SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
ARC COMMUNICATIONS INC.
(Name of Small Business Issuer in its charter)
New Jersey 22-3201557
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
788 Shrewsbury Avenue, Tinton Falls, New Jersey 07724
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (732) 219-1766
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
(i) Common Stock, $.001 Par Value; and
(ii) Class A Preferred Stock, $.20 Par Value.
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes: [X] No: [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB or any
amendment to this Form 10-KSB [_]
The issuer's revenue for the fiscal year ended December 31, 1999 was $3,629,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 17, 2000: . The aggregate market
value of the voting stock held by non-affiliates of the registrant is
approximately $3,154,128as of March 17, 2000.
State the number of shares outstanding of each of the registrant's classes
of common equity as of the latest practicable date: 13,703,132 shares of the
registrant's common stock and 720,000 shares of the registrant's preferred stock
are issued and outstanding as of March 17, 2000.
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
<PAGE>
Certain statements in this Annual Report that are not historical facts
constitute "forward-looking statements" within the meaning of the Federal
securities laws. Discussions containing such forward-looking statements may be
found in the sections entitled, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well in this
Annual Report generally. In addition, when used in this Annual Report the
words"anticipates," "intends," "seeks," "believes," "plan," "estimates," and
"expects" and similar expressions as they relate to us or our management are
intended to identify such forward-looking statements. Such statements are
subject to a number of risks and uncertainties. Our actual results, performance
or achievements could differ materially from the results expressed in, or
implied by, these forward-looking statements. We undertake no obligation to
revise these forward-looking statements to reflect any future events or
circumstances
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS......................................... 1
ITEM 2. DESCRIPTION OF PROPERTY......................................... 5
ITEM 3. LEGAL PROCEEDINGS............................................... 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 6
PART II
ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................. 6
ITEM 6. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION........................................... 7
ITEM 7. FINANCIAL STATEMENTS............................................ 9
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANT ON ACCOUNTING FINANCIAL DISCLOSURE................... 10
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT............... 9
ITEM 10. EXECUTIVE COMPENSATION.......................................... 11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT................................ 12
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 14
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................ 14
SIGNATURES.................................................................. 16
<PAGE>
PART I
Item 1. Description of Business
Introduction and General Development of Business
PART I
a. BACKGROUND
Arc Communications Inc. is a New Jersey corporation which was incorporated
on October 21, 1992 ( hereinafter referred to as "Arc" or the "Company"). Arc
was originally incorporated under the name Arc Slide Technologies Ltd. ("ASTL").
On August 14, 1996ASTL acquired Alliance Telecommunications Holding Corp.,
in a transaction accounted for as a reverse acquisition.
On July 23, 1996 Arc-Mesa Educators LTD. ("Arc-Mesa") was formed for the
purpose of engaging in the business of offering continuing education products
and services. 45 % of Arc-Mesa was initially owned by a wholly owned subsidiary
of Arc. In October 1997, Arc acquired an additional 45 % of Arc-Mesa. In 1998
the remaining 10% was acquired.
On December 19, 1997, Arc acquired all the outstanding stock of The
Navesink River Group, Inc. ("Navesink"). The acquisition of Navesink added
marketing and public relations capability to Arc's services. Prior to the
acquisition Arc was not a full-service marketing organization as it was
primarily a boutique design firm. As a result of the acquisition Arc is
positioned to attract a higher caliber of client by offering a full-service
capability. Navesink also contributed a client base that comprises a significant
percentage of Arc's revenue. Further, the principals of Navesink also brought
experienced management.
b. GENERAL
Arc is a full-service marketing consultancy and graphic design firm
specializing in the development and production of corporate marketing and
communications media. Arc's clients include Fortune 1000 companies with
concentrations in the pharmaceutical industry and information technology
industries. Services include marketing, consulting, general web site
development, electronic commerce, interactive multi-media, graphics design and
imaging. Additionally, since 1995, Arc has developed and produced websites for
major college football bowl games. In January 2000, Arc produced and hosted the
Year 2000 National College Football Championship. For further information
regarding this site refer to http://www.nokiasugarbowl.com.
Arc's graphic design and interactive multi-media products use advanced
technologies to create media for corporate communications. Arc continues to
expand its business through existing products such as a 3-D animation design and
multimedia presentations.
Interactive Sales Training Programs are a growing area of Arc's business.
Arc has formed strategic alliances with large advertising agencies that have
major pharmaceutical companies as their clients. By forming these alliances,
Arc's clients are able to use Arc's expertise in a variety of interactive
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multimedia areas. Further, such strategic alliances enable Arc's clients to use
leading edge technologies without having to incur substantial development costs.
The training programs should have a positive impact on both revenue and results
due to the fact that the margins on these products are substantially higher than
those on Arc's core business. Arc earns revenues from Interactive Sales Training
Programs from billing for the creative development. The expenses are principally
payroll related, purchase costs are insignificant.
Arc's subsidiary, Arc Internet Publishing Corp. (d/b/a Arc Mesa Educators)
("Arc Educators") is in the business of providing continuing education to a
variety of professions with a primary focus in the medical profession. By
utilizing advanced technologies, developed by Arc Educators', our goal is to
provide a quality education combined with a flexible learning environment that
cannot be attained in a more traditional continuing education program.
