As filed with the Securities and Exchange Commission on December 13, 1999
Registration Statement No.333-83701
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2 TO THE
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CIRCLE GROUP INTERNET, INC.
(Name of Small Business Issuer in its Charter)
Illinois 7375 36-4197173
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Identification No.)
or organization) Classification
Code Number)
----------------
1011 Campus Drive
Mundelein, IL 60060
847-549-6002
(Address and telephone number of
principal executive offices)
----------------
Mr. Gregory J. Halpern
Mr. Frank K. Menon
Circle Group Internet, Inc.
1011 Campus Drive
Mundelein, IL 60060
847-549-6002
(Name, address and telephone number of agent for service)
----------------
With a copy to:
Roxanne K. Beilly, Esq.
Atlas, Pearlman, Trop & Borkson, P.A.
200 East Las Olas Boulevard
Suite 1900
Fort Lauderdale, Florida 33331
(954) 763-1200
----------------
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act of 1933 registration number of the earlier registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933 registration number of the earlier registration statement for the same
offering. [ ]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box [ ].
<PAGE>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Amount Offering Aggregate Amount
Shares to be to be Price Per of Offering Registration
Registered Registered Share (1) Price (1) Fee
common stock,
$.001 par value
per share 1,825,532 $10.00 $18,255,320 $5,075
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this registration statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold by the holders until the registration
statement filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities, in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION DATED DECEMBER 13, 1999
PROSPECTUS
Circle Group Internet, Inc.
1,825,532 shares of common stock
This investment has a high degree of risk. You should carefully consider the
risk factors beginning on page 4 before purchasing any of the shares of Circle
Group Internet common stock offered by this prospectus.
The 1,825,532 shares of common stock covered by this prospectus are
being sold by selling security holders identified. The offering is not being
underwritten. Circle Group Internet will not receive any of the proceeds from
the sale of the shares by the selling security holders.
There is currently no public market for our common stock. We have
applied for listing of our common stock on the Nasdaq National Market and on the
American Stock Exchange. We do not know if we will be approved for listing on
either exchange.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is [ ], 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
<S> <C>
Prospectus Summary ........................................................................ 3
Summary Financial Data .................................................................... 3
General Information ....................................................................... 4
Risk Factors .............................................................................. 4
Forward-Looking Statements ................................................................ 6
Use of Proceeds ........................................................................... 6
Capitalization ............................................................................ 6
Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 7
Business .................................................................................. 11
Management ................................................................................ 27
Indemnification of Officers and Directors ................................................. 33
Certain Relationships and Related Transactions ............................................ 33
Our Principal Shareholders ................................................................ 35
Market For Our Securities ................................................................. 36
Selling Security Holders .................................................................. 37
Plan of Distribution ...................................................................... 42
Description of Securities ................................................................. 44
Legal Matters ............................................................................. 45
Experts ................................................................................... 45
Index to Financial Statements ............................................................. F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
Circle Group Internet, Inc.
We are an Internet company with e-finance, business-to-business, and e-tailer
divisions. Our divisions are built around the common theme of Internet-based
operations.
* Our e-finance, or Internet investment banking, division is a
broker-dealer that offers and sells securities in private placements
and public offerings. Our e-finance division focuses its activities on
the Internet sector and, more generally, on issuers seeking to market
their stock offerings to online investors.
* Our business-to-business, or B2B, division develops distinctive web
sites, engineers software, including our Internet viewing software,
and provides business-to-business consulting services.
* Our e-tailer, or Internet retailer, division is a manufacturer and
distributor of pillows, blankets, and other bedding products.
Our executive offices are located at 1011 Campus Drive, Mundelein, Illinois
60060. Our telephone number is (847) 549-6002. Our web sites are located at
www.circlegroupinternet.com., www.justdoit.net, www.bedsandbeyond.com and
www.cgisecurities.com. The information on our web sites is not a part of this
prospectus.
SUMMARY FINANCIAL DATA
The following table provides summary consolidated financial information on
Circle Group Internet. The accompanying compiled pro forma condensed
consolidated financial statements are based on the assumptions and adjustments
described in the accompanying notes, which we believe are reasonable. The
compiled pro forma condensed consolidated financial statements:
* do not claim to represent what the combined results of operations
actually would have been if the acquisitions of On-Line Bedding and
PPI Capital had occurred as of December 31, 1998 instead of the actual
closing dates, or
* what the financial position and results of operations would be for any
future periods.
You should also read the audited and unaudited historical financial statements,
and the compiled pro forma condensed consolidated financial statements included
in this prospectus.
