SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
Amendment No. 1
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
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definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant on April 20, 1999 (based upon the average of the bid and ask
prices as reported by the OTC Bulletin Board was approximately $2,681,604.
As of April 20, 1999, 6,108,700 shares of the registrant's Common Stock,
par value $.01 per share were outstanding.
Documents Incorporated By Reference: None
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PART I
Item 1. Business
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements: The statements contained herein which
are not historical facts are forward-looking statements that involve known and
unknown risks and uncertainties that could significantly affect actual results,
performance or achievements of the Company in the future and, accordingly, such
actual results, performance or achievements may materially differ from those
expressed or implied in any forward-looking statements made by or on behalf of
the Company. These risks and uncertainties include, but are not limited to,
risks associated with the Company's future growth and operating results; the
ability of the Company to successfully integrate newly acquired business
operations and personnel into its operations; changes in customer preferences;
the ability to hire and retain key personnel; compliance with federal or state
environmental laws and other laws and changes in such laws and the
administration of such laws; risks associated with government grants and funding
of the Company's clients' projects; dependence on certain significant customers;
protection of trademarks and other proprietary rights, technological change;
competitive factors; unfavorable general economic conditions; "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").
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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 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 does not receive residual or royalty payments for future discoveries or uses
involving the materials or services provided by CMT to its contract customers.
The scientific areas in which CMT offers its Contract R&D Services include
the following areas: (1) molecular biology; (2) cell biology and gene
expression; (3) mouse genetics; and (4) bioproduction and reagent preparation.
CMT also performs assay services for its R&D customers as well as other
customers in the biotechnology and pharmaceutical industries, as described
below.
Molecular Biology - CMT engages in state-of-the-art techniques in molecular
biology to isolate and characterize genes in order to isolate proteins in
connection with the discovery, testing and validation of potential drug
candidates. Services performed by CMT range from construction of standard gene
libraries (i.e. compilation of the genes contained in an individual cell) to the
cloning and expression of novel genes (i.e. identification of specific functions
with particular genes or gene sequences). CMT's staff scientists are experts in
modern techniques of molecular biology, including without limitation,
construction of cDNA expression libraries, single cell cDNA libraries, genomic
DNA libraries, size selected, normalized, subtraction libraries and other custom
gene libraries. In addition, CMT's expertise includes molecular cloning and
related functions, including the cloning of novel and known cDNAs, the cloning
of promoters and enhancers and the isolation of genomic loci and gene trapping.
Cell Biology and Gene Expression - CMT's facilities and techniques generate
cell cultures for use in connection with today's "high throughput" screening
assays, which testing utilizes automation or robotics to test large quantities
of cells very rapidly. Employing increasingly sophisticated and sensitive
molecular biology techniques being developed in the industry, CMT's staff
scientists design and engineer highly unique cell lines for drug-screening
assays and the expression of novel genes. Engineered cell lines are used
throughout the biotechnology and pharmaceutical industries to determine the
function of genes and to screen, identify and develop potential drug candidates.
CMT's services include (i) cDNA expression cloning systems, (ii) expression of
recombinant proteins in each of Eschenchia coli, yeast, Mammalian Cells and
Insect Cells and Baculovirus, (iii) preparation of cell-based assays involving
receptor binding, transcriptional activation--reporter genes, signal
transduction pathways and transcription factor translocation assays, and (iv)
affinity purification of epitope-tagged proteins.
Mouse Genetics - CMT engineers animal models of human diseases for use in
the identification and validation of potential drug candidates. The advent of
transgenic mouse technology has allowed biologists to study the impact of gene
deletions, mutations, and additions in a whole-animal system whose genetics are
well understood and can be easily manipulated. CMT builds upon this
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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 biomolecule proteins) properly formatted for further
characterization or for use in screening assays. CMT's facilities give CMT both
adherent (flasks, roller bottles, cell factories) and suspension (spinners,
bioreactors) culture capabilities as well as bioreactor capacity to 150 liters,
fractionation and purification capabilities. Its facilities are well-equipped
with dynamic loop process water system (including ultrafiltration, carbon
adsorption, multiple rounds of ion exchange, and double distillation), warm/cold
rooms, laminar-flow hoods, centrifuges and cellular cryopreservation and
storage.
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 cultures, mouse embryo cultures, and mouse embryonic stem cells. The
Specialty Media Division also identifies and develops research products and
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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. While mouse embryo media have been traditionally manufactured as
liquids, CMT has also developed a powder format greatly extending the shelf life
and opening the possibility for overseas shipment and distribution.
