Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g)
of the Securities Exchange Act of 1934
................................................................................
ARC COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
New Jersey 22-3201557
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Arc Communications, Inc.
788 Shrewsbury Avenue
Tinton Falls, New Jersey 07724
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (732) 219-1766
Securities to be registered under Section 12(b) of the Act:
Title of each class to be registered Name of each exchange on which each
class is to be registered
None
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Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
- --------------------------------------------------------------------------------
(title of class)
CLASS A PREFERRED STOCK, $.20 PAR VALUE
- --------------------------------------------------------------------------------
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Arc Communications, Inc.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number and Caption in Form 10-SB Caption in Form 10-SB
------------------------------------- ---------------------
<S> <C>
1. Item 101. Description of Business ......................... Description of Business
2. Item 303. Management's Discussion and Analysis Management's Discussion
or Plan of Operation...................................... and Analysis
3. Item 102. Description of Property.......................... Description of Properties
4. Item 403. Security Ownership of Certain Security Ownership of Certain
Beneficial Owners and Management............................ Beneficial Owners and Management
5. Item 401. Directors, Executives Officers, Directors, Executives Officers,
Promoters and Control Persons.............................. Promoters and Control Persons
6. Item 402. Executive Compensation........................... Executive Compensation
7. Item 404. Certain Relationships and Related Certain Relationships and Related
Transactions.............................................. Transactions
8. Item 202. Description of Securities........................ Description of Securities
Market Price of and Dividends on
9. Item 201. Market for Common Equity and the Registrant's Common Equity
Related Stockholder Matters............................... and Other Shareholder Matters
10.Item 103. Legal Proceedings ............................... Legal Proceedings
11.Item 304. Changes in and Disagreements with ................ Changes in and Disagreements
with Accountants on Accounting and Financial Accountants
Disclosure
12.Item 701. Recent Sales of Unregistered Recent Sales of Unregistered
Securities ............................................... Securities
13.Item 702. Indemnification of Directors and Indemnification of Directors and
Officers ................................................. Officers
14.Item 310. Financial Statements ............................ Financial Statements
15.Item 601. Exhibits ........................................ Exhibits
</TABLE>
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TABLE OF CONTENTS
PART I.........................................................................5
ITEM 1. DESCRIPTION OF BUSINESS..........................................5
BACKGROUND....................................................5
GENERAL.......................................................6
Services..........................................7
THE COMPANY'S STRENGTHS.......................................7
Focus on Clients' Business Objectives.............7
Technological Expertise...........................7
Creative Expertise................................7
ARC'S STRATEGY................................................8
Capitalize on Accomplishments and
Market Opportunities.........................8
Deploy Leading Technologies.......................8
MARKETING.....................................................8
GOVERNMENT REGULATION.........................................8
COMPETITION...................................................9
EMPLOYEES.....................................................9
ARC INTERNET PUBLISHING, INC..................................9
PERSONAL EMERGENCY MEDICAL INFORMATION
SERVICES INC.................................................10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS............................10
FORWARD-LOOKING STATEMENTS ..................................10
RESULT OF OPERATIONS ........................................11
LIQUIDITY AND CAPITAL RESOURCES .............................12
ARC YEAR 2000 COMPLIANCE.....................................13
ITEM 3. DESCRIPTION OF PROPERTIES.......................................13
THE NEW JERSEY OFFICE........................................13
THE FLORIDA OFFICE...........................................13
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...........................................13
SHAREHOLDERS AGREEMENT.......................................14
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS.................................................15
ITEM 6. EXECUTIVE COMPENSATION..........................................16
SUMMARY COMPENSATION TABLE...................................16
OPTIONS OF MANAGEMENT........................................17
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS....................................................17
ITEM 8. DESCRIPTION OF SECURITIES.......................................17
COMMON STOCK.................................................17
Dividends........................................18
Voting Rights....................................18
Preemptive Rights................................18
PREFERRED STOCK..............................................18
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OPTIONS......................................................19
TRANSFER AGENT...............................................19
PART II.......................................................................20
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER
MATTERS. .......................................................20
MARKET.......................................................20
OUTSTANDING SHARES AND SHAREHOLDERS OF
RECORD.......................................................20
DIVIDENDS....................................................21
ITEM 2. LEGAL PROCEEDINGS...............................................21
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS.....................................................21
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.........................21
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.......................22
PART F/S......................................................................23
ITEM 1. FINANCIAL STATEMENTS............................................23
PART III......................................................................24
ITEM 1. INDEX TO EXHIBITS...............................................24
INDEX OF FINANCIAL STATEMENTS...................................25
SIGNATURES......................................................26
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
a. BACKGROUND
Arc Communications, Inc. is a New Jersey corporation which was incorporated
on October 21, 1992 (hereinafter, "Arc", the "Company", "we", "us" and "our"
will each refer to Arc Communications, Inc.). The Company was originally
incorporated under the name Arc Slide Technologies Ltd. ("ASTL"). The Company
was initially authorized to issue an aggregate of 10,000 shares of common stock
with no par value.
On August 14, 1996, the Company, formerly Alliance Telecommunications
Holding Corp., acquired ASTL, a Florida corporation, acquired ASTL in a tax-free
reorganization within the meaning of Section 368(a)(1)(B) of the Internal
Revenue Code of 1986. The Company issued 10,400,000 shares of common stock to
the shareholders of ASTL.. The acquisition was accounted for as a pooling of
interest. Thereafter, ASTL became a wholly owned subsidiary of said Arc
Communications, Inc. On November 21, 1997, Arc Communications, Inc., a Florida
corporation (the "Parent"), was merged with and into its wholly owned New Jersey
subsidiary, ASTL, in a tax free reorganization within the meaning of section
368(a)(1)(A) of the Internal Revenue Code of 1986. In exchange for each share of
common stock of the Parent, the shareholders of the Parent received one share of
common stock of ASTL. At that time, ASTL changed its name to ARC Communications
Inc., the current name of the Company. The merger was accounted for as a pooling
of interest.
On July 23, 1996, Arc-Mesa Educators Ltd.("Arc-Mesa"), a New Jersey
corporation, was formed for the purpose of engaging in the business of offering
continuing education products and services. Arc-Mesa was owned 45% by Arc
Internet Publishing Corp., a wholly owned subsidiary of ASTL, 45% by Mesa
Marketing Inc., a Florida corporation, and 10% by Andrew Astrove, M.D. Said
parties entered into a Shareholders Agreement dated August 1, 1996 governing the
ownership and operation of Arc-Mesa. On October 17, 1997, Arc Internet
Publishing Corp. acquired all the assets of Mesa Marketing, Inc. ("Mesa"), a
Florida corporation, by statutory merger. The Company issued 100,000 shares of
common stock, with a par value of $.001 per share, to the shareholders of Mesa
in exchange for all the assets of Mesa. Pursuant to the purchase agreement,
50,000 shares remain held in escrow payable to Mesa shareholders based on the
achievement of certain financial goals. The shares remain in escrow as financial
goals have not been met as of this date. On April 6, 1998, Arc Internet
Publishing Corp. acquired all the assets of Arc-Mesa, by statutory merger. As a
result, Arc Internet Publishing Corp. acquired the remaining 10% interest in
Arc-Mesa from Andrew Astrove, M.D. In exchange, Dr. Astrove received 15,000
shares of common stock of the Company.
On December 19, 1997, the Company acquired all the assets of Navesink River
Group, Inc. ("Navesink"), a New Jersey corporation, in a tax free reorganization
within the meaning of Section
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368(a)(1)(A) of the Internal Revenue Code of 1986. The Company issued 100,000
shares of common stock, with a par value of $.001 per share, to the shareholders
of Navesink in exchange for all of the issued and outstanding shares of common
stock, with a no par value share, of Navesink.
As of May 17, 1999, the Company was authorized to issue 50,000,000 shares
of common stock, with a par value of $0.001 per share, and 5,000,000 shares of
preferred stock, with a par value of $0.20 per share. As of May 17, 1999,
13,750,622 shares of the Company's authorized shares of common stock were issued
and outstanding and 720,000 shares of preferred stock were issued and
outstanding.
The Company has not been subject to bankruptcy, receivership or any similar
proceedings.
The Company maintains two offices: 788 Shrewsbury Avenue, Tinton Falls, New
Jersey 07724; and 1648 Metropolitan Circle, Tallahassee, Florida 32308.
b. GENERAL
The Company is a full-service marketing consultancy and graphic design firm
specializing in the development and production of corporate marketing and
communications media. The Company's clients include fortune 500 companies with
concentrations in the pharmaceutical industry and information technology
industries. Services include marketing, consulting, general web site development
on the World Wide Web (the "Web"), electronic commerce, interactive multi-media,
graphics design and imaging.
The Company's graphic design and interactive multi-media products use
advanced technologies to create media for corporate communications. The Company
continues to expand its business through existing products such as a 3-D
animation design and multimedia presentations.
The Company's subsidiary, Arc Internet Publishing Corp (d/b/a Arc Mesa
Educators) is in the business of providing continuing education to a variety of
professions with a primary focus in the medical profession.
The Company has the ability to design and create specific websites for a
client and may operate such a site if so desired. The Company also designs and
develops interactive kiosks and advertising and promotional materials, including
packaging for retail products. The Company's Web expertise has positioned it to
effectively transition into a full service integrated, interactive marketing and
communication company. The Company's services are used by its clients to create
a new medium for advertisement, promotion and technical support of such
customer's products and services. Web sites can provide commercial organizations
benefits in addition to those available through conventional media, including
the ability to enhance a corporate brand, engage and entertain consumers,
provide in-depth information, reduce selling and operating costs, generate leads
and build retail traffic, expand distribution channels (otherwise known as
e-commerce), promote major sporting and entertainment events and monitor
popularity of content, conduct research, and build databases for on-going
marketing efforts.