3
<PAGE>
Statement of operations data:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
1999 1998 1998 1997
---- ---- ---- ----
(unaudited) Historical Pro forma Historical
---------- --------- ----------
Proforma
--------
<S> <C> <C> <C> <C> <C>
Revenues $ 3,765,618 $783,743 $338,333 $1,121,046 $282,362
Net Income (loss) $ 1,500,183 $(30,910) $ 7,422 $ (209,127) $ 23,436
Net Income (loss) per
Common Share $ 0.165 $(0.0044) $ .001 $ (.028) $ .003
Weighted average shares
outstanding 8,595,310 7,000,800 7,032,328 7,432,328 7,000,000
Balance sheet data:
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
Historical Proforma
---------- --------
<S> <C> <C> <C>
Current Assets $13,307,707 $1,033,399 $1,048,293
Total Assets $18,281,602 $1,059,303 $2,162,259
Total Liabilities $ 1,796,183 $ 35,595 $ 158,551
Working Capital $11,511,524 $ 977,804 $ 977,988
Stockholders Equity $16,485,419 $1,059,303 $2,024,708
</TABLE>
GENERAL INFORMATION
The terms "Circle Group Internet," "we," "our," and "us" refer to Circle Group
Internet, Inc. and our subsidiaries CIG Securities, On-line Bedding, and PPI
Capital Corporation. The term "you" refers to a prospective investor.
RISK FACTORS
An investment in our common stock involves a high degree of risk. In addition to
the other information contained in this prospectus, you should carefully
consider the following risk factors before investing in our common stock. A
significant portion of our B2B division's revenues are non-cash compensation
which we may never be able to liquidate, and on which we are required to pay
income taxes
Approximately 73% of our revenues for the nine months ended September 30, 1999
represented the value of restricted securities we accepted as partial payment
for our fees for business to business consulting services, and the development
of various software, from privately held, third party clients. While we
recognized revenue associated with its issuance to us as required by GAAP, we
may never be able to liquidate these securities and receive cash in their place.
We have adopted a policy of reviewing the value of these investments on a
quarterly basis. This review may result in an adjustment to their carrying value
which could adversely affect our operating results for the corresponding
quarters in that we might be required to reduce our carrying value of the
investments. During the three months ended September 30, 1999, following our
policy of reviewing the valuing of these investments, we recognized an
unrealized gain on these investments of $1,044,000 which is included as other
income in our financial statements for the nine months ended September 30, 1999
which are included in this prospectus. In
4
<PAGE>
addition, if we are unable to inevitably liquidate these securities, we will be
required to write off the investments which would adversely affect our operating
results. Finally, we will be required to use cash generated from our other
operations, or our working capital, to pay the income taxes which will be due on
this revenue attributed to non-cash compensation.
We lack prior investment banking experience
While several members of our management team have previous experience in the
securities industry, we have only recently expanded our operations with our
e-finance division. Because we have no prior experience in investment banking,
we do not know if we will be successful in developing this division. The overall
growth in our revenues will depend largely on the development of our e-finance
division. If we are unsuccessful in developing our e-finance division, it will
materially adversely affect our ability to increase our revenues and profits.
If our e-finance division does not continue to increase its membership base,
our ability to generate revenues will be adversely impacted
The compensation of our e-finance division is success-based, and is computed as
a percentage of the total funds we raise for the issuers. Our ability to raise
capital for issuers in private offerings is based, in part, upon increasing the
number of our accredited investor members who are interested in participating in
private offerings. If we are unsuccessful in these efforts, we may be able to
undertake and close only a limited number of private offerings. Any significant
limitation in the number of private offerings we are able to successfully close
will result in a reduction of our potential revenues.
New rules may be adopted which could negatively impact our e-finance division
We are focusing our e-finance efforts in an emerging area of Internet investment
banking. We do not know if new rules or regulations will be adopted by the SEC
or the NASD which might limit, or eliminate our ability to operate our e-finance
division as presently operated. The securities industry is extensively regulated
at both the federal and state levels by various regulatory organizations charged
with protecting the interests of customers. The SEC and NASD require strict
compliance with their rules and regulations. If new or revised rules or
regulations are adopted and we fail to comply with any of these laws, rules or
regulations, the SEC and/or the NASD could levy fines against, suspend or expel
CIG Securities. Significant fines could adversely impact our working capital,
and a suspension or expulsion would severely limit our projected future growth.