Unique Products for General Cell Cultures - A significant portion of the
sales revenue of the Specialty Media Division is derived from several unique
products developed by CMT. Cell culture freezing media allows research
scientists to cryogenically archive important cell lines for future use. CMT's
line of enzyme free cell dissociation solutions allow researchers to remove
cells from the vessels on which they are grown while retaining the functionality
of the proteins on their surface. This enables the cells to be used in assays
which rely on cell surface receptors. CMT also markets a kit containing all of
the reagents necessary to introduce foreign genes into cells, genetically
altering the cell line. These unique products are directly marketed by 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 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
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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 of 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 R & D
projects. Such outsourcing is due to (i) the quantity of R & D projects
necessary to stay competitive in the industry, (ii) the reduced "in-house"
staffs resulting from corporate down-sizing, (iii) the expense and risk inherent
in conducting R & D internally and (iv) the expanded capabilities and
flexibility offered by third party research companies without the associated
overhead.
The pattern for outsourcing among the large pharmaceutical companies has
been to expand from pre- and post- approval activities (including clinical trial
management, manufacturing, quality control, packaging, etc.) toward R & D. At
the front end of the development process, drug discovery based on
rapid-throughput synthesis and screening technologies is typically effected by
very large companies. On the other end, smaller technology companies tend to
provide access to "enabling" technologies that facilitate the process of target
identification and lead compound synthesis and identification. CMT intends to
address the perceived opportunity for a combination of these high-throughput
discovery technologies and the relatively mature market for pre- and
post-approval services. Because of the broad, multi-disciplinary range of
customer needs during this phase of R & D, the Company believes that CMT's
synthesis of multiple biologically based capabilities makes it well positioned
in the industry.
The Company believes that, through rapid growth by expanding
state-of-the-art facilities, recruiting world class scientists, and developing
and acquiring new technologies, CMT can benefit from the growing contract
research market.
CMT's sales efforts are coordinated by the management staff of the
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 this area is less than other areas of the market, the
potential margins are greater. Moreover, in serving these areas, CMT has built
up significant customer loyalty and name recognition, despite relatively minimal
marketing activities.
CMT's sales efforts are coordinated by the Vice President of Research
Products of CMT, whose duties include oversight of production development,
direct sales and distributor arrangements. The Company also utilizes the
services of PGC Scientifics and VWR Scientific, national distributors of
research products, 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
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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 R & D or media production. Some of these companies have captured a
significant, and in certain cases controlling, share of the research products
and the transgenic mouse outsourcing markets. Many of such competitors have
achieved significant national, regional and local brand name and product
recognition as as well as engage in frequent and extensive advertising and
promotional programs, both generally and in response to efforts by other
competitors entering the market or existing competitors introducing new
products. Many of these companies have substantially greater financial,
technical, marketing, personnel and other resources than CMT.
The Company believes that entry barriers to these markets are significant,
involving the high costs of specialized scientific equipment, the need to
recruit highly trained professional scientific staff with industrial and
academic experience, and the ability to offer a wide range of services and
expertise. The ability to compete successfully in the industry is affected by
these and other factors, including without limitation price of services, ease of
use, reliability, customer support, geographic coverage and industrial and
general economic trends. In addition, much of the R & D work involves customers
dependent on government grants and other institutional funding.
The Company believes that CMT can compete effectively based on its ability
to provide its customers with both (i) Contract R&D Services for early
stage/pre-clinical R & D in the pharmaceutical and biotechnology industries and
(ii) the preparation of reagents for cell culture, molecular biology, and mouse
genetics in the international academic and industrial research markets. The
Company believes that, although there are a number of large competitors that
have substantially greater resources than CMT, such competitors have well
established businesses in only one of these two areas. Available contract
research services have for the most part focused on delivering routine
technology at low cost. These services have flourished because by maximizing the
load on their equipment and labor resources, they can reduce the customer's
in-house cost. However, such economies of scale are achieved at a cost to the
customer who remains for the most part responsible for defining protocol and
overseeing its implementation to insure that the results are useable to the
customer's in-house projects. In contrast, CMT offers, in addition to the full
range of R & D services, complete experimental design and consultation
throughout the performance of the Contracted R&D Services.
Molecular Cell Science, Contract Research and Development Division
The Company believes that the Contract R&D Service business can be divided
into four markets, consisting of the (i) low end R&D, (ii) specialty R&D, (iii)
high end R&D and (iv) technology platform R&D, as follows:
Low End R&D - Services performed in this market are characterized by low
margins and strong competition and are technical and mechanical in nature. These
services tend not to lead to higher end, more complex projects. This market is
comprised of small local vendors, some of which have grown to cover larger
markets. CMT offers a wide range of services in this area, including those
offered by its competitors.