Contemporary professionals needing continuing education credits are drawn to our
programs for their ease-of-use, convenience, price, as well as the educational
content and current topics of interest that can enhance a professional practice.
Arc Mesa Educators is an approved provider of continuing education for the
following:
o Physicians, Physician Assistants, Radiologic Technicians through the
Accrededation Council for Continuing Medical Education ("ACCME")
o Dentists and Dental Hygeniests through an ADA CERP recognized provider
for Dental Continuing and Academy of General Dentistry
o Funeral Service Practitioners through The Academy of Professional
Funeral Service Practitioners
o Podiatric Medicine through the Council of Podiatric Medical Education
Arc has the ability to design and create specific websites for a client and
may operate such a site if so desired. Arc also designs and develops interactive
kiosks and advertising and promotional materials, including packaging for retail
products. Arc's Web expertise has positioned it to effectively transition into a
full service integrated, interactive marketing and communication company. Arc'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.
Arc'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 ACCME 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.
Personal Emergency Medical Information Services Inc. is a subsidiary of Arc
Internet Publishing Corp. which 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
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number. Upon receipt of the card, subscribers must acknowledge receipt in order
to activate their records by calling Arc'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.
Arc 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.
Arc partners with clients to focus on how new and emerging technologies can
enable them to build one-on-one customer relationships. Tapping into strategic
expertise, media know-how, creative talent and technical excellence, Arc 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. Arc 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. ARC'S STRENGTHS
Focus on Clients' Business Objectives
Arc has made understanding its clients' business challenges the primary
focus that guides its customer services. Arc often works with its clients'
management to determine how best to integrate Web sites with the clients'
business goals.
Technological Expertise
Arc believes the creative application of leading technologies is also
crucial to the success of its business. Arc'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 Arc's business and that of its clients.
Creative Expertise
Arc 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 Arc's creative staff possesses a broad spectrum of expertise to meet
clients' creative needs. In order to maintain high levels of creativity and
quality, Arc intends to recruit the best talent available. However, competition
for creative personnel is especially intense and there can be no assurance that
Arc will attract or retain adequate creative talent to accomplish these goals.
For a discussion regarding material risks faced by Arc, please see
"COMPETITION."
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d. ARC'S STRATEGY
Capitalize on Accomplishments and Market Opportunities
Arc believes that the proliferation of the Internet will continue to
provide substantial opportunities to Arc and that its successfully completed
projects will continue to enhance its marketing efforts. Arc's management does
not, however, believe that Arc's primary business will be limited to the
Internet. Arc 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, Arc believes its
services could be utilized over these channels as well.
Deploy Leading Technologies
One of Arc'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. Arc has formed informal non-exclusive relationships with key
technology providers in an effort to gain access to, and influence the features
of, their technologies.
e. MARKETING
Arc markets its services directly and seeks to form strategic marketing
relationships with third parties. Presently, Arc has 5 employees dedicated to
business development. Additionally, 3 of Arc's executive officers spend a
portion of their time marketing Arc's services. Arc also seeks to attract new
clients through other methods, including referrals from existing clients. Arc
seeks to cross-sell its various services to its clients and prospective clients
through sales presentations that encourage clients to utilize all of Arc's
services.
f. GOVERNMENT REGULATION
Arc 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 Arc's services and
products and increase the Company's cost of doing business or cause Arc to
modify its operations, or otherwise have an adverse effect on Arc'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. Arc cannot predict the impact, if any, that future regulation or
regulatory changes may have on its business. In addition, Web site developers
such as Arc face potential liability for the 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 Arc 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 Arc.
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g. COMPETITION
The markets for Arc's services are highly competitive and are characterized
by pressures to incorporate new technologies, accelerate completion schedules
and reduce prices. Arc expects competition for its services to intensify in the
future, partly because there are no substantial barriers to entry into Arc's
business. Arc faces competition from a number of sources, including potential
customers 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 such as Microsoft
Corporation and Adobe Systems Incorporated, established online service
companies, advertising agencies, internet-services and access providers as well
as specialized and integrated marketing communication firms. Many of Arc's
competitors or potential competitors have longer operating histories, more
substantial customer relationships and significantly greater financial,
managerial, technological, sales, marketing and other resources than the
Company. Arc also competes on the basis of creative reputation, price,
reliability of services and responsiveness. There can be no assurance that Arc
will be able to compete and its inability to do so would have a material adverse
impact on Arc's business, financial condition and operating results. Also, for
the year ended December 31, 1999, two customers accounted for 34% of sales.
h. EMPLOYEES
At December 31, 1999, Arc had 27 employees, of which all are full-time
employees. Full-time employees include 9 in strategic planning, executive
management, business development; 5 account managers; 5 creative and production
personnel; and 3 programmers, in addition to 5 administrative staff.
Item 2. Description of Property
The Company maintains its sole corporate offices at 788 Shrewsbury Avenue,
Tinton Falls, New Jersey 07724 (the "Office"). The Office is comprised of 7,209
square feet and is presently in the third year of a five year lease at a monthly
rent of $9,011.25 (the "Lease"). Pursuant to the terms of the Lease, the Company
has the option to renew such lease for an additional period of five years
commencing at the end of the Lease's initial term (December 31, 2001).
