Annual Reports. If the Property is used for purposes other than Grantor's
residence, Grantor shall furnish to Lender, upon request, a certified statement
of net operating income received from the Property during Grantor's previous
fiscal year in such form and detail as Lender shall require. "Net operating
income" shall mean all cash receipts from the Property less all cash
expenditures made in connection with the operation of the Property.
-15-
<PAGE>
Applicable Law. This Mortgage has been delivered to Lender and accepted by
Lender in the State of New Jersey. This Mortgage shall be governed by and
construed in accordance with the laws of the State of New Jersey.
Caption Headings. Caption headings in this Mortgage are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Mortgage.
Merger. There shall be no merger of the interest or estate created by this
Mortgage with any other interest or estate in the Property at any time held by
or for the benefit of Lender in any capacity, without the written consent of
Lender.
Multiple Parties. All obligations of Grantor under this Mortgage shall be
joint and several, and all references to Grantor shall mean each and every
Grantor. This means that each of the persons signing below is responsible for
all obligations in this Mortgage.
No Joint Venture or Partnership. The relationship of Grantor and Lender
created by this Mortgage is strictly that of debtor-creditor, and nothing
contained in this Mortgage or in any of the Related Documents shall be deemed or
construed to create a partnership or joint venture between Grantor and Lender.
Severability. If a court of competent jurisdiction finds any provision of
this Mortgage to be invalid or unenforceable as to any person or circumstance,
such finding shall not render that provision invalid or unenforceable as to any
other persons or circumstances. If feasible, any such offending provision shall
be deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Mortgage in all other respects shall remain
valid and enforceable.
Successors and Assigns. Subject to the limitations stated in this Mortgage
on transfer of Grantor's interest, this Mortgage shall be binding upon and inure
to the benefit of the parties, their successors and assigns. If ownership of the
Property becomes vested in a person other than Grantor, Lender, without notice
to Grantor, may deal with Grantor's successors with reference to this Mortgage
and the Indebtedness by way of forbearance or extension without releasing
Grantor from the obligations of this Mortgage or liability under the
Indebtedness.
Time is of the Essence. Time is of the essence in the performance of this
Mortgage.
Waivers and Consents. Lender shall not be deemed to have waived any rights
under this Mortgage (or under the Related Documents) unless such waiver is in
writing and signed by
-16-
<PAGE>
Lender. No delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by any party of a
provision of this Mortgage shall not constitute a waiver of or prejudice the
party's right otherwise to demand strict compliance with that provision or any
other provision. No prior waiver by Lender, nor any course of dealing between
Lender and Grantor, shall constitute a waiver of any of Lender's rights or any
of Grantor's obligations as to any future transactions. Whenever consent by
Lender is required in this Mortgage, the granting of such consent by Lender in
any instance shall not constitute continuing consent to subsequent instances
where such consent is required.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS MORTGAGE, AND
GRANTOR AGREES TO ITS TERMS. GRANTOR ACKNOWLEDGES RECEIPT, WITHOUT CHARGE, OF A
TRUE AND CORRECT COPY OF THIS MORTGAGE.
GRANTOR:
580 MARSHALL STREET LLC
By: _________________________(SEAL) By: _______________________(SEAL)
RICHARD MALAVARCA, Manager THOMAS J. LIVELLI, Member
Signed, acknowledge and delivered in the presence of:
X _________________________
Witness
X _________________________
Witness
-17-
<PAGE>
LIMITED LIABILITY COMPANY ACKNOWLEDGMENT
STATE OF )
)ss
COUNTY OF )
BE IT REMEMBERED that on this ___ day of ____________, 19__, before me, the
subscribers, personally appeared RICHARD MALAVARCA, Member of 580 MARSHALL
STREET LLC; and THOMAS J. LIVELLI, Member of 580 MARSHALL STREET LLC who, I am
satisfied, are the persons who signed the within instrument, and they
acknowledged that they signed the within instrument, and that the within
instrument is the voluntary act and deed of such limited liability company.