Specialty R&D - Services performed in this market tend to be technically
and/or target focused. These services seldom lead to new and more complex
projects. While a number of CMT's services touch upon this market, CMT tends to
offer a broader focus with its services.
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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 are subject to many laws and
governmental regulations and changes in these laws and regulations, or their
interpretation by agencies and the courts, occur frequently.
Environmental Regulation - The Company's operations are subject to various
evolving federal, state and local laws and regulations relating to the
protection of the environment, which laws govern, among other things, emissions
to air, discharges to ground, surface water, and groundwater, and the
generation, handling, storage, transportation, treatment and disposal of a
variety of hazardous and non-hazardous substances and wastes. Federal and state
environmental laws and regulations often require manufacturers to obtain permits
for these emissions and discharges. Failure to comply with environmental laws or
to obtain, or comply with, the necessary state and federal permits can subject
the manufacturer to substantial civil and criminal penalties. CMT operates a
manufacturing facility. Although the Company believes that such facility is in
substantial compliance with all applicable material environmental laws, it is
possible that there are material environmental liabilities of which the Company
is unaware. If the costs of compliance with the various existing or future
environmental laws and regulations, including any penalties which may be
assessed for failure to obtain necessary permits, exceed the Company's budgets
for such items, the Company's business could be adversely affected. In
additions, liability to third parties could have a material adverse effect on
the Company's business.
Potential Environmental Cleanup Liability - The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Furthermore, certain business operations of CMT also
involve shipping
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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, Food and Drug Administration, Nuclear Regulatory Commission,
the New Jersey Department of Environmental Protection and other federal, state
and local regulatory agencies. Failure of the Company to comply with any of
these requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants.
The Company has made, and will continue to make, capital and other
expenditures necessary to monitor and to comply with any applicable regulations.
For the year ended December 31, 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 ($1.0
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
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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 20, 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
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 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 20, 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 20,
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 4(2) 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 31%
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 and stockholders' equity of approximately $5,100,000.
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 ($5,015,267) 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 investment securities and certificates of deposit
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 and 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 current directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Joseph K. Pagano 53 President and Chairman of the Board
Robert A. Reinhart 49 Vice-President of Finance, Chief Financial Officer,
Treasurer and Secretary
Frederick R. Adler 73 Director
Thomas Livelli 46 Director
Richard Malavarca 46 Director
Dr. Paul A. Marks 72 Director
Samuel A. Rozzi 53 Director
</TABLE>
Joseph K. Pagano has served as President of the Company since June 1994 and as a
director since 1991. He also served as Chief Financial Officer from June 1994
until July 1996. Since 1991, he has also been engaged as a consultant to the
Company. Mr. Pagano has been a private investor for more than the past five
years.
Robert A. Reinhart is a certified public accountant and has served as Chief
Financial Officer and Vice President - Finance of the Company since July 1996
and as Vice-President and Treasurer/Secretary since May 1997. Mr. Reinhart
served as Vice President, Finance and Chief Executive Officer for Bern
Communications, Inc. from July 1996 until its dissolution in 1998. Prior to his
employment by the Company, Mr. Reinhart served as the Chief Operating Officer
and Chief Financial Officer of DeBoles Nutritional Foods, Inc. from 1992 until
1996. Prior to being engaged by De Boles Nutritional Foods, Inc. in 1992, Mr.
Reinhart was a senior manager/engagement executive with a certified public
accounting firm located on Long Island, New York.
Frederick R. Adler has been a director of the Company since May 1996. Mr. Adler
is Managing Director of Adler & Company, a venture capital management firm he
organized in 1968, and a general partner of its related investment funds. Since
January 1, 1996, Mr. Adler has been of counsel to the law firm of Fulbright &
Jaworski L.L.P. and, for more than five years prior thereto, was a senior
partner in the firm. Mr. Adler is also Chairman of the Executive Committee and a
director of Data General Corporation, Chairman and director of Shells Seafood
Restaurants, Inc., and a director of USA Detergents, Inc., as well as a director
of various private companies.