Item 3. 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.
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Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security-holders through the
solicitation of proxies or otherwise during the fourth quarter of the 1999
Fiscal Year.
PART II
Item 5. Market for Common Equity and Related Stockholders Matters
MARKET. Since October 21, 1996, the Company's Common Stock has traded on
the "OTC-Bulletin BoardThe Common Stock is presently trading under the symbol
"ACOC".
Since December 30, 1998, shares of the Company's Class A Preferred Stock
has traded 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, 1998 3 7 1/8
April 1 - June 30, 1998 1 3/4 4 1/2
July 1 - September 30, 1998 1/4 1 5/16
October 1 - December 31, 1998 1/8 1 1/8
January 1 - March 31, 1999 1/8 7/8
April 1- June 30, 1999 3/16 9/16
July 1 - September 30, 1999 1/8 9/16
October 1 - December 31, 1999 3/16 5/8
January 1 - March 17, 2000 3/16 2 1/2
ACOCP January 1 - March 31, 1999 1/8 1 5/8
March 31 - June 30, 1999 3/4 1 5/16
July 1 - September 30, 1999 1/4 3/4
October 1 - December 31, 1999 3/16 3/8
January 1 - March 17, 2000 3/16 7/8
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.
On July 1, 1999 the Company's Common Stock and Class A Preferred Stock were
delisted from the OTC-Bulletin Board due to the Company's failure to comply with
NASDAQ's recently adopted listing requirements. The Company's Common Stock and
Class A Preferred Stock returned to the OTC-Bulletin Board on November 30, 1999.
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OUTSTANDING SHARES AND SHAREHOLDERS OF RECORD. As of December 31, 1999,
13,703,132 shares of Common Stock issued and outstanding which were held of
record by 135 persons. As of December 31, 1999, 720,000 shares of preferred
stock issued and outstanding which were held of record by 11 persons.
DIVIDENDS. Since its inception, the Company has not paid any cash dividends
on its stock. There are no restrictions currently in effect which preclude the
Company from declaring dividends. However, 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. As of
December 31, 1999 accrued but unpaid preferred stock dividends aggregated
$14,000.00. 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 and
not pay dividends on the common stock.
RECENT SALES OF UNREGISTERED SECURITIES. From December 1996 through March
1997, the Company conducted a private placement offering of securities whereby
the Company issued a total of 495,000 shares of Common Stock and received net
proceeds of $430,823 after the deduction of expenses amounting to $64,177 (the
"First Offering"). Such offering was exempted from registration pursuant to
Section 4(2) of the Securities Act. The First Offering's expenses consisted of a
10% consulting fee, legal, printing and accounting fees and other miscellaneous
expenses. The entire First Offering was sold to one entity, Ainsley Engineering,
who was not a 10% shareholder of the Company.
During October 1997, the Company completed a second private placement
offering of securities whereby the Company issued a total of 300,000 shares of
Common Stock and received net proceeds of $261,071 after the deduction of
expenses amounting to $38,929 (the "Second Offering"). Such offering was
exempted from registration pursuant to Section 4(2) of the Securities Act. The
Second Offering's expenses consisted of a 10% consulting fee, legal fees and
printing and registration expenses. The entire Second Offering was sold to one
entity, Maslen International, who was not a 10% shareholder of the Company.
From July 1998 though December 1998, the Company conducted an offering for
a total of 700,000 shares of its Class A Preferred Stock in exchange for
$140,000 in cash and subscriptions receivable (the "Preferred Offering"). Such
offering was exempted from registration under Section 4(2) of the Securities
Act. Subsequently, 30,000 shares were cancelled resulting in a reduction of
gross proceeds to $134,000. The Company received net proceeds from the Preferred
Offering of $112,149 after the deduction of expenses amounting to $25,851. Those
expenses consisted of a 10% consulting fee, printing and accounting fees and
other miscellaneous expenses. Additionally, the Company issued 50,000 shares of
preferred stock as payment for certain offering cost. Such offering was not
underwritten and no officers, directors or 10% shareholders of the Company were
subscribers.
Item 6. Management's Discussion and Analysis of Financial Condition and Plan
of Operation
Years Ended December 31, 1999 and December 31, 1998
Arc's net sales for the years ended December 31, 1999 and 1998 were
$3,629,000 and $2,868,000 respectively, an increase of 27 percent. In Arc's
multi-media segment, sales for the years ended December 31, 1999 and 1998 were
$2,975,000 and $2,567,000 respectively, an increase of 16 percent. In its
continuing education segment, sales for the years ended December 31, 1999 and
1998 were $654,000 and $301,000 respectively, an increase of 117 percent.
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Revenue growth was driven by an expanding revenue base in Arc's core
business of Internet site development, interactive multi-media development, and
new capability of delivering live educational seminars through its continuing
professional education company, Arc Educators.
The increase in the multi-media segment is a result of (1) web site
development revenue increasing $343,000 (or 394%) as a result of Arc's expansion
into the burgeoning area of business-to-business e-commerce, (2) full
interactive multimedia development increased $287,000 (or 92%) due to Arc's
expansion into high-level corporate training and (3) these gains were partially
offset by the anticipated decline in professional services revenue of $222,000
(or 45%).