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Services
The Company partners with clients to focus on how new and emerging
technologies can enable them to build one-on-one customer relationships. Tapping
into superior strategic expertise, media know-how, creative talent and technical
excellence, the Company guides clients to achieving a favorable return on
investment from Web-based marketing.
The scope of our services has ranged from consulting services to complete
marketing-driven design and construction of multi-level Web sites. The Company
also offers numerous integrated services in addition to those discussed above,
particularly offline media planning and buying related to identification,
negotiation for and purchase of banners, sponsorship and proprietary
partnerships on Web sites.
c. THE COMPANY'S STRENGTHS
Focus on Clients' Business Objectives
The Company has made understanding its clients' business challenges the
primary focus that guides its customer services. The Company often works with
its clients' management to determine how best to integrate Web sites with the
clients' business goals.
Technological Expertise
The Company believes the creative application of leading technologies is
also crucial to the success of its business. The Company's technical programming
personnel are skilled in various computer operating systems, tools and
languages, including, C/C++, Java, HTML, CGI, PERL, Visual Basic, Shockwave
Flash, among others. These programmers are responsible for providing complex
computer programming for special features on CD-ROM products and Web sites as
well as periodically assessing new technologies in order to identify and deploy,
directly and through independent contractors, those that are most promising for
enhancing the Company's business and that of its clients.
Creative Expertise
The Company believes that, in addition to the creative elements required in
traditional graphic design, superior interactive development requires that the
end product is easy-to-use, contains intuitive interfaces and seamless
integrated technologies and has an engaging look and feel. Management believes
that the Company's creative staff possesses a broad spectrum of expertise to
meet clients' creative needs. In order to maintain high levels of creativity and
quality, the Company intends to recruit the best talent available. However,
competition for creative personnel is especially intense and there can be no
assurance that the Company will attract or retain adequate creative talent to
accomplish these goals.
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d. ARC'S STRATEGY
Capitalize on Accomplishments and Market Opportunities
The Company believes that the proliferation of the Internet will continue
to provide substantial opportunities to the Company and that its successfully
completed projects will continue to enhance its marketing efforts. The Company's
management does not, however, believe that the Company's primary business will
always be limited to the Internet. The Company has the ability to produce
digital content which may be carried over a variety of emerging technologies
such as digital satellite and interactive television. Although there is no
assurance that any of these technologies will achieve acceptance in the
marketplace, the Company believes its services could be utilized over these
channels as well.
Deploy Leading Technologies
One of the Company's objectives is to apply both proven and emerging
technologies as they become available in order to maximize the effectiveness of
its Web site services. The Company has formed informal non-exclusive
relationships with key technology providers in an effort to gain access to, and
influence the features of, the Company's utilization of their technologies.
e. MARKETING
The Company markets its services directly and seeks to form strategic
marketing relationships with third parties. Presently, the Company had 5
employees dedicated to business development. Additionally, 3 of the Company's
executive officers spend a portion of their time marketing the Company's
services. The Company also seeks to attract new clients through other methods,
including referrals from existing clients. The Company seeks to cross-sell its
various services to its clients and prospective clients through sales
presentations that encourage clients to utilize all of the Company's services.
f. GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to Web site service
companies and marketing and communications firms. However, due to the increasing
media attention focused on the Internet, it is possible that a number of laws
and regulations may be adopted with respect to the Internet, covering issues
such as user privacy, pricing and characteristics and quality of products and
services. The adoption of any such laws or regulations may decrease the growth
of the Internet, which could in turn decrease the demand for the Company's
services and products and increase the Company's cost of doing business or cause
the Company to modify its operations, or otherwise have an adverse effect on the
Company's business, operating results or financial condition. Moreover, the
applicability to the Internet of existing laws such as property ownership, libel
and personal privacy is uncertain. The Company cannot predict the impact, if
any, that future regulation or regulatory changes may have on its business. In
addition, Web site developers such as the Company face potential liability for
the
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actions of clients and others using their services, including liability for
infringement of intellectual property rights, rights of publicity, defamation,
libel and criminal activity under the laws of the U.S. and foreign
jurisdictions. Although the Company maintains $2,000,000 of general liability
insurance, and a $2,000,000 umbrella policy, any imposition of liability in
excess of such policies limits or if not covered by such policies could have a
material adverse effect on the Company.
g. COMPETITION
The markets for the Company's services are highly competitive and are
characterized by pressures to incorporate new technologies, accelerate
completion schedules and reduce prices. The Company expects competition for its
services to intensify in the future, partly because there are no substantial
barriers to entry into the Company's business. The Company faces competition
from a number of sources, including potential clients that perform interactive
marketing and communications services and Web site development services
in-house. These sources also include other Web site service boutique firms,
communications, telephone and telecommunications companies, computer hardware
and software companies, established online service companies, advertising
agencies, Internet-services and access providers as well as specialized and
integrated marketing communication companies, all of which are entering the Web
site design and creation market in varying degrees and are competing with the
Company. Many of the Company's competitors or potential competitors have
significantly greater financial, sales, marketing and other resources than the
Company. The Company's ability to retain relationships with its existing clients
and generate new clients and relationships depends to a significant degree on
the quality of its services and its reputation, as compared with the quality of
services provided by and the reputations of, the Company's competitors. The
Company also competes on the basis of creative reputation, price, reliability of
services and responsiveness. There can be no assurance that the Company will be
able to compete and its inability to do so would have a material adverse impact
on the Company's business, financial condition and operating results.
h. EMPLOYEES
At March 31, 1999, the Company had 24 employees, of which all are full-time
employees. Full-time employees include 8 in strategic planning, executive
management, business development; 3 account managers; 5 creative and production
personnel; and 3 programmers, in addition to administrative staff.
i. ARC INTERNET PUBLISHING CORP
The Company's wholly owned subsidiary, Arc Internet Publishing, Corp,
develops and operates internet businesses and electronically publishes
interactive educational and reference material for the medical and dental
professions. Arc Internet Publishing, d/b/a, Arc Mesa Educators located at
http://www.arcmesa.com (the "Mesa Web site"), which provides continuing
professional education on the internet to the medical, dental and funeral
director's professions. Arc Mesa has achieved CCME Category One accreditation.
The Mesa Web site provides access to informative courses, administers state
mandated testing and provides immediate results in a live interactive setting.
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j. PERSONAL EMERGENCY MEDICAL INFORMATION SERVICES INC.
Personal Emergency Medical Information Services Inc. is a subsidiary of Arc
Internet Publishing Corp. The Company maintains an Emergency Medical Information
Services ("EMIS") website on the internet. EMIS provides 24-hour, worldwide
immediate access of a subscriber's personal medical records via the internet at
http://www.emis.org (the "EMIS Site"). Subscribers are issued an official EMIS
subscriber membership card that contains a secret personal subscriber
information number. Upon receipt of the card, subscribers must acknowledge
receipt in order to activate their records by calling the Company's customer
services department. Subscriber membership cards provide a unique identification
number that must be entered in order to retrieve a subscriber's record.
Individual subscribers or any authorized healthcare provider may obtain
individual records from anywhere in the world by entering or scanning the
barcoded identification number shown on each membership card into a computer
connected to the internet at the EMIS Site. The Company maintains a 24-hour help
hotline to provide assistance to those who might not have internet access or to
request an immediate fax. A patent application is presently pending for this
product.
The initial subscription fee for the EMIS service is $50.00. Payment of
such fee allows a subscriber to store the subscriber information form, EKG or
other medical records with a maximum page size of 8 1/2 x 14 inches. The annual
renewal fee is $25.00, and allows subscribers to update up to three of the
original records posted. Additional pages or updates may be purchased at a rate
of $15.00 per page.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
a. FORWARD-LOOKING STATEMENTS
Some of the information in this Form 10-SB may constitute forward-looking
statements which are subject to various risks and uncertainties. Such statements
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "estimate," "continue," "plan," or other similar
words. These statements discuss future expectations, contain projections of
results of operations or of financial conditions or state other
"forward-looking" information. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of certain factors,
including but not limited to: competitive factors and pricing pressures;
relationships with its manufacturers and distributors; legal and regulatory
requirements; general economic conditions; and other risk factors which may be
described in our future filings with the Commission. We do not promise to update
forward-looking information to reflect actual results or changes in assumptions
or other factors that could affect those statements. In addition, when
considering such forward-looking statements, you should keep in mind the factors
described in other cautionary statements appearing elsewhere in this Form 10-SB.
Such statements describe circumstances which could cause actual results to
differ materially from those contained in any forward-looking statement.
This Form 10-SB may also include statistical data regarding the Internet.
This data may have been obtained from industry publications and reports which we
believe to be reliable sources. We have not independently verified such data nor
sought the consent of any organizations to refer to their reports herein.
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b. RESULT OF OPERATIONS
Three Months ended March 31, 1999 and March 31, 1998
Arc's net sales for the three months ended March 31, 1999 and March 31,
1998 were $965,944 and $601,843 respectively, an increase of 60.4%. The
significant volume for the first three months of 1999 was partially due to the
continued growth of the Mesa Web site. Also, the Company signed significant
deals for Interactive Sales Training Programs with major Pharmaceutical
companies.
Gross profits for the three months ended March 31, 1999 and 1998 were
$898,539 and $470,587 respectively, an increase of 91%. The increase in gross
profits is attributable to the sharp increase in net sales as discussed above.
Selling, general and administrative expenses for the three months ended
March 31, 1999 and March 31, 1998 were $614,067 and $641,821 respectively, a
decrease of 4.2%. The decrease is attributed to cutbacks in overhead that were
made during the second half of 1998. This decrease in overhead was maintained
while dramatically increasing sales during the latter part of 1998 and the first
quarter of 1999.