Thomas Livelli has been a director of the Company since June 1998. He is also
the President and Chief Executive Officer of the Company's subsidiary, Cell &
Molecular Technologies, Inc. ("CMT"). Mr. Livelli was the founder of Molecular
Cell Sciences, Inc., the predecessor to the Molecular Cell Science Division of
CMT, and the co-founder of the Specialty Media Division of CMT. From January
1986 until July 1997, Mr. Livelli was a Laboratory Manager at the Howard Hughes
Medical Institute at Columbia University. Prior to 1986, Mr. Livelli worked at
Merck Research Laboratories ("Merck") and Cistron Biotechnology ("Cistron"),
directing their respective gene expression programs. While at Cistron, Mr.
Livelli was a Visiting Scholar at Columbia University. Mr. Livelli has also
served in the capacity of a scientific consultant for Merck, Cistron, Synaptic
Pharmaceutical, and Life Technologies, Inc. In addition to his duties as
President and Chief Executive Officer of CMT, Mr. Livelli maintains a part-time
faculty appointment at Columbia University College of Physicians & Surgeons in
the Department of Neurobiology and Behavior.
-18-
<PAGE>
Richard Malavarca has been a director of the Company since June 1998. He is also
the Vice President - Research Products of CMT, where he is responsible for the
day to day operations, product development and marketing for the Specialty Media
Division of CMT. Mr. Malavarca was aco-founder of Specialty Media, Inc., the
predecessor to the Specialty Media Division of CMT where he served as Vice
President from 1987 until May 1997. Mr. Malavarca has also worked at the Harvard
Medical School, The Roche Institute for Molecular Biology, Merck Research
Laboratories and Cistron in basic research involving developmental biology,
molecular and cell biology. He left Cistron in 1987 to start Specialty Media,
Inc.
Dr. Paul A. Marks has been a director of the Company since June 1998. Since 1980
Dr. Marks also served as President and Chief Executive Officer of the Memorial
Sloan-Kettering Cancer Center. He is also a Member of the Sloan-Kettering
Institute for Cancer Research, and Attending Physician of Memorial Hospital for
Cancer and Allied Diseases. He has served as an advisor to the National
Institutes of Health, the National Science Foundation and other government
bodies. He was a member of the President's Cancer Panel (1976-77), the
President's Biomedical Research Panel (1976-77) and the President's Commission
on the Accident on Three Mile Island (1979). He was a member of the Council of
the National Academy of Sciences (1985-87), the Council of the Institute of
Medicine (1973-76), chaired the Division of Medical Sciences, National Research
Council of the National Academy of Sciences (1973-76) served as President of the
American Society for Clinical Investigation (1971-72) and the President of the
American Society of Hematology (1983-84), and co-chaired the External Advisory
Committee of the National Institutes of Health Intramural Research Program
(1993- 94), and chaired the Search Committee for Director, National Cancer
Institute (1994-95). Dr. Marks is a Director Emeritus of Pfizer, Inc.
(pharmaceutical manufacturer) and a director of Tularik, Inc. (biotechnology
company) and Genos (genomic company).
Samuel A. Rozzi has been a director of the Company most recently since January
1997. He previously served as a director of the Company from 1991 until June
1996. Mr. Rozzi has been the President of Corporate National Realty, Inc., a
corporate real estate brokerage and services firm, since September 1988.
Messrs. Livelli, Marks and Malavarca were appointed directors following the
increase in the size of the board of directors of the Company from three to six
members effected in connection with the CMT Merger consummated on May 29, 1998.
Directors are elected annually by the stockholders. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board of
Directors.
-19-
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that
Company's officers and directors, and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities, file certain
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than 10 percent beneficial
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by the Company, or representations obtained from certain reporting persons, the
Company believes that during the year ended December 31, 1998 all filing
requirements applicable to its officers, directors, and greater than 10 percent
beneficial stockholders were complied with.