The increase in revenue for continuing professional education, is primarily
due to the new capability of delivering live educational seminars through its
distance learning company.
Operating costs for the years ended December 31, 1999 and 1998 were
$580,000 and $640,000 respectively. The decrease is due to the reduction in the
amount of outside labor and the decrease in outside printing costs.
Selling, general and administrative expenses for the years ended December
31, 1999 and December 31, 1998 were $2,765,000 and $2,576,000 respectively.
Selling, general and administrative expenses for 1999 increased at the low rate
of 7 percent. The increase is primarily due to an increase in salaries.
Depreciation and amortization expenses for the years ended December 31,
1999 and December 31, 1998 were $144,000 and $169,000 respectively. The decrease
is due to the fact that the fiscal year ending December 31, 1998 included
impairment charges relating to certain capitalized web site development costs.
Net income (loss) for the years ended December 31, 1999 and December 31,
1998 amounted to $112,000 and ($537,000) respectively. The primary factor for
the profitability in 1999 was the ability for sales growth with minimal increase
in costs and expenses. Earnings per share for 1999 were $0.01, an increase over
1998's per share loss of $0.04.
Liquidity and Capital Resources
Cash flow generated by operations for the year ended December 31, 1999 was
$185,000. Positive cash flow from operating activities for the year ended
December 31, 1999 was achieved, due to the significant increases in revenue. The
Company believes that its present clients will generate sufficient revenue to
maintain an appropriate level of liquidity for the near term.
The Company maintains a line of credit of $750,000. As of December 31,
1999, $306,000 of the line of credit remains available for future use subject to
collateral restrictions. The Company utilizes the line of credit for working
capital. Although the company believes that the amount available under the line
of credit is sufficient for its short term requirements, the Company expects
that the line of credit might be increased for its long term financing needs.
Management intends to obtain term financing in addition to its line of credit.
Cash flow from investing activities were negative for the year ended
December 31, 1999. Net cash used in investing activities for the year ended
December 31, 1999 was $101,000 and was for capital expenditures. Financing cash
flows were provided by utilization of an additional $44,000 of the $750,000 line
of credit.
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Item 7. Financial Statements
Please see the attached consolidated financial statements.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
On July 15, 1999, Beck, Weiss & Company, the Company's independent auditor
for the previous two fiscal years, resigned in that capacity as a result of the
Company's newly reporting status and such auditor's limited experience in
matters governing compliance with the federal and state securities laws. On that
same date, Beck, Weiss & Company accepted the position of the Company's
principal accountant.
On July 15, 1999, the Registrant's Board of Directors approved the
engagement of Richard A. Eisner & Company, LLP to serve as independent auditors
for the fiscal year ending December 31, 1999.
During fiscal years 1998 and 1997, respectively, there were no
disagreements with Beck, Weiss & Company on any matter of accounting principals
or practices, financial statement disclosure, or auditing scope or procedure or
any reportable events.
PART III
Item 9. 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
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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. Mr. Meyer is the brother of Steven
Meyer who is also an officer and director of the Company.
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.
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Item 10. Executive Compensation
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- -----------------------------
Other Annual
Compensa- Securities
tion ($) Underlying All Other
Name Year Salary ($) Bonus Options Compensation
- --------------- ---- ---------- ---- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Steven H. Meyer 1999 97,308 none 3,149 75,000(1) none
1998 88,093 none 3,103 none
1997 86,648 none none none none
Michael Rubel 1999 125,000 none none 150,000(2) none
1998 139,031 none none 150,000(2) none
Kenneth P. Meyer 1999 97,308 none 6,204 75,000(1) none
1998 88,093 none 6,150 none
1997 83,090 none
Ethel Kaplan 1999 97,308 none 5,442 150,000(1) none
1998 88,093 none 5,363 none
1997 86,648
John Lisovitch 1999 124,000 none none 150,000(1) none
1998 138,031 none none none
</TABLE>
(1) 25% of these options vested as of December 31, 1999.
(2) 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, 102,500 have vested.
Compensation Pursuant To Plans
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, 1999 aggregated $555,719. Set forth below is a
summary compensation table prepared in accordance with the applicable
11
<PAGE>
rules of the Securities and Exchange Commission.
OPTIONS OF MANAGEMENT
Individual Grants
<TABLE>
<CAPTION>
Number of
Securities Employees in Total Options
Underlying Fiscal Year in which have
Options which Options Exercise vested as of Expiration
Name Granted were Granted Price 12/31/99 Date
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Steven H. Meyer 75,000 9.43% $ 0.50 2003
Michael Rubel 150,000 18.86% $ 0.50 2003
Kenneth P. Meyer 75,000 9.43% $ 0.50 2003
Ethel Kaplan 150,000 18.86% $ 0.50 2003
John Lisovitch 150,000 18.86% $ 0.50 2003
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Common Stock
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 March 17, 2000. At such date there were 13,703,132 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.