Depreciation and amortization expenses for the three months ended March 31,
1999 and March 31, 1998 were $35,934 and $49,554 respectively, a decrease of
27.5%. This decrease is attributable to write downs at December 31, 1998 in
intangible assets.
Net income for the three months ended March 31, 1999 was $241,580 compared
to a loss of $195,102 for the comparable period in 1998, for an increase of
436%. Management believes that the increase in net income is due to the dramatic
increase in sales coupled with the decrease in overhead.
Years Ended December 31, 1998 and December 31, 1997
Arc's net sales for the years ended December 31, 1998 and 1997 were
$2,867,591 and $2,396,988 respectively, an increase of 19.6%. Management
believes that this increase resulted from increasing an expanding client base in
its core business of Web site development and full-service marketing programs,
in addition to the continuing growth of its Mesa Web site.
Selling, general and administrative expenses for the years ended December
31, 1998 and December 31, 1997 were $2,575,692 and $1,474,225 respectively. The
increase was due to increased overhead due to the mergers of two companies at
the end of 1997. These mergers resulted in an increase in administrative
expenses due to the increase in personnel.
Depreciation and amortization expenses for the years ended December 31,
1998 and December 31, 1997 were $386,090 and $156,973 respectively. The increase
was due to write downs of intangible assets at December 31, 1998.
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Net loss for the year ended December 31, 1998 amounted to $929,657 after a
net income of $2,335 for the year ended December 31, 1997. The primary factors
in the decrease in net income were write-offs of investments in affiliates of
$213,188 and write downs of intangible assets of $200,372.
c. LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 1999 and March 31, 1998
Cash flow generated by operations were $(25,691) for the three months ended
March 31, 1999 and $(431,690) for the three months ended March 31, 1998.
Negative cash flow from operating activities for the first three months of 1998
is primarily attributable to a $129,801 increase in accounts receivable and a
decrease of 148,989 in Accounts Payable. Cash flow from operating expenses was
negative in 1999 primarily due to an increase in accounts receivable of
$251,934.
Cash used for investing activities during the three months ended March 31,
1999 and March 31,1998 was $13,040 and 14,323, respectively which was primarily
used to purchase computer equipment.
Cash flow generated from financing activities was $40,000 for the three
months ended March 31, 1999 and $163,000 for the three months ended March 31,
1998. Net cash provided by financing activities decreased due to a significant
increase in sales which resulted in an increase in collections.
Cash increased during the three months ended March 31, 1999 by $1,269 and
decreased by $283,013 for the same period in 1998.
Years Ended December 31, 1998 and December 31, 1997
Cash flow generated by operations were $(573,125) for the year ended
December 31, 1998 and $45,172 for the year ended December 31, 1997. Positive
cash flow from operating activities for the year ended December 31, 1997 was
achieved, primarily due to an increase accounts payable and an increase in
accrued expenses and other current liabilities. The negative cash flow for the
year ended December 31, 1998 was due to an increase in depreciation and
amortization, losses from investment in affiliates, and a decrease in accounts
payable.
Cash flow from investing activities were positive for the years ended
December 31, 1998 and 1997. Net cash used in investing activities for the years
ended December 31, 1998 and 1997 were $442,470 and $648,819 respectively. The
significant increase in net cash used in investing activities in 1997 was
primarily due to the sale of common stock, which resulted in net proceeds of
$522,071. Financing cash flows were provided by loans and issuance of stock for
the year ending December 31, 1998. The company utilized $349,000 of its 4750,00
line of credit through a banking institution. The company received net proceeds
from the sale of preferred stock of $113,149.
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ARC YEAR 2000 COMPLIANCE
Arc has taken steps to ensure that it is year 2000 compliant. All of the
hardware and software used by the Company have been protected. The Company
believes that the servers it uses to interact on the internet are Year 2000
compliant. Further, the Companies which presently supply products or services to
Arc have informed Arc that they have taken the appropriate steps to ready their
hardware and software for Year 2000. However, the Company cannot guarantee any
other company's Year 2000 readiness and in the event that any Company which Arc
relies upon for services or products is not Year 2000 ready, the Company may
suffer irreparable economic harm.
ITEM 3. DESCRIPTION OF PROPERTIES
THE NEW JERSEY OFFICE
The Company's maintains an office at 788 Shrewsbury Avenue, Tinton Falls,
New Jersey 07724 (the "New Jersey Office"). The New Jersey Office is comprised
of 7,209 square feet and Arc Slide Technologies, Inc. as the Lessee is presently
in the third year of a five year lease at a monthly rent of $9,011.25 (the "New
Jersey Lease"). Pursuant to the terms of the New Jersey Lease, the Company has
the option to renew such lease for an additional period of five years commencing
at the end of the New Jersey Lease's initial term (December 31, 2001).
THE FLORIDA OFFICE
The Company also maintains an office at 1648 Metropolitan Circle,
Tallahassee, Florida 32308 (the "Florida Office"). The Florida Office is
comprised of 2,000 square feet and Arc Internet Publishing Corp. as the Lessee
is presently in the first year of a four year option term at a monthly rent of
2,247.00 (the "Florida Lease"). Pursuant to the terms of the Florida Lease, the
Company has the option to renew such lease for an additional period of four
years commencing at the end of the Florida Lease's option term (July 31, 2002).
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's common
stock beneficially owned by each officer and director of the Company and each
shareholder who holds more than 5% of the outstanding common stock of the
Company as of May 17, 1999. At such date there were 13,750,622 shares of common
stock (the "Common Stock") and 720,000 shares of preferred stock, respectively,
issued and outstanding. Unless specifically indicated otherwise, all such
ownership interests are direct.
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<TABLE>
<CAPTION>
Name and Address of Beneficial
Title of Class Owner Amount Percent of Class
- -------------- ----- ------ ----------------
<S> <C> <C> <C>
Common Stock Ethel Kaplan (1)(2)(12) 4,549,270 33.08%
6 Edwards Point Road
Rumson, New Jersey 07760
Steven H. Meyer(3)(7)(9) 2,312,020 16.81%
7 Emma Drive
Wayside, New Jersey 07712 2523
Kenneth P. Meyer(4)(8)(9) 2,310,687 16.80%
7 Wemrock Drive
Wayside, New Jersey 07712 2563
Michael Rubel(5)(10) 100,000 .0072%
6 Almark Terrace
Wayside, New Jersey 07712
John Lisovitch(6)(11) 50,000 .0036%
75 White Pine Road
Columbus, New Jersey 08022
</TABLE>
(1) Does not include 90,000 shares held by three trusts to which Ms. Kaplan is
custodian under the uniform gift to minors act.
(2) Ethel Kaplan is a Director and Secretary of the Company.
(3) Steven Meyer is a Director, the Chief Executive Officer and the President
of the Company.
(4) Kenneth Meyer is a Director and the Vice President Creative Manager of the
Company.
(5) Michael Rubel is the Company's Chief Operating Officer.
(6) John Lisovitch is the Information Technology Vice President.
(7) Does not include the option to purchase 18,750 shares of the Company's
Common Stock pursuant to Mr. Meyer's Stock Option Agreement.
(8) Does not include the option to purchase 18,750 shares of the Company's
Common Stock pursuant to Mr. Meyer's Stock Option Agreement.
(9) Kenneth Meyer and Steven Meyer are brothers.
(10) Does not include the option to purchase 75,000 shares of the Company's
Common Stock pursuant to Mr. Rubel's Stock Option Agreement.
(11) Does not include the option to purchase 37,500 shares of the Company's
Common Stock pursuant to Mr. Lisovitch's Stock Option Agreement.
(12) Does not include the option to purchase 37,500 shares of the Company's
Common Stock pursuant to Ms. Kaplan's Stock Option Agreement.
SHAREHOLDERS AGREEMENT
On August 22, 1994, Steven H. Meyer, Kenneth P. Meyer, Ethel Kaplan, Peter
C. Cosmas (collectively, the "Shareholders" for the purposes of this section)
and Arc Slide Technologies Ltd. ("ASTL") entered into a shareholders agreement
whereby the Shareholders agreed to restrict the transfer of their shares of ASTL
for the term of such agreement (the "Shareholders Agreement"). The
14
<PAGE>
Shareholders Agreement restricts all transfers of the Shareholders' ASTL shares
with the exception of transfers of their respective shares to their immediate
family members. Although the Shareholders Agreement has been amended numerous
times, such agreement remains in effect.
Mr. Cosmos is a former director of the Company.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Name Age Position
- ---- --- --------
Steven H. Meyer 37 Chief Executive Officer, President
and Director
Michael Rubel 45 Chief Operating Officer
Kenneth P. Meyer 40 Vice President Creative Manager
and Director
Ethel Kaplan 67 Secretary and Director
John Lisovitch 52 Vice President Information
Technology Services
The Board of Directors of the Company consists of three persons. Directors
serve until the next annual meeting of shareholders or until their successors
are duly elected and qualified. Officers are elected to serve, subject to the
discretion of the Board of Directors, until their successors are appointed. None
of the Directors of the Company hold directorships in any other public
companies.
STEVEN H. MEYER has served as the Company's Chief Executive Officer and
President since its inception. From 1987 to 1992, Mr. Meyer founded and was
employed by Slide Effects, Inc. Mr. Meyer received a Bachelor of Fine Arts
degree from Syracuse University in 1983. Mr. Meyer is the brother of Kenneth
Meyer who is also an officer and director of the Company.