Item 11. Executive Compensation
The following table discloses the compensation awarded by the Company to
(i) each of the President and Chief Financial Officer of the Company (the
"Company Executives") for the period from June 1, 1998 until December 31, 1998
(the "Stub Period") and for the twelve (12) month period ended May 31 in each of
the three fiscal years ended May 31, 1998, 1997 and 1996, and (ii) the President
of CMT (the "CMT Executive" and, together with the Company Executives,
hereinafter collectively referred to as the "Named Executives") for the twelve
(12) month period ended December 31 in each of the three fiscal years ended
December 31, 1998, 1997 and 1996. During the most recent twelve (12) month
period ended May 31, 1998 and December 31, 1998, as the case may be, no other
officer of the Company or CMT, as the case may be, received a total salary and
bonus that exceeded $100,000 during such twelve (12) month period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-----------------------
Principal Fiscal Long-Term and Other
Name Position Year Salary ($) Bonus ($) Compensation
---- -------- ------ ---------- --------- -------------------
<S> <C> <C> <C> <C> <C>
Joseph K. Pagano President and Chairman of Stub Period -- -- $ 43,750 (2)
the Board (1) 1998 -- -- 75,000
1997 -- -- 75,000
1996 -- -- 75,000; Options (3)
Robert A. Reinhart Chief Financial Officer, Stub Period $ 70,369(2) -- --
Vice-President, Treasurer 1998 125,000 -- Options (4)
and Secretary 1997 86,000(5) $ 25,000 Options (6)
Thomas Livelli President and Chief 1998 (8) $ 138,462(9) -- --
Executive Officer of CMT (7) 1997 (8) 63,462 $181,000 --
1996 (8) 101,212 -- --
</TABLE>
- ----------
(1) Mr. Pagano, who was elected President of the Company on June 15, 1994,
receives a consulting fee of $75,000 per annum and reimbursement of
documented expenses incurred on behalf of the Company in connection with
his position as a consultant to the Company. See "Item 13. Certain
Relationships and Related Transactions"
-20-
<PAGE>
(2) Reflects the respective compensation or consulting fee, as the case may be,
of the Named Executive, pro rated for the seven month Stub Period.
Following the CMT Merger, the Company adopted the calendar fiscal year of
CMT. The Company previously operated under a fiscal year ended May 31st.
(3) On May 14, 1996, the Company granted Mr. Pagano non-qualified stock options
to purchase up to 217,000 shares of the Common Stock of the Company under
the Company's 1990 Stock Option Plan, at $1.625 per share, in substitution
for an existing option held by Mr. Pagano.
(4) On April 20, 1998, the Company granted Mr. Reinhart incentive stock options
to purchase up to 25,000 shares of the Common Stock of the Company at $2.25
per share, which options vest in two equal installments on each of April
20, 1999 and April 20, 2000.
(5) Reflects Mr. Reinhart's salary rate of $100,000 for the year ended May 31,
1997, pro rated from July 22, 1996, when he was elected Chief Financial
Officer of the Company.
(6) On October 25, 1996, the Company granted Mr. Reinhart incentive stock
options to purchase up to 40,000 shares of the Common Stock of the Company
at $2.50 per share, which options became immediately exercisable on the
date of grant. Such options were subsequently re-priced on January 16,
1998, to an exercise price of $0.75 (the fair market value of the Common
Stock at such time).
(7) Mr. Livelli is President and Chief Executive Officer of CMT, a wholly-owned
subsidiary of Prime.
(8) Reflects salary paid for the calendar years ended December 31, 1998, 1997
and 1996. Because the Company adopted as its fiscal year CMT's calendar
year at the time of the CMT Merger, no Stub Period calculation is required
when disclosing the compensation paid to CMT's executive officers.
(9) Reflects Mr. Livelli's (i) effective salary rate of $135,000 (as amended at
May 29, 1998 following the CMT Merger) for the year ended December 31,
1998, pro rated from May 29, 1998, when he was elected President of CMT in
conjunction with the CMT Merger, and (ii) effective salary rate of $150,000
for the year ended December 31, 1998, pro rated for the five months ended
May 29, 1998.
-21-
<PAGE>
The following table discloses information concerning options granted during
the year ended December 31, 1998 to the Named Executives.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Percent of Annual Rates of Stock
Number of Securities Total Price Appreciation for
Underlying Options/SARs Exercise or Option Term
Name Option/SARs Granted Granted Base Price Expiration Date 5% 10%
- ---- -------------------- ------------ ----------- --------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Reinhart 25,000 8.5% $2.25 /share April 20, 2002 $ 12,122 $ 26,106
</TABLE>
The following table sets forth information concerning the number of options
owned by the Named Executives and the value of any in-the-money unexercised
options as of December 31, 1998. No options were exercised by the Named
Executives during fiscal 1998.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at December 31, 1998 at December 31, 1998 (1)
---------------------------- ------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joseph K. Pagano 217,000(2) -0- -0- -0-
Robert A. Reinhart 40,000(3) 25,000(4) $10,000 -0-
</TABLE>
- ----------
(1) Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year end
market value of the common stock. An Option is "in-the-money" if the fiscal
year end fair market value of the Common Stock exceeds the option exercise
price. At December 31, 1998, the closing price per share of the Common
Stock as reported by the OTC Bulletin Board was $1.00.
(2) Stock options granted by the board of directors as of May 14, 1996, under
the Company's 1990 Stock Option Plan, having an exercise price of $1.625
per share, which options became immediately vested and exercisable from the
date of grant and, as amended, expire May 14, 2001.