The lack of an operating history in our e-finance division may impede our
abilities to attract quality offerings
Our ability to attract potential clients is also based, in part, on our success
with prior transactions in which we have assisted companies in raising capital.
We have only recently expanded into this division, and must still develop a
track record on which our future clients can evaluate our likelihood of success
in assisting them to raise capital. Until we develop this track record, we may
incur difficulties in attracting potential clients which have the greatest
potential for future success.
5
<PAGE>
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements. We intend to identify
forward-looking statements in this prospectus using words such as "believes,"
"intends," "expects," "may," "will," "should," "plan," "projected,"
"contemplates," "anticipates," or similar statements. These statements are based
on our beliefs, as well as assumptions we made using information currently
available to us. Because these statements reflect our current views concerning
future events, these statements involve risks, uncertainties and assumptions.
Actual future results may differ significantly from the results discussed in the
forward-looking statements. Some, but not all, of the factors that may cause
these differences include those discussed in the Risk Factors section beginning
on page 4 of this prospectus. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the resale of our common stock by the
selling security holders made under this prospectus.
CAPITALIZATION
The following table sets forth our capitalization at September 30, 1999 and has
been derived from financial information appearing in the financial statements
included in this prospectus.
September 30, 1999
------------------
(unaudited)
Total debt: $1,796,183
Stockholders' equity:
common Stock, $.0001 par value
per share; 50,000,000 shares
authorized; 9,837,180 shares issued
and outstanding at September 30,
1999 492
Additional paid-in capital 16,115,211
Retained earnings 1,343,932
Dividend (974,216)
Total stockholders' equity $16,485,419
Total capitalization $18,281,602
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the related notes which appear elsewhere in this prospectus. We
acquired On-Line Bedding in January 1999, and our consolidated revenues for the
nine months ended September 30, 1999 include revenues for On-Line Bedding for
the period of February 1, 1999 through September 30, 1999. On-Line Bedding was
an S corporation until our acquisition of all of its stock. We acquired PPI
Capital in March 1999. PPI Capital is a shell corporation with no operations or
revenues. While it is included in our consolidated financial statements for the
nine months ended September 30, 1999 and 1998, and our balance sheet at
September 30, 1999, we do not provide any separate information on PPI Capital.
Our financial statements for the nine months ended September 30, 1998 have been
adjusted to give pro forma effect to the acquisitions of On-Line Bedding and PPI
Capital as if these acquisitions had occurred in January 1998 and March 1998,
respectively. We did not close our acquisition of CIG Securities until November
1999 and its results of operations are not included in our financial statements
for the nine months ended September 30, 1999. The following discussion assumes
the pro forma acquisitions of On-Line Bedding and PPI Capital at September 30,
1999 and 1998 and for the nine months ended September 30, 1999.
Results of operations
Third quarter of 1999 as compared to third quarter of 1998
Consolidated
Our revenues increased approximately 380% for the nine months ended September
30, 1999 from the comparable period in fiscal 1998. The following table provides
a breakdown of the revenues for our B2B division and our e-tailer division for
the periods indicated:
Nine Months Ended September 30,
1999 1998
(unaudited) (unaudited)
B2B division $3,003,050 $181,854
e-tailer division 762,568 621,889
---------- --------
$3,765,618 $783,743
========== =======
Our consolidated operating expenses increased significantly for the second
quarter of fiscal 1999 over the second quarter of fiscal 1998 as a result of the
expansion of our B2B division, and shareholder distributions to the shareholders
of On-Line Bedding which have been treated as a dividend. Included in the
operating expenses for the nine months ended September 30, 1999 is also a one
time expense of $495,000 which represents the value of stock grants to new
employees hired during fiscal 1999. Other Income for the nine months ended
September 30, 1999 is primarily attributable to a $1,044,000 unrealized gain on
stock received as compensation for services, with the balance attributable to
interest income. Our consolidated income from operations increased from a loss
for the nine months ended September 30, 1998. This increase is primarily the
result of the operations of our B2B division.
Based upon an internal analysis of our pending projects and orders, we
anticipate revenues will continue to increase during the balance of fiscal 1999
in both our B2B and e-tailer divisions. In addition, we anticipate that we will
begin to report revenues from our e-finance division during the fourth quarter
of fiscal 1999.
7
<PAGE>
B2B division
Revenues reported by this division increased approximately 1,755% for the nine
months ended September 30, 1999 from the comparable period in fiscal 1998. These
revenues included revenues from sales of business-to-business consulting
services and our Internet viewing software. Revenues for the comparable period
in fiscal 1998 were generally attributed to sales of our marketing software.