MICHAEL RUBEL has served as the Company's Chief Operating Officer since
July of 1998. Mr. Rubel was the co-founder and eventually President and Chief
Executive Officer of CMP Advertising ("CMP") from 1976 to 1992, He then formed
the Navesink River Group which merged with the Company. Mr. Rubel received a
Bachelor of Science degree in accounting from Fairleigh Dickenson University in
1975.
KENNETH P. MEYER has served as the Company's Vice President Creative
Manager and Director since 1993. Mr. Meyer was a Vice President of Slide
Effects, Inc. from 1989 to 1993. Mr. Meyer attended the University of Florida
from 1976 to 1982 majoring in Fine Arts.
15
<PAGE>
ETHEL KAPLAN has served as the Company's Secretary and Director since 1993.
Ms. Kaplan was the founder and President of Arc Technologies, Inc. ("Arc
Technologies") from 1989 to 1993. Ms. Kaplan attended Syracuse University and
Alfred University.
JOHN LISOVITCH has served as the Company's Vice President of Information
Technology since 1997. Mr. Lisovitch was employed by CMP from 1988 to 1992. He
joined with Mr. Rubel to form the Navesink River Group which merged with the
Company. Mr. Lisovitch received a degree from Pennsylvania State University with
a Bachelor of Arts degree in Advertising and Journalism in 1968.
ITEM 6. EXECUTIVE COMPENSATION
Total cash compensation paid to all executive officers as a group for
services provided to Arc and its subsidiaries in all capacities during the
fiscal year ended December 31, 1998 aggregated $541,341. Set forth below is a
summary compensation table prepared in accordance with the applicable rules of
the Securities and Exchange Commission.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Other Securities
Annual Underly-
Name and Compensa- ing All Other
Principal Position Year Salary($) Bonus tion Options Compensation
- ------------------ ----- ---------- ----- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Steven H. Meyer 1998 88,093 none none 75,000(2) none
1997 86,648 none none none none
Michael Rubel 1998 139,031 none none 150,000(1) none
Kenneth P. Meyer 1998 88,093 none none 75,000(2) none
1997 83,090 none none none none
Ethel Kaplan 1998 88,093 none none 150,000(2) none
1997 86,648 none none none none
John Lisovitch 1998 138,031 none none 150,000(2) none
</TABLE>
(1) Mr. Rubel holds options to purchase 300,000 shares of the Company's Common
Stock pursuant to his employee Stock Option Agreement. Of those 300,000
options, 75,000 have vested.
(2) 25% of these options have vested as of June 1, 1999.
16
<PAGE>
OPTIONS OF MANAGEMENT
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
% of Total % of
Granted Options Holder's
Granted to Total
Number of Employees in Options
Securities Year in which Fiscal Year in which have
Underlying Options were which Options Exercise vested as of Expiration
Name Options Granted Granted were Granted Price June 1, 1999 Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Steven H. Meyer 75,000 1999 9.43% $0.50 25%
Michael Rubel 150,000 1997 27.77% $0.50 25%
150,000 1999 18.86% $0.50 25%
Kenneth P. Meyer 75,000 1999 9.43% $0.50 25%
Ethel Kaplan 150,000 1999 18.86% $0.50 25%
John Lisovitch 150,000 1999 18.86% $0.50 25%
</TABLE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was not during the last two years and is not presently a party
to any transaction exceeding $60,000 with any of the following persons: (i) any
director or executive officer of the Company; (ii) any nominee for election as a
director; (iii) any holder of 5% or more of any class of the Company's voting
securities; and (iv) any member of the immediate family of any person in
(i),(ii) or (iii) above.
ITEM 8. DESCRIPTION OF SECURITIES
The Company is authorized to issue 50,000,000 shares of Common Stock, $.001
par value ("Common Stock") and 5,000,000 shares of preferred stock with a $.20
par value. As of the close of business on May 17, 1999, there were 13,750,622
shares of Common Stock and 720,000 shares of preferred stock outstanding.
COMMON STOCK
All shares of common stock which are issued and outstanding are fully paid
for and nonassessable. The following is a summary description of the general
terms and provisions of the Company's Common Stock.
17
<PAGE>
Dividends. Since its inception, the Company has not paid any cash dividends
on its Common Stock. Any declaration in the future of any cash or stock
dividends will be, at the discretion of the Board of Directors and will depend
upon, among other things, earnings, the operating and financial condition of the
Company, capital expenditure requirements, and general business conditions.
There are no restrictions currently in effect which preclude the Company from
granting dividends, with the exception that dividends may not be paid on the
Common Stock while there are accrued but unpaid dividends on the Class A
Preferred Stock (defined below). It is the current intention of the Company to
retain any earnings in the foreseeable future to finance the growth and
development of its business.
Voting Rights. A Holder of Common Stock is entitled to one vote per share
on all matters submitted for action by the shareholders. A quorum for the
transaction of business at any meeting of the holders of Common Stock is the
majority of the votes of all shares issued and outstanding. All shares of Common
Stock are equal to each other with respect to the election of directors;
therefore, the holders of more than 50% of the outstanding Common Stock present
at a meeting at which a quorum is present and at which directors are being
elected can, if they choose to do so, elect all of the directors. Thus, the
holders of as little as 25.01% of the outstanding Common Stock could elect
directors. The terms of directors are not staggered. Directors are elected
annually to serve until the next annual meeting of shareholders and until their
successor is elected and qualified. There are no preemptive rights to purchase
any additional shares of Common Stock or other securities of the Company, nor is
cumulative voting applicable to the election of the Board of Directors.
Preemptive Rights. The holders of Common Stock are not entitled to
preemptive or subscription rights.
PREFERRED STOCK
The articles of incorporation vest the Board of Directors with the
authority to divide the preferred stock into series and to fix and determine the
relative rights and preferences of the shares of any preferred series
established to the fullest extent permitted by the laws of the State of New
Jersey and the amended articles of incorporation with respect to among other
things: (a) the number of shares to constitute a series and the distinctive
designation thereof; (b) the rate and preference of dividends, if any, and, if
so, the time of the payment of dividends; (c) whether dividends are cumulative
and, if so, the date from which dividends begin accruing; (d) whether shares may
be redeemed and, if so, the redemption price and the terms and conditions of
redemption; (e) the liquidation preferences payable in the event of involuntary
or voluntary liquidation; (f) sinking fund or other provisions, if any, for the
redemption or purchase of shares; (g) the terms and conditions upon which shares
may be converted, if convertible, and (h) voting rights, if any.
Effective September 1, 1998, the Company issued a series of preferred
stock. The series was designated as Series A: 9% Cumulative, Preferred Stock,
with a par value of $0.20 per share (the "Class A Preferred Stock"). There are
1,500,000 shares in the series, each valued at the capital amount of $0.20, an
aggregate of $300,000 in total capital. Dividends accrue annually at the rate of
9% per annum, but are payable in the discretion of the Company only when funds
are available
18
<PAGE>
therefor. The Class A Preferred Stock may be redeemed at the election of the
Company at any time and from time to time in whole or in part by paying $0.20
per share plus all accrued but unpaid dividends, but only after 30-days prior
written notice. The Class A Preferred Stock also carries preferential
liquidation rights, but does not have voting rights or a sinking fund for
redemption.
OPTIONS
On May 29, 1997 the Company adopted an Incentive Stock Option Plan granting
to key employees options to purchase restricted shares of the Company's Common
Stock (the "ISOP"). Pursuant to the terms of the ISOP, the Board of Directors
determines the option price. The options granted under the ISOP generally vest
over a four year period and expire either three years after termination of
employment or ten years after the date of the grant. A total of 1,500,000 shares
have been reserved for present and future grants of stock options. The Company,
on November 15, 1998, adjusted the exercise price of all options from $1.50 per
share to $.50 per share. At December 31, 1998, options on 460,000 shares at $.50
per share were outstanding of which 97,500 were exercisable.
On April 15, 1999, the Company granted five separate options, among others,
to Steven H. Meyer, Kenneth P. Meyer, John Lisovitch, Ethel Kaplan and Michael
Rubel (the "SHM Option", the "KPM Option", the "JL Option", the "EK Option" and
the "MR Option", respectively and the "Five Options", collectively). The SHM
Option granted Steven H. Meyer the right to purchase 75,000 shares of Common
Stock at a price of $.50 per share. The KPM Option granted Kenneth P. Meyer the
right to purchase 75,000 shares of Common Stock at a price of $.50 per share.
The JL Option granted John Lisovitch the right to purchase 150,000 shares of
Common Stock at a price of $.50 per share. The EK Option granted Ethel Kaplan
the right to purchase 150,000 shares of Common Stock at a price of $.50 per
share. The MR Option granted Michael Rubel the right to purchase 150,000 shares
of Common Stock at a price of $.50 per share. The Five Options vest equally over
a four year period.
The shares of Common Stock which may be acquired under the above options
have not been registered under the Securities Act of 1933, as amended, and there
is no obligation by the Company to register such.
TRANSFER AGENT
Registrar and Transfer Company, 10 Commerce Drive, Cranford, NJ 07016
serves as the Company's transfer agent and registrar for the Company's Common
Stock.
19
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
MARKET. As of October 21, 1996, the prices for the shares of the Company's
Common Stock have been quoted on the "OTC-Bulletin Board," maintained by the
National Association of Securities Dealers, Inc. The Common Stock is presently
trading under the symbol "ACOC".
As of December 30, 1998, the prices for the Company's Class A Preferred
Stock have been quoted on the "OTC-Bulletin Board," maintained by the National
Association of Securities Dealers, Inc. The Class A Preferred Stock is presently
trading under the symbol "ACOCP".
The Following table sets forth the range of high and low bid quotations for
the Company's Common Stock and Class A Preferred Stock during each calendar
quarter since they began trading, each of which has been rounded to the nearest
whole cent.