(3) Incentive stock options granted pursuant to Agreement dated October 25,
1996, having an exercise price of $2.50 per share, which options became
immediately vested and exercisable from the date of grant and expire five
(5) years after the date of grant. Such options were subsequently re-priced
-22-
<PAGE>
on January 16, 1998, to $0.75 per share (the fair market value of the
Common Stock at such time).
(4) Incentive stock options granted pursuant to Agreement dated April 20, 1998,
having an exercise price of $2.25 per share, which options vest in two
equal installments on each of April 20, 1999 and April 20, 2000 and expire
four (4) years after the date of grant.
Employment Agreements
In conjunction with the CMT Merger, the Company assumed the three-year
employment agreement, dated May 22, 1997 and amended as of May 29, 1998, with
Thomas J. Livelli, pursuant to which Mr. Livelli serves as President and Chief
Executive Officer of CMT. The employment agreement provides for an annual base
compensation of $135,000. The employment agreement provides for Mr. Livelli's
employment on a full-time basis and contains a provision that the employee will
not compete or engage in a business competitive with the current or anticipated
business of the Company during the term of the employment agreement and for a
period of one year thereafter.
-23-
<PAGE>
Director Compensation
Directors receive no cash compensation for serving on the Board of
Directors or for attending Board or Committee (if any) meetings. However,
non-employee directors are eligible to be granted non-qualified stock options
under the Company's 1990 Stock Option Plan. Nonqualified stock options may be
exercised for up to 10 years from the date of grant at such exercise prices as
the Board of Directors may determine.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company did not have a Compensation Committee of its Board of Directors
during fiscal 1998. Decisions as to compensation during fiscal 1998 were made by
the Company's Board of Directors. Mr. Pagano, who is an officer of the Company,
and Messrs. Livelli and Malavarca, who are officers of CMT, served as members of
the Board of Directors during fiscal 1998. None of the other executive officers
of the Company served on the Board of Directors or the compensation committee of
any other entity, any of whose officers served on the Board of Directors during
fiscal 1998.
Stock Option Plans
The Company adopted the 1990 Stock Option Plan (the "Plan"), which provides
for grants of options to purchase up to 1,000,000 shares of Common Stock, as
amended by resolution dated June 12, 1996 of the Board of Directors, which
options may be granted to employees, consultants, agents and other persons
deemed valuable to the Company or any of its subsidiaries. The Plan permits the
Board of Directors or the Committee of the Plan, as the case may be, to issue
incentive stock options ("ISOs"), as defined in Section 422 of the Internal
Revenue Code (the "Code"), and stock options that do not conform to the
requirements of that Code section ("non-ISOs"). The exercise price of each ISO
may not be less than 100% of the fair market value of the Common Stock at the
time of grant, except that in the case of a grant to an employee who owns
(within the meaning of Code Section 422) 10% or more of the outstanding stock of
the Company or any subsidiary (a "10% Stockholder"), the exercise price may not
be less than 110% of such fair market value. The exercise price of each non-ISO
also may not be less than 100% of the fair market value of the Common Stock at
the time of grant. Options may not be exercised prior to the first anniversary,
or on or after the tenth anniversary (fifth anniversary in the case of an ISO
granted to a 10% Stockholder) of their grant. Options may not be transferred
during the lifetime of the option holder. No stock options may be granted under
the Plan after May 2000.
The Plan is administered by the Board of Directors and may be administered
by a Committee chosen by the Board of Directors. Subject to the provisions of
the Plan, the Board of Directors or such Committee, as applicable, has the
authority to determine the individuals to whom the stock options are to be
granted, the number of shares to be covered by each option, the option price,
the type of option, the option period, the restrictions, if any, on the exercise
of the option, the terms for the payment of the option price and other terms and
conditions. Payment by option holders upon exercise of an option may be made (as
determined by the Board of Directors or the Committee) in cash, or, in certain
instances, by shares of Common Stock.
Under the terms of the CMT Merger, the Company issued options to purchase
115,200 shares of its Common Stock under the Plan to holders of options to
purchase shares of CMT's stock, which options
-24-
<PAGE>
had been granted under the stock option plan of CMT. In addition, the Company
reserved shares of its Common Stock with respect to options to purchase up to an
additional 273,800 shares of Common Stock for future grant under the Plan for
employees of CMT. Of these reserved shares, options to purchase up to an
aggregate of 44,250 shares of Common Stock were granted January 1, 1999 under
the 1990 Plan to fourteen (14) employees of CMT. The terms of such options
provide for a four (4) year vesting period by which all the options shall become
exercisable. To the extent not exercised, the options shall expire on December
31, 2008.