___________________________
Notary Public
-18-
<PAGE>
Schedule A
All that certain tract, lot and parcel of land lying and being in the Town
of Phillipsburg, County of Warren, and State of New Jersey, being more
particularly described as follows:
BEGINNING AT A POINT IN THE NORTHERLY RIGHT OF WAY OF HECKMAN STREET, SAID
POINT BEING THE SOUTHEASTERLY CORNER OF BLOCK 1005, LOT 3 LANDS NOW OR FORMERLY
OF THE NORTON PARTNERSHIP AND THE POINT OF BEGINNING REFERRED TO IN A DEED
BETWEEN WILLIAM M. NORTON, JR. , AND WILLIAM M. NORTON, DATED NOVEMBER 6, 1985
RECORDED IN BOOK 938 PAGE 115 AND BEING ALSO DISTANT 367.33 FEET IN A
NORTHEASTERLY DIRECTION ALONG THE NORTHWESTERLY SIDE LINE OF HECKMAN STREET FROM
ITS INTERSECTION WITH THE NORTHEASTERLY SIDE LINE OF ANDERSON STREET AND RUNNING
THENCE
(1) ALONG THE EASTERLY LINE OF LOT 3, NORTH THIRTY-SEVEN DEGREES,
FIFTY-THREE MINUTES, TWENTY-SEVEN SECONDS WEST (N. 37(degree) 53' 270") A
DISTANCE OF ONE HUNDRED NINETY-FIVE AND TWENTY-NINE HUNDREDTHS FEET (195.29') TO
A POINT IN THE SOUTHERLY RIGHT OF WAY OF MARSHALL STREET, BEING THE
NORTHEASTERLY CORNER OF LOT 3 THENCE
(2) ALONG THE SOUTHERLY RIGHT OF WAY OF MARSHALL STREET, NORTH SIXTY-EIGHT
DEGREES, FORTY-NINE MINUTES, NO SECONDS EAST (N. 68(degree) 49' 00"), A DISTANCE
OF ONE HUNDRED THIRTY-FIVE AND NINETY-FOUR HUNDREDTHS FEET (135.94') TO A POINT,
BEING THE NORTHWESTERLY CORNER OF BLOCK 1005, LOT 1 LANDS NOW OR FORMERLY OF
WILLIAM M. NORTON, THENCE
(3) ALONG THE WESTERLY LINE OF LOT 1, SOUTH THIRTY-EIGHT DEGREES,
THIRTY-EIGHT MINUTES, FIFTY-THREE SECONDS EAST (S. 38(degree) 38' 53") A
DISTANCE OF ONE HUNDRED FIFTY-EIGHT AND SEVENTY-FOUR HUNDREDTHS FEET (158.74')
TO A POINT IN THE NORTHERLY RIGHT OF WAY OF HECKMAN STREET, BEING THE
SOUTHWESTERLY CORNER OF LOT 1 THENCE
(4) ALONG THE NORTHERLY RIGHT OF WAY OF HECKMAN STREET, SOUTH FIFTY-THREE
DEGREES, TWELVE MINUTES, NO SECONDS WEST (S. 53(degree) 12' 00") A DISTANCE OF
ONE HUNDRED THIRTY-TWO AND THIRTY-TWO HUNDREDTHS FEET (132.32') TO THE POINT AND
PLACE OF BEGINNING
ALL IN ACCORDANCE WITH A SURVEY PREPARED BY WILLIAM ASSOCIATES, INC., L.S.,
DATED DECEMBER 23, 1996.
(NOTE: SAID TAX LOT AND BLOCK REPORTED FOR INFORMATION ONLY)
-19-
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of May
22, 1997, by and between Cell & Molecular Technologies, Inc., a Delaware
corporation having its principal offices at 406 Grand Central Avenue,
Lavallette, NJ 08735 (the "Company" or "Employer") and Thomas J. Livelli, an
individual residing at 245 Bryn Mawr Avenue, Lavallette, NJ 08735 (the
"Employee").
INTRODUCTION
To provide for the best interests of the Company and the Employee, the
Company and Employee have agreed to the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:
1. EMPLOYMENT.
The Company hereby employs the Employee and the Employee accepts such
employment as President and Chief Executive Officer ("CEO") of the Company.
2. TERM OF AGREEMENT.
This Agreement shall commence as of the date first written above (the
"Effective Date") and shall continue in effect for an initial term of 3 years;
provided, however, that it shall automatically renew for one additional year
upon expiration of such initial term (the initial term and renewal, if any,
being hereinafter referred to collectively as the 'Term") unless the Company or
Employee shall give written notice to the other that it or he does not wish to
extend this Agreement not later than 30 days prior to such renewal.
3. DUTIES.
Employee shall be employed under this Agreement as President and CEO of the
Company, with scientific responsibilities, and agrees to perform the duties
normally incidental to the position of President and CEO during the Term of this
Agreement.