Included in the revenues for the nine months ended September 30, 1999 which were
reported by this division is approximately $2,739,000 in non-cash revenue. We
anticipate that we will continue to accept restricted securities from time to
time as partial payment for services rendered by our B2B division. Based upon
our internal review of pending projects within this division, we anticipate that
revenues will continue to increase during the balance of fiscal 1999.
Operating expenses in this division increased significantly for the nine months
ended September 30, 1999 from the comparable period in fiscal 1998 as a result
of our growth and development. These additional expenses included costs
associated with additional employees, and product and service development. As we
continue to expand our operations in this division during the balance of fiscal
1999, we anticipate operating expenses will continue to increase.
This division reported net income of approximately $1,402,250 for the nine
months ended September 30, 1999, of which $1,044,000 is attributable to the
recognition of unrealized gains on stock accepted as payment for B2B consulting
services, versus a net loss of approximately $26,912 for the comparable period
in fiscal 1998. This division had not begun accepting stock as partial payment
for its services in 1998.
e-tailer division
Revenues reported by this division increased approximately 23% for the nine
months ended September 30, 1999 from the comparable period in fiscal 1998. Gross
profit as a percentage of sales decreased by approximately 7.1% for the nine
months ended September 30, 1998 to approximately 31.4% for the comparable period
in fiscal 1999. The gross profit reported for the nine months ended September
30, 1998 was higher than customarily reported by On-Line Bedding as a result of
a non-recurring order flow in that period. The profit margin reported for
On-Line Bedding for the nine months ended September 30, 1999 is closer to this
division's historic norms. We anticipate a modest increase in revenues at this
division through the balance of fiscal 1999 as its e-commerce web site becomes
operational.
Operating expenses in this division remained essentially unchanged. For the nine
months ended September 30, 1998 compensation payable to Mr. Edward Halpern,
On-Line Bedding's president, is reflected as an Other Expense. Mr. Edward
Halpern's compensation for the nine months ended September 30, 1999 is included
in the operating expenses for our B2B division. We do not presently anticipate
any increases in operating expenses within this division. This division reported
net income of approximately $97,933 for the nine months ended September 30, 1999
versus net income of approximately $179,290 for the comparable period in fiscal
1998. This reduction in net income is primarily attributable to the lower
margins this division reported during the second quarter of fiscal 1999, as well
as the effect of a change from an S corporation to a C corporation following our
acquisition of On-Line Bedding's stock in January 1999.
8
<PAGE>
Fiscal year 1998 as compared to fiscal year 1997
During fiscal years 1998 and 1997 our operations were limited to the
engineering, development, and marketing of our web-based software marketing
tools, and the engineering and development of our Internet viewing software.
During the last quarter of fiscal 1998 our management also devoted a significant
portion of its time to our capital raising efforts. Accordingly, while our
revenues increased approximately 19% for fiscal 1998 from fiscal 1997, the
remaining results of our operations remained constant from one year to another.
Liquidity and capital resources
At September 30, 1999 we had working capital of approximately $11,511,524, an
increase of approximately $10,513,720 from December 31, 1998. This increase is
attributed to proceeds we received from our capital raising activities. In
addition to cash on hand, we have established a $1 million line of credit with a
commercial bank, of which we have drawn $500,000 against at September 30, 1999.^
The current assets at September 30, 1999 includes $50,753 in prepaid taxes,
deferred tax assets, and general prepaid expenses including insurance. Other
assets at September 30, 1999 includes security deposits.
During the balance of fiscal 1999 we anticipate hiring approximately 10
additional employees and will, accordingly, increase our payroll and operating
expenses. These additional expenses will be funded by our existing working
capital until our revenues increase proportionately. In the event we do not
generate sufficient additional revenues to offset the expenses related to an
increase in our payroll and operating expenses, we will continue to fund the
costs from our working capital. We anticipate the payroll and general and
administrative costs associated with these additional employees will aggregate
approximately $555,498 for the balance of fiscal 1999.
We have also funded the start-up of our e-finance division, and the expansion of
our e-tailer division during the balance of fiscal 1999. We estimate these
costs, which will be funded from our working capital, will be approximately
$228,156 for our e-finance division and approximately $114,400 for our e-tailer
division. During the balance of fiscal 1999, we anticipate our revenues will
increase, including the fees to be earned by our e-finance division.
We have also set aside $1 million of our cash to contribute to the fund which
will invest in Illinois technology companies. Other than these planned capital
expenditures, and the costs associated with our continued growth, we do not
presently have any planned or anticipated use of proceeds for the balance of
funds raised in our capital raising activities.