At the year ended December 31, 1998, options to purchase an aggregate of
350,000 shares of the Company's Common Stock were outstanding under the Plan and
7,200 options had been exercised.
The Company from time to time has also granted non-plan options to certain
officers, employees and consultants. Options to purchase an aggregate of 308,000
shares of the Company's Common Stock were outstanding at December 31, 1998, of
which options to purchase an aggregate of 208,000 shares of the Company's Common
Stock were granted to Messrs. Reinhart, Adler and Marks during the 1998 fiscal
year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information, as of April 20, 1999 (except as
otherwise noted in the footnotes), regarding the beneficial ownership of the
Company's Common Stock of: (i) each person or group known by the Company to own
beneficially more than five percent of the outstanding shares of the Company's
Common Stock; (ii) each director of the Company; (iii) the Named Executives; and
(iv) all directors and executive officers of the Company as a group. Except as
otherwise specified, the Company believes that all persons named in the chart
have sole voting and investment power over the shares listed.
<TABLE>
<CAPTION>
Amount and Nature of Percentage of
Name and Address of Beneficial Owner Beneficial Ownership Common Stock
- ------------------------------------ -------------------- -------------
<S> <C> <C>
Frederick R. Adler
1520 S. Ocean Blvd
Palm Beach, FL 33480 704,673(1) 11.26%
Joseph K. Pagano
P.O. Box 7785
Aspen, CO 81612 1,454,450(2) 22.99%
Samuel A. Rozzi
c/o Corporate National Realty
7600 Jericho Turnpike
Woodbury, NY 11797 447,525 7.33%
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, NY 10005 1,124,859(3) 18.41%
J. Morton Davis
44 Wall Street
New York, NY 10005 1,124,859(3)(4) 18.41%
Robert A. Reinhart
c/o Cell & Molecular Technologies, Inc.
580 Marshall Street
Phillipsburg, New Jersey 08865 52,500(5) *
Thomas Livelli
c/o Cell & Molecular Technologies, Inc.
580 Marshall Street
Phillipsburg, New Jersey 08865 306,000 5.01%
Paul A. Marks
7 Rossiter Road
Washington, Connecticut 06793 18,000(6) *
</TABLE>
-25-
<PAGE>
<TABLE>
<S> <C> <C>
Richard Malavarca
c/o Cell & Molecular Technologies, Inc.
580 Marshall Street
Phillipsburg, New Jersey 08865 180,000 2.95%
All directors and officers as a group (seven 3,163,148(7) 48.32%
persons)
</TABLE>
- ----------
(*) Less than 1%.
(1) Includes options to purchase up to 150,000 shares of the Company's Common
Stock, at an exercise price of $0.75 per share.
(2) Includes options to purchase up to 217,000 shares of the Company's Common
Stock, at an exercise price of $1.625 per share.
(3) The information with respect to D.H. Blair Investment Banking Corp.
("Blair") and J. Morton Davis is based upon Amendment No. 7, dated May 1,
1996, to the Schedule 13D, dated January 31, 1992, filed by such persons
with the SEC. The Schedule 13D states that Blair shares voting and
investment power over 1,124,859 shares, and Mr. Davis has sole voting and
investment power over such 1,124,859.
(4) Includes 8,500 shares owned by Mr. Davis' wife. Mr. Davis disclaims
beneficial ownership of the 8,500 shares owned by his wife.
(5) Represents options to purchase up to 40,000 shares and 25,000 shares (of
which options are currently exercisable with respect to only 12,500 shares)
of the Company's Common Stock, at an exercise price of $0.75 and $.2.25 per
share, respectively.
(6) Represents options to purchase up to 18,000 shares of the Company's Common
Stock, at an exercise price of $2.00 per share.
-26-
<PAGE>
(7) Includes options to purchase up to an aggregate of 437,500 shares of the
Company's Common Stock, which options are exercisable at April 20, 1999 or
within 60 days of such date, previously granted to the directors or
officers of the Company.
Item 13. Certain Relationships and Related Transactions.
In October 1998, the Company entered into a 180-day note payable agreement
with a bank for a maximum of $200,000, which note is collateralized by a
$200,000 certificate of deposit as well as a personal guarantee of Joseph K.
Pagano, the President and Chairman of the Board of the Company. In December
1998, the bank advanced the Company $160,000 under this agreement, which note
bears interest at 6.25% per annum and is payable monthly. During February 1999,
$60,000 was repaid. The principal and any accrued interest is currently due June
29, 1999, following the 90 day renewal period agreed to by the bank as of the
original April 1, 1999 maturity date.