4. SCOPE.
The Employee shall devote substantially full time to the business of the
Company during the Term of this Agreement. The Company acknowledges and supports
Employee's duties and
<PAGE>
responsibilities under a part-time appointment as a senior research associate at
Columbia University, and Employee and the Company agree that Employee can
continue in such or a similar position during the Term hereof, provided the
Employee's duties in such position do not unreasonably interfere with Employee's
duties under this Agreement.
5. COMPENSATION AND BENEFITS.
During the Term of this Agreement, the Employee shall be entitled to the
following compensation and benefits.
(a) Base Salary. The Company shall pay to the Employee an annual
salary of One Hundred Fifty Thousand Dollars ($150,000) ("Base Salary") for
all services to be rendered by the Employee pursuant to this Agreement. The
Base Salary shall be paid in equal installments every two weeks.
(b) Employee Benefit and Retirement Programs. The Employee shall be
entitled to the benefits described in Exhibit I hereto and the management
employees shall be entitled to the benefits described in Exhibit 2 hereto.
(c) Expense Reimbursement. The Company shall reimburse the Employee
for all reasonable and necessary travel and entertainment expenses,
disbursements, and other reasonable and necessary incidental expenses
incurred for or on behalf of the Company, in addition to any fees, charges,
or costs for membership in business or professional organizations
reasonably approved by the Company, upon the presentation of appropriate
vouchers or other evidence of such expenditures. The Employee will not
incur any single expense in excess of $2,000 without the prior approval of
the Board of Directors or an appropriate committee thereof.
6. TERMINATION.
(a) Termination for Cause. Employer may terminate Employee's employment
hereunder for Cause. For purposes of this Agreement, "Cause" shall mean and be
limited to (i) the willful and continued failure by Employee to substantially
perform his duties hereunder (other than any such failure resulting from
Employee's incapacity due to physical or mental illness) after demand for
substantial performance is delivered by Employer specifically identifying the
manner in which Employer believes Employee has not substantially performed his
duties and the failure to correct such failure within 15 days of Employee's
receipt of such demand, or (ii) the willful engaging by Employee in criminal
misconduct which is injurious to Employer, monetarily or otherwise, and the
failure to correct such failure within 15 days of Employee's receipt of such
demand, or (iii) Employee is convicted by a court of competent jurisdiction or,
or pleads guilty or nolo contendere to, any felony involving the possession of
controlled substance, moral turpitude, theft or larceny,
-2-
<PAGE>
or (iv) the willful violation by Employee of the provisions of Section 8 hereof
provided that such violation results in material injury to Employer.
(b) Termination for Good Reason. Employee may terminate this Agreement for
"Good Reason". "Good Reason" shall mean the occurrence of any circumstance set
forth below, unless such circumstance is fully corrected within 30 days of
receipt by the Company of written notice of such circumstance from Employee:
(1) the assignment to Employee of "duties inconsistent with the
position of President and CEO of the Company," (as defined below), removal
of the Employee from the position of President and CEO of the Company, or a
substantial diminution in the nature or status of Employee's
responsibilities from those in effect as of the Effective Date, other than
pursuant to a merger or combination of the Company with another company in
a transaction approved by the vote of Employee in his capacity as a member
of the Board of Directors of the Company or as a shareholder of the
Company;
(2) a reduction by the Company of the Base Salary as in effect on the
effective date hereof;
(3) the deliberate failure by the Company to provide, within two weeks
of the date payment was required, the compensation, expense reimbursement,
or benefits specified in Section 5, provided Employee is not the person
responsible for payment of compensation, expense reimbursement or benefits;
and provided, further, that after the passage of two weeks from the date
payment was required, Employee shall have given written notice to Frederick
R. Adler and Joseph K. Pagano at their addresses or fax machines as
provided in Section 9(j) (or as changed by notice to Employee) of such
failure by the Company, Employee shall have called a meeting of the Board
of Directors and such failure shall not have been completely cured by the
close of business two business days after such meeting of the Board of
Directors.
(4) any breach of Section 3.1 of the Shareholders Agreement which
continues more than 15 days after notice of such breach has been received
by Shareholders Adler and Pagano; or
(5) any purported termination of employment under this Agreement by
the Company which is not based on "Cause" under Section 6(a); for purpose
of this Agreement, no such purported termination shall be effective.
(c) Definition. Employee's duties at Molecular Cell Science, Inc. and
Specialty Media, Inc. prior to the date hereof related to executive scientific
management and executive business development shall not be deemed "duties
inconsistent with the position of President and CEO of the Company" as used in
Section 6(b)(1).