12
<PAGE>
<TABLE>
<CAPTION>
Name and Address
Title of Class of Beneficial Owner Amount Percent of Class
<S> <C> <C>
Common Stock
Ethel Kaplan (1)(2)(12) 4,624,270 33.6%
6 Edwards Point Road
Rumson, New Jersey 07760
Steven H. Meyer(3)(7)(9) 2,349,520 17.1%
7 Emma Drive
Wayside, New Jersey 07712
Kenneth P. Meyer(4)(8)(9) 2,348,187 17.1%
7 Wemrock Drive
Wayside, New Jersey 07712 2563
Michael Rubel(5)(10) 250,000 1.80%
6 Almark Terrace
Wayside, New Jersey 07712
John Lisovitch(6)(11) 125,000 .91%
75 White Pine Road
Columbus, New Jersey 08022
---------- -----
TOTAL 9,696,977 68.9%
</TABLE>
(1) Does not include 90,000 shares held by three trusts to which Ms. Kaplan as
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) Includes the option to purchase 75,000 shares of the Company's Common Stock
pursuant to Mr. Meyer's Stock Option Agreement, 37,500 shares are currently
vested.
(8) Includes the option to purchase 75,000 shares of the Company's Common Stock
pursuant to Mr. Meyer's Stock Option Agreement, 37,500 shares are currently
vested.
(9) Kenneth Meyer and Steven Meyer are brothers.
(10) Includes the option to purchase 300,000 shares of the Company's Common
Stock pursuant to Mr. Rubel's Stock Option Agreement,150,000shares are
currently vested.
(11) Includes the option to purchase 150,000 shares of the Company's Common
Stock pursuant to Mr. Lisovitch's Stock Option Agreement, 75,000 shares are
currently vested.
(12) Includes the option to purchase 150,000 shares of the Company's Common
Stock pursuant to Ms. Kaplan's Stock Option Agreement, 75,000 shares are
currently vested.
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
13
<PAGE>
of their shares of ASTL for the term of such agreement (the "Shareholders
Agreement"). In 1997 the shareholders received one share of ASTL for every share
of Arc. ASTL subsequently changed its name to Arc Communications Inc. Thus, the
Shareholders Agreement restricts all transfers of the Shareholders' Arc's shares
with the exception of transfers of their respective shares to their immediate
family members. Although the Shareholders Agreement has been amended numerous
times and Mr. Cosman is no longer a party to such agreement, such agreement
remains in effect between Steven H. Meyer, Kenneth P. Meyer and Ethel Kaplan.
Mr. Cosmas is a former director of the Company.
Item 12. 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 13. Exhibit and Reports on Form 8-K
(a) Index to Exhibits
3.1 Certificate of Incorporation of Arc Slide Technologies Ltd., dated
October 21, 1992.(1)
3.2 Certificate of Amendment to the Certificate of Incorporation of Arc
Slide Technologies Ltd., dated August 1, 1994.(1)
3.3 By-laws of Arc Slide Technologies Ltd., adopted August 1, 1994.(1)
3.4 Certificate of Amendment to the Certificate of Incorporation of Arc
Slide Technologies Ltd., dated October 13, 1997, changing the name of
the corporation to Arc Communication, Inc., and increasing the
authorized common stock to 50,000,000 shares.(1)
3.5 Letter from the Florida Department of State indicating that the
Articles of Merger were filed on November 19, 1997.(1)
3.6 Articles of Merger of Arc Communications Inc., a Florida corporation,
into its wholly-owned subsidiary Arc Communications, Inc., a New
Jersey corporation dated November 21, 1997.(1)
3.7 Certificate of Merger of Navesink River Group Inc., into Arc
Communications Inc., dated December 19, 1997.(1)
3.8 Plan of Merger of Navesink River Group Inc., into Arc Communications
Inc., dated December 19, 1997.(1)
3.9 Unanimous Consent of Directors in Lieu of Special meeting of directors
of ARC Communications dated July 14, 1998.(1)
14
<PAGE>
3.10 Certificate of Amendment to the Certificate of Incorporation of Arc
Communications Inc., dated August 31, 1998.(1)
3.11 Certificate of Amendment to the Certificate of Incorporation by the
Board of Directors of Arc Communications Inc. dated September 1,
1998.(1)
3.12 Class A Preferred Stock Provisions dated September 15, 1998.(1)
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.(1)
10.1 $750,000 Promissory Note with Sovereign Bank, dated August 27,
1998.(1)
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.(1)
10.3 Consultation agreement between Wall Street Advancement, Inc. and Arc
Communications Inc., dated March 8, 1999.(1)
21.1 Arc Communications Inc.'s Subsidiaries
27.1 Financial Data Schedule
(1) Filed as the same encumbered exhibit to a Registration Statement (File
No. 0-26213) filed on October 5, 1999.
15
<PAGE>
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: Arc Communications Inc.
By: /s/ Michael Rubel
-----------------
Michael Rubel
Chief Operating Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant, and in the capacities and on the
date indicated.