On May 29, 1998, the Company consummated the CMT Merger pursuant to which a
wholly-owned subsidiary of Prime merged with and into CMT. Under the terms of
the CMT Merger, all of the outstanding shares of capital stock of CMT were
converted into an aggregate of 1,611,000 shares of Common Stock, par value $.01
per share, of the Company, representing approximately 26.4% (after consummation
of the CMT Merger) of the Company's issued and outstanding Common Stock. Of the
shares issued pursuant to the CMT Merger, 393,000 and 202,500 shares of the
Company's Common Stock were issued to Joseph K. Pagano, the President and
Chairman of the Board of the Company, and Frederick R. Adler, a director of the
Company, respectively, each of whom was a stockholder of CMT at the time of the
CMT Merger.
At the time of the CMT Merger, there were loans outstanding from CMT to six
of its shareholders, in the aggregate principal amount of $500,000, as evidenced
by promissory notes from CMT to each such shareholder. Messrs. Pagano and Adler
were among these shareholders and, at the time of the CMT Merger, held
promissory notes in the principal amounts of $218,333 and $112,500,
respectively. These notes currently bear interest at a rate of 5% and mature May
1, 2000 (as adjusted in connection with the CMT Merger).
In July 1991, the Company entered into a consulting agreement with Joseph
K. Pagano, effective through July 2, 1993 (the "Consulting Agreement"), which
Consulting Agreement was renewed in each of the last six years. Mr. Pagano was
retained to assist the Company in finding a business to acquire and to advise
the Company in the investment of its funds pending any such acquisition. The
Consulting Agreement initially provided for a monthly consulting fee and
non-accountable expense allowance of $6,250 in the aggregate. In May 1992, the
Consulting Agreement was amended to provide for a monthly consulting fee of
$6,250 and reimbursement of documented expenses incurred on behalf of the
Company and approved by an officer of the Company. The Consulting Agreement also
provides for Mr. Pagano to participate in employee benefit plans and receive
fringe benefits generally provided to the Company's senior management and
permits the payment to Mr. Pagano of bonuses within the discretion of the Board
of Directors. Mr. Pagano was elected President and a director of the Company on
June 15, 1994.
-27-
<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 (*)
-28-
<PAGE>
10.13 Form of Amendment to Employment Agreement dated as of May 29,
1998 between Cell & Molecular Technologies, Inc. and Thomas
Livelli (**)
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.
(*) Previously filed with the Securities and Exchange Commission as
Exhibits to, and incorporated herein by reference from, the Company's
Report on Form 10-K for the fiscal year ended December 31, 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.
-29-
<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 and accrued expenses 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 Company 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 29, 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 29, 1999
Joseph K. Pagano (principal executive officer)
/s/ Robert A. Reinhart
- ----------------------- Chief Financial Officer, Treasurer, April 29, 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 29, 1999
Samuel Rozzi
/s/ Richard Malavarca
- ----------------------- Director April 29, 1999
Richard Malavarca
/s/ Thomas Livelli
- ----------------------- Director April 29, 1999
Thomas Livelli
- ----------------------- Director April __, 1999
Paul A. Marks
</TABLE>
Cell & Molecular Technologies, Inc.
580 Marshall Street
Phillipsburg, NJ 08865
May 29, 1998
Mr. Thomas Livelli
245 Bryn Mawr Avenue
Lavallette, NJ 08735
Dear Mr. Livelli:
Reference is made to the Employment Agreement dated May 22, 1997, between
you and Cell & Molecular Technologies, Inc. (the "Employment Agreement").
This letter confirms that, effective as of June 1, 1998, for good and
valuable consideration, the receipt and sufficiency of which are hereby mutually
acknowledged, and the provisions of Section 6(b)(2) of the Employment Agreement
notwithstanding, Section 5(a) of the Employment Agreement is hereby amended to
reduce the Base Salary (as such term is defined in the Employment Agreement) to
One Hundred Thirty-Five Thousand Dollars ($135,000).
Except as otherwise provided hereby, the Employment Agreement, as hereby
amended, shall remain in full force and effect from and after the date hereof.
Very truly yours,
CELL & MOLECULAR TECHNOLOGIES, INC.
By: /s/ JOSEPH K. PAGANO
-------------------------------
Name: Joseph K. Pagano
Title: President
AGREED AND ACCEPTED:
MAY 29, 1998:
/s/ THOMAS LIVELLI
- -----------------------
THOMAS LIVELLI