-3-
<PAGE>
(d) Death or Disability. Upon the (i) death of Employee, or (ii) the
permanent disability of Employee such that he is no longer capable of performing
his duties under this Agreement, the Company can terminate this Agreement after
ensuring payment of any applicable benefits provided in Section 5(b).
(e) Judicial Determination. If a court determines that "Good Reason" did
not exist for Employee's termination of this Agreement, Employee shall become
subject to the obligations under Section 8.
7. COMPENSATION UPON TERMINATION.
Upon termination of employment as provided herein during the term of this
Agreement, Employee shall be entitled to the following benefits:
(a) For Cause or Other Than Good Reason. If employment is terminated
by the Company for Cause, or by Employee other than for Good Reason,
Company shall pay to Employee the full Base Salary up to the date of
termination at the rate in effect at the time and shall pay any other
amounts payable to Employee up to the date of termination pursuant to any
other compensation plans, programs, or this Agreement. Upon such payment,
the Company shall have no further obligation to Employee under this
Agreement.
(b) Good Reason or Other than Cause, Death, or Disability. If
employment is terminated by the Employee for Good Reason or by the Company
other than for Cause, death, or disability, the Employee shall be entitled
to the benefits set forth below:
(1) The Company shall pay to Employee (i) the full Base Salary
through the date of termination at the rate in effect at the time and
no later than the loth business day following the date of termination;
and (ii) all other amounts to which Employee is entitled under this
Agreement or any compensation plan of the Company applicable to
Employee at the time such payments are due; and
(2) Employee shall be relieved of his obligations under Section
8.
8. NON-DISCLOSURE; NON-COMPETITION.
(a) Confidential Information. Subject to the disclosures and uses essential
to Employee's duties and responsibilities under the part-time position referred
to in Section 4, Employee shall not, to the detriment of Employer, knowingly use
for his own benefit or disclose or reveal to any unauthorized person, any trade
secret or other confidential information received by Employee in the course of
his employment or engagement in any capacity by Employer which relates to
Employer or to any of the businesses operated by it, including, but not limited
to, any scientific procedures or processes, customer lists, customer needs,
price and performance information, specifications, hardware, software, devices,
-4-
<PAGE>
supply sources and characteristics, business opportunities, marketing,
promotional, pricing and financing techniques, or other information relating to
the business of Employer, and Employee confirms that such information
constitutes the exclusive property of Employer. However, information shall not
be deemed to be confidential if it is: (i) generally available in the industry
in which Employer operates, (ii) a matter of common knowledge or public record
or is disclosed in published literature or (iii) obtained by Employee from a
third party without violation of any confidentiality agreement. Employee agrees
that, except as otherwise expressly agreed to by Employer, he will return to
Employer, promptly upon the request of the Board or any executive officer
designated by the Board, at the time his employment terminates, any physical
embodiment of such confidential information.
(b) Non-Competition. For a period of one year following the termination of
the Term, other than a termination by Employer without Cause, or a termination
by Employee for Good Reason, Employee shall not engage, directly or indirectly
(which includes, but is not limited to, owning, managing, operating,
controlling, being employed by, giving financial assistance to, participating in
or being connected in any material way with any business of the Company;
provided, however, that Employee's ownership as a passive investor of less than
one percent (1%) of the issued and outstanding stock of any publicly held
corporation or partnership so engaged shall not by itself be deemed to
constitute such engagement by Employee.
(c) Remedies. Employee recognizes that the possible restrictions on his
activities which may occur as a result of his performance of his obligations
under this Section 8 are required of the reasonable protection of Employer and
Employee expressly acknowledges that damages alone will be an inadequate remedy
for any breach or violation of this Section 8, and that Employer, in addition to
all other remedies at law or in equity, shall be entitled, as a matter of right,
to injunctive relief, including specific performance, with respect to any such
breach or violation, in any court of competent jurisdiction. If any of the
provisions of this Section 8 are held to be in any respect an unreasonable
restriction upon Employee, then they shall be deemed to extend only over the
maximum period of time, geographic area, and/or range of activities as to which
they may be enforceable.
9. MISCELLANEOUS.
(a) General Interpretative Principles. For purposes of this Agreement,
except as expressly provided or unless the context otherwise requires (i) the
terms defined in this Agreement have the meanings assigned to them in the
provision in which they first appear and include the plural as well as the
singular, (ii) references herein to "Sections" or "Subsections" without
reference to a document are to designated Sections and "Subsections" of this
Agreement, and (iii) the words "herein" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
provision.