- --------------------------------------------------------------------------------
SYMBOL TIME PERIOD LOW BID HIGH BID
- ------ ----------- ------- --------
ACOC January 1 - March 31, 1997 5 3/8 6 13/16
April 1- June 30, 1997 6 1/2 7 1/2
July 1 - September 30, 1997 6 7 9/16
October 1 - December 31, 1997 6 3/4 7 5/8
January 1 - March 31, 1998 3 1/16 6 3/4
April 1 - June 30, 1998 1 5/8 4 1/2
July 1 - September 30, 1998 1/4 1 3/16
October 1 - December 31, 1998 .20 15/16
January 1 - March 31, 1999 .20 7/16
March 31 - May 18, 1999 3/16 9/16
ACOCP January 1 - March 31, 1999 7/16 1 5/8
March 31 - May 18, 1999 3/4 13/16
- --------------------------------------------------------------------------------
The above prices were obtained from the National Quotation Bureau, Inc. The
quotations represent inter-dealer quotations without retail mark-up, mark-down
or commission, and may not necessarily represent actual transactions.
OUTSTANDING SHARES AND SHAREHOLDERS OF RECORD. As of May 12, 1999, the transfer
ledgers maintained by the Company's Stock Transfer Agent indicated that there
were approximately 13,750,622 shares of Common Stock issued and outstanding
which were held of record by 135 persons. As of May 12, 1999, the transfer
ledgers maintained by the Company's Stock Transfer Agent indicated that there
were approximately 720,000 shares of preferred stock issued and
20
<PAGE>
outstanding which were held of record by 11 persons.
DIVIDENDS. Since its inception, the Company has not paid any cash dividends on
its stock. Any declaration in the future of any cash or stock dividends will be,
at the discretion of the Board of Directors and will depend upon, among other
things, earnings, the operating and financial condition of the Company, capital
expenditure requirements, and general business conditions. There are no
restrictions currently in effect which preclude the Company from granting
dividends, with the exception that dividends may not be paid on the Common Stock
while there are accrued but unpaid dividends on the Class A Preferred Stock: 9%
Cumulative, Convertible, Redeemable Preferred Stock. It is the current intention
of the Company to retain any earnings in the foreseeable future to finance the
growth and development of its business.
ITEM 2. LEGAL PROCEEDINGS
No material legal proceedings to which the Company (or any officer or
director of the Company, or any affiliate or owner of record or beneficially of
more than five percent of the Common Stock, to management's knowledge) is party
or to which the property of the Company is subject is pending, and no such
material proceeding is known by management of the Company to be contemplated.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
During July and August 1996, the Company completed two private placement
offerings of securities whereby the Company issued a total of 1,800,000 shares
of common stock and received net proceeds of $451,500 after the deduction of
costs amounting to $113,500. During 1997, the Company issued a total of 585,000
shares of Common Stock for $497,071 after the deduction of costs amounting to
$87,929 in cash in a private placement offering which was exempted from
registration under Rule 504 of Regulation D of the Securities Act (the "1997
Private Placement"). Each investor was accredited and/or sophisticated. In order
to provide the 1997 Private Placement subscribers with full and complete
disclosure the Company distributed private placement memorandum and offered to
allow inspections of its books and records. The 1997 Private Placement
memorandum integrated audited financial statements for the two most recent
fiscal years.
On July 29, 1998, the Company issued 750,000 shares of its Class A Preferred
Stock for $150,000 in cash in a private placement offering which was exempted
from registration under Rule 504 of Regulation D of the Securities Act (the
"Preferred Offering"). Sixty subscribers purchased Class A Preferred Stock in
the Preferred Offering. In order to provide the subscribers to the Preferred
Offering with
21
<PAGE>
full and fair disclosure, the Company distributed private placement memorandum
and offered to allow inspections of its books and records. The Preferred
Offering memorandum integrated audited financial statements for the two most
recent fiscal years.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the Articles of Incorporation, the Company has such authority
as the New Jersey Business Corporation Act allows to indemnify its officers and
directors to the extent provided for in such statute, charter provision, bylaw,
contract or other arrangement under which any controlling person, director or
officer of the Company is insured or indemnified in any manner against which
liability they may incur in their capacity as such is the New Jersey Business
Corporation Act, as enacted and in effect upon adoption of the Articles of
Incorporation and Bylaws governing the Company. The provisions of the New Jersey
Business Corporation Act provide that a company may, but is not obligated to,
indemnify against the liability of an individual made a party to a lawsuit
because they were previously or currently a director or officer of the Company,
if such person acted in good faith and reasonably believed that his or her
actions were in the best interests of the Company. The Company may not indemnify
such persons if a judgement or other final adjudication adverse to the corporate
agent establishes that his acts or omissions (a) were in breach of his duty of
loyalty to the corporation or its shareholders, (b) were not in good faith or
involved a knowing violation of law or (c) resulted in receipt by the corporate
agent of improper personal benefit. The Company may indemnify such persons if
they are ultimately successful in the suit. Pending a final determination, the
Company may advance funds to these persons, but only if provision is made for
the return of all funds advanced in the event that such persons are subsequently
found to be unentitled to indemnification. Indemnification would include actions
of the officers and directors of the Company taken in connection with this
filing. If available at reasonable cost, the Company intends to maintain
insurance against any liability incurred by its officers and directors in
defense of any actions to which they are made parties by reason of their
positions as officers and directors.
22
<PAGE>
PART F/S
ITEM 1. FINANCIAL STATEMENTS
For information regarding this item, reference is made to the "Index of
Financial Statements."
23
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS.*
3.1 Articles of Incorporation and one Amendment dated August 31, 1998.
3.2 By-laws of Arc Slide Technologies Ltd., adopted August 1, 1994.
3.3 Class A Preferred Stock Provisions.
9.1 Shareholders Agreement between Steven H. Meyer, Kenneth P. Meyer,
Ethel Kaplan, Peter C. Cosmas and Arc Slide Technologies, Inc. dated
August 22, 1994.
10.1 750,000 Promissory Note with Sovereign Bank, dated August 27, 1998.
10.2 The September 24, 1996 lease between Arc Slide Technologies, Inc. and
Robert F. Reynolds and Pauline Reynolds for the property located at
788 Shrewsbury Avenue, Tinton Falls, New Jersey 07724.
10.3 The July 10, 1997 lease between MESA Marketing, Inc. and Steven E.
Allen & Kenneth L. Franklin for the property located at 1648
Metropolitan Circle, Tallahassee, Florida 32308.
21.1 Arc Communications, Inc.'s Subsidiaries
* To be filed by amendment
24
<PAGE>
INDEX OF FINANCIAL STATEMENTS
Page
ANNUAL FINANCIAL STATEMENTS:
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES:
Report of Independent Auditor F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 to F-16
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES:
Consolidated Balance Sheets as of March 31, 1998 and 1997 F-17
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997 F-18
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 F-19
Notes to Consolidated Financial Statements F-20
25
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 27, 1999
ARC COMMUNICATIONS, INC.