/s/ Steven H. Meyer
- ------------------------------------
name: Steven H. Meyer
CEO, President and Director
/s/ Michael Rubel
- ------------------------------------
name: Michael Rubel
Chief Operating Officer
/s/ Kenneth P. Meyer
- ------------------------------------
name: Kenneth P. Meyer
Vice President and Director
/s/ Ethel Kaplan
- ------------------------------------
name: Ethel Kaplan
Secretary and Director
16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
18
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1999 and 1998
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
Contents
Page
----
Consolidated Financial Statements
Independent auditors' reports F-2
Balance sheet as of December 31, 1999 F-4
Statements of operations for the years ended
December 31 1999 and 1998 F-5
Statements of changes in stockholder's equity
for the years ended December 31, 1999 and 1998 F-6
Statements of cash flows for the years ended
December 31, 1999 and 1998 F-7
Notes to financial statements F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Arc Communications, Inc.
Tinton Falls, New Jersey
We have audited the accompanying consolidated balance sheet of Arc
Communications, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arc Communications
Inc. and subsidiaries as of December 31, 1999, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
February 10, 2000
F-1
<PAGE>
To the Board of Directors and Stockholders
of Arc Communications, Inc.
We have audited the accompanying statement of operations, stockholders' equity
and cash flows of Arc Communications, Inc. for the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 or 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Arc
Communications, Inc. for the year ended December 31, 1998, 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 Sheet
December 31, 1999
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents $ 352,000
Accounts receivable - net 724,000
Inventory 10,000
Prepaid expenses and other current assets 8,000
-----------
Total current assets 1,094,000
-----------
Property and equipment, net 363,000
-----------
Other assets:
Goodwill - net 77,000
Security deposits 8,000
Due from employees 28,000
-----------
Total other assets 113,000
-----------
$ 1,570,000
===========
LIABILITIES
Current liabilities:
Advances under line of credit $ 444,000
Accounts payable and accrued expenses 315,000
Deferred revenue 21,000
-----------
Total current liabilities 780,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, 9% cumulative, stated value $.20; 5,000,000 shares authorized; 720,000
shares issued and outstanding (at liquidating value) 144,000
Common stock, no par value, stated value $.001; 45,000,000 shares authorized;
13,703,132 shares issued and outstanding 14,000
Additional paid-in capital 1,375,000
Accumulated deficit (743,000)
-----------
Total stockholders' equity 790,000
-----------
$ 1,570,000
===========
</TABLE>
See notes to financial statements F-3
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 3,629,000 $ 2,868,000
----------- -----------
Costs and expenses:
Operating costs 580,000 640,000
Selling, general and administrative 2,765,000 2,576,000
Depreciation and amortization 144,000 169,000
----------- -----------
Total costs and expenses 3,489,000 3,385,000
----------- -----------
Other income (expense):
Interest income 14,000 9,000
Interest expense (42,000) (29,000)
----------- -----------
Total other expense (28,000) (20,000)
----------- -----------
Net income (loss) $ 112,000 $ (537,000)
=========== ===========
Basic and diluted income (loss) per share $ 0.01 $ (0.04)
=========== ===========
</TABLE>
See notes to financial statements F-4
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- ------------------------ Total
Shares Shares Additional Accumulated Stockholders'
Issued Amount Issued Amount Paid-in Capital Deficit Equity
------- ----------- ----------- --------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 13,538,132 $ 14,000 $ 1,212,000 $ (318,000) $ 908,000
Issuance of preferred stock 750,000 $ 150,000 (32,000) 118,000
Issuance of common stock for
professional services 12,500 6,000 6,000
Issuance of common stock for
purchase of 10% minority
interest in a subsidiary 15,000 11,000 11,000
Issuance of common stock 25,000 (5,000) (5,000)
Conversion of loan from stockholder
to common stock 160,000 160,000 160,000
Net loss (537,000) (537,000)
-------- ----------- ----------- --------- ----------- ----------- ---------
Balance, December 31, 1998 750,000 150,000 13,750,632 14,000 1,352,000 (855,000) 661,000
-------- ----------- ----------- --------- ----------- ----------- ---------
Issuance of common stock and options
services rendered 2,500 23,000 23,000
Cancellation of preferred stock (30,000) (6,000) (6,000)
Cancellation of common stock
subject to an escrow agreement (50,000)
Net income 112,000 112,000
-------- ----------- ----------- --------- ----------- ----------- ---------
Balance, December 31, 1999 720,000 $ 144,000 13,703,132 $ 14,000 $ 1,375,000 $ (743,000) $ 790,000
======== =========== =========== ========= =========== =========== =========
</TABLE>
See notes to financial statements F-5
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 112,000 $(537,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 144,000 169,000
Provision for uncollectible accounts 73,000 45,000
Issuance of options for professional services 23,000
Issuance of common stock for professional services 6,000
Changes in :
Accounts receivable (261,000) (163,000)
Inventory 5,000 (2,000)
Prepaid expenses and other current assets 3,000 26,000
Security deposits 1,000 4,000
Due from employees (8,000) (1,000)
Accounts payable and accrued expenses 72,000 (135,000)
Deferred revenue 21,000 (1,000)
--------- ---------
Net cash provided by (used in) operating activities 185,000 (589,000)
--------- ---------
Cash flows from investing activities:
Expenditures for property and equipment (101,000) (58,000)
Cash surrender value - officers' life insurance 1,000
--------- ---------
Net cash used in investing activities (101,000) (57,000)
--------- ---------
Cash flows from financing activities:
Proceeds from line of credit 44,000 349,000
Repayment of capital lease obligations (20,000)
Net proceeds from sale of common stock 113,000
--------- ---------
Net cash provided by financing activities 44,000 442,000
--------- ---------
Net increase (decrease) in cash and cash equivalents 128,000 (204,000)
Cash and cash equivalents - beginning of year 224,000 428,000
--------- ---------
Cash and cash equivalents - end of year $ 352,000 $ 224,000
========= =========
Supplemental disclosures of cash flow information:
Interest $ 43,000 $ 29,000
</TABLE>
See notes to financial statements F-6
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999 and 1998
NOTE A - ORGANIZATION AND DESCRIPTIONS OF BUSINESS
Arc Communications, Inc. (the "Company") is a full-service marketing consulting
and New Media design firm specializing in sports marketing, technology and the
pharmaceutical industry. Services include marketing, consulting, website
development, electronic commerce, interactive multi-media, graphics design and
imaging.