-5-
<PAGE>
(b) Indemnification. To the greatest extent not inconsistent with the laws
and public policies of the State of New Jersey, the Company hereby agrees to
indemnify and hold Employee harmless from and against any and all claims,
liabilities, cost, or expense (including reasonable attorney's fees) incurred by
Employee in connection with any investigation, hearing, or proceeding, whether
administrative or judicial, or in any forum whatsoever, (as such, a
"proceeding"), arising from or related to Employee's employment by Company or
performance of the duties hereunder. The Company shall pay for or reimburse the
Employee on a monthly basis for the reasonable expenses incurred by Employee in
connection with any such proceeding in advance of final disposition, within 10
business days of the submission by Employee of supporting documentation, subject
to first receiving from the Employee an unsecured written undertaking to return
such funds to the Company if a court determines that the Employee was not
entitled thereto. The indemnification and advancement of expenses provided
herein shall be applicable to any claims, investigation, hearing, or proceeding
arising from acts or omissions of Employee relating to his employment or
performance of the duties hereunder occurring before or after the Effective
Date. The obligations of this Section 9(b) shall survive the termination of this
Agreement.
(c) Cumulative Remedies. If either party breaches any provision in this
Agreement, the other party shall be entitled to pursue any remedy available in
law or in equity. The parties agree that remedies for breach of this Agreement
are cumulative.
(d) Successors, Binding Agreement. This Agreement shall inure to the
benefit of and be enforceable by the parties and their legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. The Company shall require any successor hereto to assume and agree to
perform this Agreement in accordance with its terms. Failure of any successor to
so assume and agree shall entitle Employee to all rights and privileges
applicable to termination for "Good Reason."
(e) Notice. Notices, requests or other communications provided for herein
shall be given in writing, sent by hand delivery or by recognized overnight
delivery service or by registered or certified mail, return receipt requested,
with postage prepaid, or by fax. Such notices shall be addressed to the parties
at their respective addresses set forth on the first page of this Agreement, or,
if to Mr. Adler, at 1520 South Ocean Boulevard, Palm Beach, FL 33480 (or to fax
number (561) 659-1010) and if to Mr. Pagano, at 434 E. Cooper, Suite 201, Aspen,
CO 81611 (or to fax number (970) 920-7931), unless notice of a change of address
or fax is furnished in the manner provided in this Section 8(e). Any notice
which is required to be made within a stated period of time shall be considered
timely if delivered before midnight of the last day of such period.
(f) Waiver. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in a
writing signed by the parties hereto. No waiver by any party hereto at any time
of any breach by any other party hereto of, or compliance with, any provision of
this Agreement to be performed by any
-6-
<PAGE>
other party shall be deemed a waiver of similar or dissimilar provision at the
same or at any prior or subsequent time.
(g) Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof. There are no
other written, oral, express, or implied agreements, understandings, or
representations between the parties except as have been expressly set forth in
this Agreement.
(h) Choice of Law. This Agreement shall be governed, construed and enforced
in accordance with the internal laws, and not the laws of conflicts, of the
State of New Jersey.
(i) Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Effective Date.
CELL & MOLECULAR TECHNOLOGIES, INC.
By:
------------------------------------
Richard Malavarca, Vice-President
EMPLOYEE
---------------------------------------
Thomas J. Livelli
-7-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION
EXTRACTED FROM FORM 10-K AT DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 84,146
<SECURITIES> 5,096,557
<RECEIVABLES> 325,575
<ALLOWANCES> 20,000
<INVENTORY> 116,991
<CURRENT-ASSETS> 5,835,796
<PP&E> 1,522,516
<DEPRECIATION> 518,792
<TOTAL-ASSETS> 11,825,683
<CURRENT-LIABILITIES> 5,925,376
<BONDS> 0
0
0
<COMMON> 61,087
<OTHER-SE> 5,013,196
<TOTAL-LIABILITY-AND-EQUITY> 11,825,683
<SALES> 2,127,233
<TOTAL-REVENUES> 2,127,233
<CGS> 1,458,257
<TOTAL-COSTS> 1,458,257
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,385
<INCOME-PRETAX> (688,161)
<INCOME-TAX> 10,513
<INCOME-CONTINUING> (688,161)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (698,674)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