By: /s/ Steven H. Meyer
--------------------------------------------
Steven H. Meyer, Principal Executive Officer
By: /s/ Michael Rubel
--------------------------------------------
Michael Rubel, Principal Financial Officer
26
<PAGE>
ARC COMMUNICATIONS, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT
Financial Statements
Consolidated Balance Sheets, December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended December 31, 1998
and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998
and 1997
Notes to Consolidated Financial Statements
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Arc Communications, Inc. and Subsidiaries
Shrewsbury, New Jersey
We have audited the accompanying consolidated balance sheets of Arc
Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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 financial statements referred to above present fairly, in
all material respects, the financial position of Arc Communications, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
BECK, WEISS & COMPANY
Edison, New Jersey
February 19, 1999
F-2
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 223,693 $ 428,329
Accounts receivable - net 535,838 417,614
Inventory 15,765 13,387
Prepaid expenses 11,222 20,134
Other receivables 6,000 23,050
----------- -----------
Total Current Assets 792,518 902,514
----------- -----------
PROPERTY AND EQUIPMENT - NET 396,196 496,745
----------- -----------
OTHER ASSETS
Goodwill - net 86,640 96,865
Security deposits 9,410 13,310
Due from related party 19,908 72,062
Intangible assets - net -0- 200,372
Investment in affiliates -0- 163,281
Officers' life insurance cash surrender value -0- 963
----------- -----------
Total Other Assets 115,958 546,853
----------- -----------
TOTAL ASSETS $ 1,304,672 $ 1,946,112
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 400,115 $ 51,115
Note payable - related party -0- 160,000
Capitalized lease obligations - current portion 4,061 19,484
Accounts payable 177,745 259,627
Accrued Expenses 59,776 113,284
Deferred revenue -0- 1,000
----------- -----------
Total Current Liabilities 641,697 604,510
----------- -----------
LONG-TERM LIABILITIES
Capitalized lease obligations, less current portion 1,695 5,951
Deferred income taxes -0- 24,113
----------- -----------
Total Long-Term Liabilities 1,695 30,064
----------- -----------
Total Liabilities 643,392 634,574
MINORITY INTEREST -0- 10,572
----------- -----------
COMMITMENTS AND CONTINGENCIES 643,392 645,146
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.20 par value, authorized 5,000,000 shares, issued
and outstanding 750,000 in 1998 and -0- in 1997 150,000 -0-
Common stock, $.001 par value, authorized 45,000,000 shares, issued
and outstanding 13,750,632 in 1998 and 13,538,132 in 1997 13,751 13,538
Additional paid-in capital 1,352,566 1,212,808
Retained earnings (accumulated deficit) (855,037) 74,620
----------- -----------
Total Stockholders' Equity 661,280 1,300,966
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,304,672 $ 1,946,112
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET SALES $ 2,867,591 $ 2,396,988
----------- -----------
COSTS AND EXPENSES
Operating costs 626,940 732,156
Selling, general and administrative 2,575,692 1,474,225
Depreciation and amortization 386,090 156,973
----------- -----------
Total Costs and Expenses 3,588,722 2,363,354
----------- -----------
OPERATING INCOME (LOSS) (721,131) 33,634
----------- -----------
OTHER INCOME (EXPENSES)
Interest income 9,596 13,167
Interest expense (28,904) (16,427)
Loss from investments in affiliates (213,188) (27,114)
----------- -----------
Net Other Expense (232,496) (30,374)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) AND
MINORITY INTEREST (953,627) 3,260
INCOME TAX PROVISION (BENEFIT) (23,970) 1,036
----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST (929,657) 2,224
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY -0- (111)
----------- -----------
NET INCOME (LOSS) $ (929,657) $ 2,335
=========== ===========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ (0.07) $ 0.00
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- ------------------------
Number Number
of Shares Amount Of Shares Amount
--------- ------ --------- ------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 -0- $ -0- 12,750,000 $ 12,750
Issuance of common stock pursuant to private placement
offerings net of expenses
285,000 285
Issuance of common stock pursuant to acquisition of Mesa
Marketing, Ltd. 100,000 100
Issuance of common stock pursuant to private placement
offerings net of expenses 300,000 300
Issuance of common stock for professional services 10,000 10
Issuance of common stock for services related to private placement 93,132 93
------- ----------- ---------- -----------
Net income
BALANCE, DECEMBER 31, 1997 -0- -0- 13,538,132 13,538
Issuance of preferred stock, net of costs 750,000 150,000
Issuance of common stock for professional services 12,500 13
Issuance of common stock for purchase of 10% minority
interest in Arc/Mesa Educators, Ltd. 15,000 15
Issuance of common stock for services related to private placement 25,000 25
Expenses related to private placement offerings
Issuance of common stock related to conversion of loan from
stockholder 160,000 160
------- ----------- ---------- -----------
Net loss
BALANCE, DECEMBER 31, 1998 750,000 $ 150,000 13,750,632 $ 13,751
======= =========== ========== ===========
Additional Retained Total
Paid-In Earnings Stockholders'
Capital (Deficit) Equity
------- --------- ------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 686,525 $ 72,285 $ 771,560
Issuance of common stock pursuant to private placement
offerings net of expenses
242,473 242,758
Issuance of common stock pursuant to acquisition of Mesa
Marketing, Ltd. 24,900 25,000
Issuance of common stock pursuant to private placement
offerings net of expenses 254,013 254,313
Issuance of common stock for professional services 4,990
5,000
Issuance of common stock for services related to private placement (93) -0-
Net income 2,335 2,335
----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 1,212,808 74,620 1,300,966
Issuance of preferred stock, net of costs (31,851) 118,149
Issuance of common stock for professional services 6,237 6,250
Issuance of common stock for purchase of 10% minority
interest in Arc/Mesa Educators, Ltd. 10,557 10,572
Issuance of common stock for services related to private placement (25) -0-
Expenses related to private placement offerings (5,000) (5,000)
Issuance of common stock related to conversion of loan from
stockholder 159,840 160,000
Net loss (929,657) (929,657)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $ 1,352,566 $ (855,037) $ 661,280
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(929,657) $ 2,335
--------- ---------
Adjustments to reconcile net income or loss to net cash
provided by operating activities:
Depreciation and amortization 386,090 156,973
Loss from investments in affiliates 213,188 11,349
Provision for uncollectible accounts 45,000 20,000
Issuance of common stock for professional services 6,250 5,000
Deferred income taxes (24,113) 836
Minority interest in earnings of subsidiary -0- (111)
Increase (decrease) in cash from changes in:
Accounts receivable (163,224) (135,843)
Inventory (2,378) (13,387)
Prepaid expenses 8,912 12,692
Other receivable 17,050 (23,050)
Security deposits 3,900 (2,800)
Due from related party 2,247 (62,366)
Accounts payable and accrued expenses (135,390) 144,332
Deferred revenue (1,000) (70,788)
--------- ---------
Total Adjustments 356,532 42,837
--------- ---------
Net Cash Provided (Used) in Operating Activities (573,125) 45,172
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and equipment (58,041) (320,512)
Expenditures for intangible assets (16,903) (205,895)
Cash surrender value-officers' life insurance 963 (963)
--------- ---------
Net Cash Used in Investing Activities (73,981) (527,370)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 349,000 160,000
Repayment of capital lease obligations (19,679) (33,252)
Net proceeds from sale of common and preferred stock 113,149 522,071
--------- ---------
Net Cash Provided by Financing Activities 442,470 648,819
--------- ---------
NET INCREASE (DECREASE) IN CASH (204,636) 166,621
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 428,329 261,708
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 223,693 $ 428,329
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 28,904 $ 16,427
Cash paid for income taxes $ 143 $ 200
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Arc Communications, Inc. is a full-service marketing consultancy and
New Media design firm specializing in sports marketing, high
technology and the pharmaceutical industry. Services include marketing
consulting, web-site development, electronic commerce, interactive
multi-media, graphics design and imaging.
Arc Communication's wholly owned subsidiary, Arc Internet Publishing
Corp. develops and operates internet businesses and electronically
publishes interactive educational and reference material for the
medical and dental professions, which provides continuing professional
education on the Internet to the medical, dental and funeral
director's professions.
Arc Internet Publishing's wholly owned subsidiary, Personal Emergency
Medical Information Services Inc., operates on an internet basis that
provides personal medical information on line.
On February 25, 1998, Arc Internet Publishing acquired the remaining
10% minority interest of Arc Mesa Educators, Ltd. becoming a wholly
owned subsidiary which was subsequently merged into Arc Internet
Publishing.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidations
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries in which a controlling interest is
maintained. For those consolidated subsidiaries where Company
ownership is less then 100%, the outside stockholders' interests are
shown as minority interests. Investments in affiliates over which the
Company has significant influence but not a controlling interest are
carried on the equity basis.
Use of Estimates in Preparation of Financial Statements
The preparation of the accompanying consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that directly
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results may differ from these estimates.
Allowance for Doubtful Accounts
The Company establishes an allowance for uncollectible trade accounts
receivable based on management's evaluation of collectibility of
outstanding accounts receivable. The allowances for doubtful accounts
is $65,000 and $20,000 as of December 31, 1998 and 1997, respectively.
Per Share Data
The basic and diluted per share data has been computed on the basis of
the net income or loss for each year after giving effect for the
accrued preferred stock dividends for 1998, divided by the weighted
average number of shares of common stock outstanding. The weighted
average shares of common stock outstanding for the years ended
December 31, 1998 and 1997 aggregated 13,573,809 and 12,903,652,
respectively.
Inventory
Inventories are stated at the lower cost or market, with cost
determined on a first-in, first-out basis.
F-7
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Property and Equipment
Property and equipment are stated at cost and are depreciated over
their estimated useful lives on the straight-line method for financial
statement purposes and the accelerated method for income tax purposes.
Cost of major additions and betterments are capitalized; maintenance
and repairs which do not improve or extend the life of respective
assets are charged to expense as incurred. When an asset is sold or
otherwise disposed of, the cost of the property and the related
accumulated depreciation is removed from the respective accounts and
any resulting gains or losses, if any, is included in the results of
operations.
Goodwill and Intangible Assets
Goodwill represents the excess of acquisition cost over the fair value
of net assets acquired in the purchase of Mesa Marketing, Inc. during
1997, as discussed more fully in Note 13. Goodwill is amortized on a
straight-line basis over ten years and is presented net of accumulated
amortization. For December 31, 1998 and 1997 the accumulate
amortization of goodwill is $11,443 and $1,218, respectively.
Amortization included as a charge to income amounted to $10,225 and
$1,218 for the years ended December 31, 1998 and 1997, respectively.
Intangible assets consists of costs incurred to acquire product and
process technology and the costs to develop internet sites to market
products and services provided by the Company. These assets are
amortized using the straight-line method. The amortization period for
product and process technology and internet site development is 15
years and 5 years, respectively.
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed of", SFAS 121, requires that long-lived assets and
certain identifiable intangibles, including goodwill, to be held and
used by an entity, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairments are recognized in operating
results to the extent that carrying value exceeds fair value. In 1998,
the Company recognized an asset impairment as discussed in Note 4 to
the consolidated financial statements.
Investment in Affiliates
The Company has investments in affiliates that are accounted for on
the equity method. The investments are 50% owned, development stage
entities. The carrying value as of December 31, 1998 and 1997 is as
follows:
Investment Carrying Value
- ---------------------------------------- ------------------
1998 1997
----- --------
IREX, Inc. $ -0- $151,427
International Writers' Exchange, A Joint Venture -0- 11,854
----- --------
-0- $163,281
===== ========
During the fourth quarter of 1998, the Company determined that the
assets held by the affiliates, consisting mainly of intangible assets,
were impaired and that the investments be written down to reflect no
value. Furthermore, loans to the affiliates were also determined to be
uncollectible. The investment and loans to affiliates were combined
and are reported as a loss from investments in affiliates of $213,188
on the statement of operations.
Property Under Capital Lease
The Company accounts for capital leases, which transfer substantially
all the benefits and risks incident to the ownership of property, as
an acquisition of an asset and the incurrence of an obligation. All
other leases (operating leases) are recorded as an expense in the
period incurred.
F-8
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
The Company presents cash flows under the indirect method of
reconciling net income to net cash flow.
Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred.
Revenue Recognition
The Company recognizes revenues from sales at the date the product is
shipped and as professional services are performed.