The Company, through its subsidiaries, electronically publishes interactive
educational and reference material for the medical and dental professions,
provides on-line continuing professional education to the medical, dental and
funeral director's professions and provides on-line personal medical
information.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and all of its subsidiaries after elimination of all
significant intercompany accounts and transactions. On February 25, 1998,
the Company acquired the remaining 10% minority interest of a previously
90% owned subsidiary by issuing 15,000 shares of the Company's common stock
with a fair value of $11,000.
[2] Cash and cash equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
The Company maintains cash balances in various financial institutions.
Management periodically evaluates the credit worthiness of such
institutions.
[3] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
[4] 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 allowance for doubtful accounts is
$57,000 as of December 31, 1999.
F-7
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[5] Per share information:
Basic earnings per share ("EPS") is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding. Diluted EPS is computed by dividing income available to common
stockholders by the weighted average shares outstanding, assuming all
dilutive potential common shares were issued using, with respect to the
assumed proceeds from the excess of dilutive options and warrants, the
treasury stock method calculated based upon average market price for the
period. The weighted average number of common shares outstanding for the
year ended December 31, 1999 and 1998 aggregated 13,739,000 and 13,574,000,
respectively.
[6] Inventory:
Inventories are stated at the lower of cost or market, with cost determined
on a first-in, first-out basis.
[7] Property and equipment:
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives of 5 years.
[8] Goodwill:
Goodwill resulting from an acquisition accounted for as a purchase is being
amortized on a straight-line basis over ten years. The carrying value of
goodwill is analyzed quarterly by the Company based upon the expected cash
flows of the acquired enterprise. Amortization expense amounted to $10,000
for each of the years ended December 31, 1999 and 1998.
[9] Revenue recognition:
The Company recognizes income from sales at the date the product is shipped
and as professional services are performed. Revenue from custom software
development is recognized based on its percentage of completion.
[10] Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") allows companies to either expense
the estimated fair value of stock options or to continue to follow the
intrinsic value method set forth in APB Opinion 25, "Accounting for Stock
Issued to Employees" ("APB 25") but disclose the pro forma effects on net
income had the fair value of the options been expensed. The Company has
elected to continue to apply APB 25 in accounting for its stock option
incentive plans.
[11] Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred. During 1999 and 1998, the Company recorded advertising
expense of $33,000 and $65,000, respectively.
F-8
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999 and 1998
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1999 consists of:
Equipment and furniture $ 868,000
Leasehold improvements 88,000
------------
956,000
Accumulated depreciation 593,000
------------
Property and equipment, net $ 363,000
============
Depreciation expense included in selling, general and administrative expense
aggregated $134,000 and $159,000 for the years ended December 31, 1999 and 1998,
respectively.
NOTE D - ADVANCES UNDER LINE OF CREDIT
Advances under a $750,000 line of credit bear interest at the bank's prime rate
plus 1.5% (10% as of December 31, 1999) and are collateralized by the Company's
accounts receivable. The line of credit is due on demand.
NOTE E - INCOME TAXES
The significant components of the Company's deferred tax asset and liability as
of December 31, 1999 are as follows:
Deferred income tax asset:
Net operating losses carry forwards $ 476,000
Deferred income tax liability:
Accrual to cash adjustment (172,000)
------------
Deferred tax asset 304,000
------------
Valuation allowance (304,000)
------------
Net deferred tax asset $ 0
===========
The significant components of the provision for income taxes for the years ended
December 31, 1999 and 1998 are as follows:
1999 1998
--------- ---------
Deferred:
Federal $(119,000) $ (18,000)
State (35,000) (11,000)
Change in valuation allowance 154,000 29,000
--------- ---------
Total deferred income taxes $ 0 $ 0
========= =========
F-9
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999 and 1998
NOTE E - INCOME TAXES (CONTINUED)
As of December 31, 1999, the Company has net operating loss carryforwards of
approximately $1,227,000 for federal income tax purposes, which expire through
2019.
The difference between the statutory federal income tax rate on the Company's
pre-tax income (loss) and the Company's effective income tax rate is summarized
as follows:
1999 1998
------ ------
Statutory federal income tax rate 34.0% 15.0%
State income tax, net of federal benefit 9.0
Prior year overaccrual 90.6
Change in tax rate 21.4
Increase (decrease) in valuation
allowance (142.8) (24.0)
Other (3.2)
------ ------
Effective income tax rate 0% 0%
====== ======
NOTE F - RELATED PARTY TRANSACTION
Legal fees paid to corporate counsel, with which the son of a
director/shareholder is affiliated, were $37,000 and $52,000 for 1999 and 1998,
respectively.
NOTE G - STOCKHOLDERS' EQUITY
[1] Common stock:
In connection with the Company's 1997 acquisition of a subsidiary, 50,000
shares were issued subject to an escrow agreement whereby, if a certain
performance benchmark was met on or before October 31, 1999, the shares
would be released. The benchmark was not met and the shares were cancelled
in 1999.
[2] Preferred stock:
On August 31, 1998, the Company issued 720,000 shares of preferred stock in
a private placement offering and received net proceeds of $118,000. Accrued
dividends as of December 31, 1999 aggregated $17,000.
During 1999, 30,000 shares of preferred stock and related subscription
receivable were canceled.
[3] Stock options:
The Company has a stock option plan under which 1,500,000 shares of common
stock are reserved for issuance upon exercise of either incentive or
nonincentive stock options which may be granted from time to time by the
Board of Directors to employees and others. The Board of Directors
determines the option price (not to be less than fair market value for
incentive options) at the date of grant. The options have a maximum term of
4 years.
NOTE G - STOCKHOLDERS' EQUITY (CONTINUED)
F-10
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999 and 1998
The Company applies APB 25 in accounting for its stock option incentive
plan and, accordingly, recognizes compensation expense for the difference
between the fair value of the underlying common stock and the exercise
price of the option at the date of grant. 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 plans consistent with the methodology
prescribed under SFAS No. 123, the Company's proforma net income and net
income per share for 1999 would have been approximately $90,000 and $.01,
respectively. The weighted average fair value of the options granted during
1999 were $.20 per share on the date of grant using the Black-Scholes
option pricing model with the following assumptions; dividend yield 0%,
volatility 486%, expected life 4 years, risk free interest rate of
approximately 5.3%.
The following table summarizes stock options transactions under the plan:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998
------------------------ ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Options:
Granted and outstanding at beginning
of year 460,000 $0.50 450,000 $1.50
Granted 640,000 0.50 530,000 0.63
Cancelled (520,000) 1.50
--------- --------
Outstanding at end of year 1,100,000 $0.50 460,000 $ .50
========= ========
</TABLE>
On November 15, 1998, the Company repriced all outstanding options to the then
current market value of $0.50 per share.
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, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- -------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable Average
Exercise as of Remaining Exercise as of Exercise
Prices 12/31/99 Life (in Years) Price 12/31/99 Price
-------- ----------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$0.50 1,100,000 3.01 $0.50 390,000 $0.50
</TABLE>
In March 1999, the Company entered into a two year consulting agreement with a
public relations company. Under the terms of the agreement, the Company issued
225,000 options exercisable at $1.00 per share with an estimated fair value of
the date of grant of $56,000. During the year ended December 31, 1999, the
Company recognized an expense of $23,000.
F-11
<PAGE>
ARC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999 and 1998
NOTE H - COMMITMENTS
The Company leases office space and equipment under operating leases with an
initial or remaining term in excess of one year, expiring through 2003. As of
December 31, 1999, minimum aggregate rentals are as follows:
Year Ending
December 31,
------------
2000 $ 153,000
2001 128,000
2002 31,000
2003 23,000
----------
$ 335,000
==========
Total rent expense for the years ended December 31, 1999 and 1998 aggregated
$167,000 and $140,000, respectively.
NOTE I - MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
For the year ended December 31, 1999, two customers accounted for 34% of sales.
One of these customers accounted for 38% of sales for the year ended December
31, 1998. The aggregate accounts receivable balances as of December 31, 1999 for
these customers were $212,000.
NOTE J - SEGMENT INFORMATION
The Company has two reportable segments; multi-media and continuing professional
education. The multi-media products business is comprised of interactive
multi-media programs, printing and internet site development. The continuing
professional education business (CPE) is comprised of the traditional hard copy
examinations and examinations taken on the internet.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
Revenues
<S> <C> <C>
Multi-media $ 2,975,000 $ 2,567,000
Continuing professional education 654,000 301,000
----------- -----------
Total consolidated revenues $ 3,629,000 $ 2,868,000
=========== ===========
Net income (loss)
Multi-media $ 226,000 $ (400,000)
Continuing professional education (114,000) (137,000)
----------- -----------
Total consolidated net income (loss) $ 112,000 $ (537,000)
=========== ===========
Assets
Multi-media $ 1,402,000 $ 1,169,000
Continuing professional education 168,000 136,000
----------- -----------
Total consolidated assets $ 1,570,000 $ 1,305,000
=========== ===========
</TABLE>
F-12
EXHIBIT 21.1
SUBSIDIARIES OF ARC COMMUNICATIONS INC.
Name State of Incorporation
---- ----------------------
Arc Internet Publishing Corp. New Jersey
17