Recent Accounting Pronouncement
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use"
("SOP 98- 1"). SOP 98-1 is effective for financial statements for
years beginning after December 15, 1998. SOP 98-1 provides guidance
over accounting for computer software developed or obtained for
internal uses including the requirements to capitalize specified costs
and amortization of such costs. The Company does not expect the
adoption of this standard to have a material effect on its
capitalization policy.
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation
in the current year financial statements.
NOTE 3 - PROPERTY AND EQUIPMENT
The costs and accumulated depreciation of property and equipment at
December 31 are summarized as follows:
1998 1997
-------- --------
Equipment and furniture $788,536 $732,373
Leasehold improvements 66,458 66,458
-------- --------
Total Property and Equipment 854,994 798,831
Accumulated depreciation 458,798 302,086
-------- --------
Property and equipment, net $396,196 $496,745
======== ========
Depreciation included as a charge to income amounted to $158,590 and
$120,077 for the years ended December 31, 1998 and 1997, respectively.
NOTE 4 - INTANGIBLE ASSETS
The costs and accumulated amortization of intangible assets at
December 31 are summarized as follows:
1998 1997
----- --------
Product and process technology $ -0- $ 79,995
Internet site development -0- 202,503
----- --------
Total Intangible Assets -0- 282,498
Accumulated amortization -0- 82,126
Intangible assets, net $ -0- $200,372
===== ========
F-9
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 4 - INTANGIBLE ASSETS - Continued
Amortization included as a charge to income amounted to $217,275 and
$36,896 for the years ended December 31, 1998 and 1997, respectively.
The Corporation recorded an impairment loss on the long-lived assets
of its product and process technology and internet sites. The Company
determined that there would be no further cash flows derived from
these assets. Accordingly, the Company recognized an asset impairment
loss of $167,686, the carrying value of the asset, as of December 31,
1998.
NOTE 5 - LINE OF CREDIT
At December 31, 1998, the Company has a $750,000 line of credit with
Sovereign Bank. The line bears interest at the bank's prime rate plus
1% and was incurring interest at the rate of 8.75% at December 31,
1998. The line of credit, which expires June 30, 1999, is secured by
accounts receivable. As of December 31, 1998 and 1997, the Company has
$400,115 and $51,115, respectively, outstanding on the line of credit.
As of December 31, 1998, the Company is in violation of a covenant
that requires borrowings under the line of credit not to exceed 80% of
the accounts receivable under 90 days outstanding. However, the bank
has agreed to waive the violation of this covenant as of December 31,
1998.
NOTE 6 - CAPITAL LEASE OBLIGATIONS
As mentioned in Note 2 and 3, the Company is obligated under various
capital leases for certain equipment that expire at various dates
during the next two years.
The following represents future minimum lease payments and the net
present value of the future minimum lease payments under capital
leases for the years ended December 31,:
1999 $ 4,669
2000 1,788
-------
Total minimum lease payments 6,457
Less: Amount representing interest (701)
-------
Present value of net minimum lease payments 5,756
Less: Current maturities (4,061)
-------
Long-term maturities $ 1,695
=======
NOTE 7 - ACCRUED EXPENSES
Accrued expense at December 31, are summarized as follows:
1998 1997
-------- --------
Payroll $ 19,560 $ 73,421
Commissions 13,249 10,000
Professional fees 20,000 23,500
Other 6,967 6,363
-------- --------
$ 59,776 $113,284
======== ========
F-10
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - INCOME TAXES
The significant components of the Company's deferred income tax and
liabilities as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Net operating losses $ 228,000 $ 86,400
Deferred income tax liability:
Revenue and expense recognition differences
arising from the cash basis method of
accounting utilized for income tax purposes (78,073) (24,113)
Valuation allowance (149,927) (86,400)
--------- ---------
Net deferred income tax liability $ -0- $ (24,113)
========= =========
</TABLE>
The significant components of the provision (benefit) for income taxes
for the years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current:
Federal $ -0- $ -0-
State 143 200
--------- ---------
Total Current Taxes 143 200
--------- ---------
Deferred:
Federal (54,775) 523
State (32,865) 313
Change in valuation allowance 63,527 -0-
--------- ---------
Total Deferred Taxes (24,113) 836
--------- ---------
Provision (benefit) for income taxes $ (23,970) $ 1,036
========= =========
</TABLE>
The difference between the statutory federal and state income tax rate
and the effective rate for the Company's income tax provision and
benefit for each of the years ended December 31, 1998 and 1997,
respectively, is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Statutory federal income tax rate 15.00% 15.00%
Statutory state income tax rate 9.00 9.00
Increase in valuation allowance (26.90)
Miscellaneous 7.80
--------- ---------
Effective income tax rate (2.90)% 31.80%
========= =========
</TABLE>
As of December 31, 1998, the Company has a net operating loss
carrryforward of approximately $950,000 for federal income tax
purposes, which expires through 2018.
F-11
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company is involved in various related party transactions
consisting of loans receivable, notes payable and sales to related
companies.
Sales to related parties were $2,939 in 1998 and $38,781 in 1997.
During 1997, the Company sold Internet sites to IREX, Inc.
(International Real Estate Exchange) and International Writers'
Exchange, A Joint Venture. As described in Note 2, both IREX and
International Writers' Exchange are 50% owned investments of the
Company. These investments are accounted for using the equity method.
Accordingly, for the year ended December 31, 1997, the carrying amount
of the investment has been reduced by 50% of the gross profit to
reflect the Company's share not yet earned. In addition, as of
December 31, 1997, the Company had loans receivable due from IREX and
International Writers' Exchange. These loans were unsecured,
non-interest bearing and did not have any specific repayment terms. As
discussed in Note 2, as of December 31, 1998 the carrying amount of
these investments and the related loans receivable have been written
down to reflect no value.
The Company also has a loan receivable due from Medical Licensing
Service, Inc. (MLS), which is owned by certain stockholders of the
Company. The amount due in 1998 and 1997 from MLS includes an
unsecured note of $9,108 and $13,983, respectively, bearing interest
at 9.00% per annum and matures on October 1, 1999. The remaining
balance due from MLS is unsecured and non-interest bearing.
A summary of the amounts due from related parties is as follows:
December 31
------------------
1998 1997
------- -------
IREX, Inc. $ -0- $50,667
International Writers' Exchange, A Joint Venture -0- 2,719
Medical Licensing Service, Inc. 10,800 4,693
Medical Licensing Service, Inc. (note receivable) 9,108 13,983
------- -------
Total $19,908 $72,062
======= =======
Legal fees paid to corporate counsel, a related party, were $52,399
and $32,687 for 1998 and 1997, respectively.
NOTE 10 - STOCKHOLDERS' EQUITY
Preferred Stock
In July 1998, the shareholders authorized 5,000,000 shares of 9%
cumulative preferred stock of $.20 par value with a liquidation at par
plus accrued dividends, if any. Holders of the preferred stock have no
voting rights nor is it convertible to common stock. On August 31,
1998, the Company sold 750,000 preferred shares at par value in a
private placement offering and received net proceeds of $118,149.
Accrued dividends as of December 31, 1998 were $4,500.
Common Stock
As described in Note 1, the Company issued 15,000 shares of common
stock to acquire the 10% minority interest of Arc Mesa Educators, Ltd.
During 1998, the Company converted a note payable with an outstanding
balance of $160,000 to 160,000 shares of common stock.
F-12
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - STOCKHOLDERS' EQUITY - Continued
Common Stock - (Continued)
During 1997, the Company completed two private placement offerings of
securities whereby the Company issued a total 585,000 shares of common
stock and received net proceeds of $497,071 after the deduction of
costs amounting to $87,929. In conjunction with the private placement
offerings, the Company issued 25,000 of common stock in 1998 and
93,132 shares of common stock in 1997 for services provided to
complete the private placement.
During 1997, the Company issued common stock to acquire two existing
companies as described more fully in Note 13. On November 1, 1997, the
Company issued 100,000 shares of common stock to acquire Mesa
Marketing, Inc. Pursuant to the purchase agreement 50,000 shares are
held in escrow subject to the Company obtaining certain financial
goals. On December 19, 1997, the Company issued an additional 100,000
shares to acquire Navesink River Group, Inc.
NOTE 11 - STOCK COMPENSATION PLAN
Effective May 31, 1997, the Company adopted an Incentive Stock Option
Plan granting to key employees options to purchase restricted shares
of Company common stock. The Board of Directors determines the option
price. Options generally vest over a four year period and expire
either three years after termination of employment or ten years after
the date of grant. A total of 1,500,000 shares have been reserved for
present and future grants of stock options. At December 31, 1998,
options on 460,000 shares at $.50 per share were outstanding of which
97,500 were exercisable. The Company, on November 15, 1998, adjusted
the exercise price of all options from $1.50 per share to $.50 per
share.
The following table summarizes stock option transactions under the
plan:
Year ended December 31,
1998 1997
-------------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Shares Price Shares Price
------- ------ ----- ------ -----
Granted and outstanding
at beginning of year 450,000 $1.50 -0-
Granted 530,000 0.63 450,000 $1.50
Canceled (520,000) 1.50 -0-
--------- ---- --------- ----
Outstanding at end of year 460,000 $0.50 450,000 $1.50
========= ==== ========= ====
Exercisable at end of year 97,500 -0-
========= =========
The following table summarizes information about stock options outstanding for
which the Company has an obligation to issue shares of common stock as of
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Exercise as of Remaining Exercise as of Exercise
Price 12/31/98 Life (in years) Price 12/31/98 Price
-------- ----------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.50 460,000 3.74 0.50 97,500 0.50
</TABLE>
F-13
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - STOCK COMPENSATION PLAN - Continued
The fair value of each option granted in 1997 and 1998 has been
estimated on the date of grant using the Black-Scholes options pricing
model with the following assumptions; no dividend yield, expected
volatility of 40%, an expected life of 3.74 years and a risk-free
interest rate of 6.75% and 4.83% for the 1997 and 1998 options,
respectively. The fair values of options granted during 1997 and 1998
ranged from $0.42 to $0.69 per share for 1997 and from $0.17 to $0.20
per share for 1998.
The Company applies APB 25 in accounting for its stock option
incentive plan and, accordingly, recognizes compensation expense for
the difference between fair value of the underlying common stock and
the exercise price of the option at the date of grant. The effect of
applying SFAS No. 123 on 1997 and 1998 pro forma net loss is not
necessarily representative of the effect on reported net income (loss)
in future years due to, among other things (1) the vesting period of
the stock options and (2) the fair value of additional stock options
in future years. Had compensation cost for the Company's stock option
plan been determined based upon the fair value at the grant date for
awards under the plan consistent with the methodology prescribed under
SFAS No. 123, the Company's pro forma net loss in 1997 and 1998 would
have been approximately $(35,985) and $(955,715), respectively, and
the pro forma loss per share would have remained unchanged at $0.00
and $(0.07), respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under operating leases expiring in
various years through 2003. As of December 31, 1998, minimum aggregate
annual rentals, excluding escalation charges, are as follows:
Year Ending
December 31,
------------
1999 $166,698
2000 153,494
2001 136,805
2002 31,681
2003 20,321
--------
Total $508,999
========
Total rent expense for facilities charged to operations for the years
ended December 31, 1998 and 1997 amounted to approximately $140,153
and $113,614, respectively.
NOTE 13 - BUSINESS COMBINATIONS
On October 31, 1997, Arc Internet Publishing Corp., a wholly owned
subsidiary of Arc Communications, Inc. acquired Mesa Marketing, Inc.
in a tax free reorganization within the meaning of Section
368(a)(1)(A) of the Internal Revenue Code of 1986. Arc Communications,
Inc. issued 100,000 shares of restricted common stock in exchange for
Arc Internet Publishing Corp. receiving all of the outstanding stock
of Mesa Marketing, Inc. The merger agreement provides that 50,000
shares of the common stock issued be held in escrow until such time as
certain financial goals are met by the business unit formerly known as
Mesa Marketing, Inc. Should the contingently issued common stock
become applicable, it will increase the purchase price of Mesa
Marketing, Inc. and will increase the amount of goodwill recorded on
this transaction. The acquisition was accounted for as a purchase, and
accordingly, was included with combined operations from the
acquisition date through December 31, 1997. The total cost of the
acquisition was $124,913 which included acquisition costs of $21,901,
various liabilities totaling $78,012 and the designated value of the
restricted stock issued of $25,000. This amount exceeded the fair
value of the net assets of Mesa Marketing, Inc. by $98,083. The excess
is being amortized on the straight-line method over 10 years.
F-14
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 13 - BUSINESS COMBINATIONS
The following values were assigned to the assets and liabilities
acquired:
Cash $ 3,769
Property and equipment 5,670
Deposits 1,000
Other receivable 16,066
Accounts payable (26,942)
Notes payable (28,493)
Investment (22,251)
Goodwill 76,181
-----------
Common Stock Issued $ 25,000
===========
The following summarized pro forma (unaudited) information assumes the
acquisition had occurred on January 1, 1997:
1997
-----------
Net Sales $ 2,607,457
===========
Net Income $ 32,357
===========
The pro forma financial information presented above is not necessarily
indicative of the operating results which would have been achieved had
the Company acquired Mesa Marketing, Inc. at the beginning of the
period presented or of the results to be achieved in the future.
NOTE 14 - MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Sales to several key customers, representing divisions of a single
company, for the year ended December 31, 1998 and 1997 consisted of
approximately 38.0% and 48.8%, respectively, of total sales. The
aggregate accounts receivable balances at December 31, 1998 and 1997
for these major customers were $201,859 and $154,690, respectively.
The Company maintains cash balances at several banks. At times, such
cash balances may be in excess of the Federal Deposit Insurance
Corporation insurance limit.
NOTE 15 - EMPLOYMENT AGREEMENTS
Steven Meyer, President of the Company, entered into an employment
agreement effective August 1, 1994 for a period of five years. The
employment agreement provides for a base annual compensation of
$85,000.
Kenneth Meyer, Executive Vice President and Treasurer of the Company
entered into an employment agreement effective August 1, 1994 for a
period of five years. The employment agreement provides for a base
annual compensation of $85,000.
Ethel Kaplan, Secretary of the Company entered into an employment
agreement effective August 1, 1994 for a period of five years. The
employment agreement provides for a base annual compensation of
$85,000.
F-15
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
During 1997, the Company entered into employment agreements with
several division managers effective for a period of four years. The
employment agreements provide for incentive compensation generally
determined in accordance with certain revenue goals established for
each division.
F-16
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
ASSETS
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 224,962 $ 145,316
Accounts Receivable - net of Allowances for Doubtful Accounts
of $65,000 and $20,000 respectively 787,772 547,415
Inventory 15,765 13,387
Prepaid expenses 9,798 16,458
Other receivables -0- 4,382
----------- -----------
Total Current Assets 1,038.297 726,958
----------- -----------
PROPERTY AND EQUIPMENT - NET 375,755 496,833
----------- -----------
OTHER ASSETS
Goodwill - net 84,188 94,413
Security deposits 9,410 13,310
Intangible assets - net 0 163,205
Investment in affiliates 0 165,000
Due from Related Party 20,943 69,495
Officers Life 963
----------- -----------
Total Other Assets 114,541 508,838
----------- -----------
TOTAL ASSETS $ 1,528,593 $ 1,730,177
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 440,115 $ 374,115
Accounts Payable and Accrued Expenses 180,973 223,922
Capitalized lease obligations - current portion 4,645 12,205
----------- -----------
Total Current Liabilities 625,733 610,242
----------- -----------
LONG-TERM LIABILITIES
Capitalized lease obligations, less current portion -0- 5,951
Deferred income taxes -0- -0-
----------- -----------
Total Long-Term Liabilities -0- 5,951
----------- -----------
Total Liabilities 625,733 616,193
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.20 par value, authorized 5,000,000 shares, issued
and outstanding 750,000 in 1999 and -0- in 1998 150,000 -0-
Common stock, $.001 par value, authorized 45,000,000 shares, issued
and outstanding 13,750,632 in 1999 and 13,553,132 in 1998 13,751 13,553
Additional paid-in capital 1,352,566 1,223,365
Retained earnings (accumulated deficit) (613,457) (122,934)
----------- -----------
Total Stockholders' Equity 902,860 1,113,984
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,528,593 $ 1,730,177
=========== ===========
</TABLE>
F-17
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
NET SALES $ 965,944 $ 601,843
--------- ---------
COSTS AND EXPENSES
Operating costs 67,405 131,256
--------- ---------
Gross Profit 898,539 470,587
--------- ---------
Selling, general and administrative 614,067 641,821
Depreciation and amortization 35,934 49,554
--------- ---------
Total Costs and Expenses 650,001 691,375
--------- ---------
OPERATING INCOME (LOSS) 248,538 (220,788)
--------- ---------
OTHER INCOME (EXPENSES)
Interest income 2,889 4,804
Interest expense (11,847) (3,360)
Loss from investments in affiliates -0- 129
Other Income 2,000 -0-
--------- ---------
Net Other Expense (6,958) 1,573
--------- ---------
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)
241,580 (219,215)
INCOME TAX PROVISION (BENEFIT) -0- 24,113
--------- ---------
NET INCOME (LOSS) $ 241,580 $(195,102)
========= =========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ 0.0176 $ (0.0144)
========= =========
</TABLE>
F-18
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES --------- ---------
<S> <C> <C>
Net income (loss) $ 241,580 $(195,102)
--------- ---------
Adjustments to reconcile net income or loss to net cash
provided by operating activities:
Depreciation and amortization 35,934 49,554
Loss from investments in affiliates -0- 129
Deferred income taxes -0- (24,113)
Increase (decrease) in cash from changes in:
Accounts receivable (251,934) (129,801)
Inventory -0- -0-
Prepaid expenses 1,424 3,676
Other Receivables 6,000 18,668
Due from related party (1,035) 2,567
Accounts payable and accrued expenses (56,548) (148,989)
Capitalized Lease Obligations (1,112) (7,279)
Deferred revenue -0- (1,000)
--------- ---------
Total Adjustments (267,271) (236,588)
--------- ---------
Net Cash Provided (Used) in Operating Activities (25,691) (431,690)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and equipment (13,040) (12,604)
Expenditures for intangible assets -0- -0-
Cash surrender value-officers' life insurance -0- (1,719)
--------- ---------
Net Cash Used in Investing Activities (13,040) (14,323)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 40,000 163,000
--------- ---------
Net Cash Provided by Financing Activities 40,000 163,000
--------- ---------
NET INCREASE (DECREASE) IN CASH 1,269 (283,013)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 223,693 428,329
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 224,962 $ 145,316
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 11,847 $ 3,360
Cash paid for income taxes -0- -0-
</TABLE>
F-19
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
MARCH 31, 1999
Basis of Presentation
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to fairly present the Company's financial position and
its results of operations and cash flows as of the dates and for the periods
indicated.
Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These condensed consolidated financial statements should be
read in conjunction with the audited December 31, 1998 consolidated financial
statements and related notes included in the Company's year end certified
Financial Statement. The results of operations for the three months are not
necessarily indicative of the operating results for the full year.
Amounts for the three months ended March 31,1998 have been reclassified to
conform with the March 31,1999 presentation.
F-20