Other than our working capital and the line of credit, we do not presently have
any additional sources of liquidity. However, we believe our existing resources
are sufficient to fund our planned expansion during the balance of fiscal 1999
and into fiscal 2000.
Special capital considerations of our e-finance division
CIG Securities must follow the SEC's Uniform Net Capital Rule, Rule 15c3-1,
which is designed to measure the financial integrity and liquidity of a
broker-dealer, and the minimum net capital deemed necessary to meet its
commitments to its customers. Rule 15c3-1 provides that a broker-dealer doing
business with the public must not permit its aggregate indebtedness to exceed 15
times its net capital or, alternatively, that it not permit its net capital to
be less than 2% of aggregate debit items as calculated by the rule. As of this
date, CIG Securities is required to maintain a minimum net capital of $5,000. As
of September 30, 1999, it had net capital in excess
9
<PAGE>
of the minimum net capital required of $26,263. The minimum net capital required
is based upon the nature of CIG Securities' broker dealer business. If CIG
Securities remains principally engaged in the offer and sale of private
placement securities, then its net capital requirements remain at a minimum. In
the event CIG Securities ever becomes involved in the participation in public
underwritings, then net capital requirements will be increased to a minimum of
$100,000.
As a broker dealer, CIG will be subject to liabilities based upon the nature of
its business. CIG intends to restrict its business during the first 12 months of
operations to the private placement of equity securities. Its capital
requirements will be limited, and we should not be subject to any fluctuations
in the stock market. However, as a broker dealer engaged in the sale of equity
securities, CIG could be subject to claims by subscribers to private offerings
based upon allegations of false or misleading statements contained in the
selling memorandum. At the time CIG undertakes public offerings for its clients,
it will be subject to similar liabilities related to the contents of the
prospectus. CIG will seek to limit its liability by conducting significant due
diligence and working closely with its attorneys and accountants. We are unable
at this time to predict what effect CIG's activities, if any, will have on our
liquidity and capital resources.
Year 2000 readiness disclosure
We are aware of the issues associated with the programming code in existing
computer systems as the year 2000 approaches. The Year 2000 issue relates to
whether computer systems will properly recognize and process information
relating to dates in and after the year 2000. These systems could fail or
produce erroneous results if they cannot adequately process dates beyond the
year 1999, and are not corrected. Significant uncertainty exists in the software
industry concerning the potential consequences that may result from the failure
of software to adequately address the Year 2000 issue. We have reviewed all
software and hardware used internally by us in all support systems to determine
whether they are Year 2000 compliant. Our software has already been upgraded by
the manufacturer or was recently purchased and is Year 2000 compliant. We are
fully Year 2000 compliant as of the date of this prospectus.
The costs to us to in identifying and evaluating Year 2000 compliant issues were
not material. Most of our expenses have related to the upgrades or
replacements, when necessary, of software or hardware, as well as costs
associated with time spent by our employees in the evaluation process and Year
2000 compliance matters generally. These expenses are included in our capital
expenditures budget, and were not material to our financial position or results
of operations. The only outside vendor upon which we rely, other than utility
companies and similar businesses, is the company which provides us with access
to the Internet. This company has informed us that its system is Year 2000
compliant.
10
<PAGE>
BUSINESS
Our history
We were formed as an Illinois corporation in May 1994 using the name Circle
Group Entertainment Ltd. We subsequently changed our name to Circle Group
Internet, Inc. in 1997. We had no operations between May 1994 and January 1997.
Beginning in 1997, our first business ventures were related to the development
and marketing of software that strategically placed web sites in Internet
directories. Prior to the development of these software products, we researched
the Internet for technological developments that we believed could give
businesses the ability to enhance revenue generating opportunities through an
Internet presence. Our research led to the development of our initial software
products. These products were:
- BULLSEYE Target Market E-mail Spider for Windows 95 which gave
users the ability to target markets on the web through a keyword
search,
- Web Visitor I.D. which automatically captured the e-mail address
of web site visitors, and
- Zap Pow Submissions which strategically placed web site addresses
in Internet directories.
These products were marketed principally to businesses with web sites to create
cost justification, leads, and prospects for their products and services. The
retail price of these products ranged from $35.00 to $350.00. These products
were met with marginal commercial acceptance. During 1999 we began the
development of our Internet viewing software. After its launch, we discontinued
the marketing of the BULLSEYE Target market E-Mail Spider, the Web Visitor I.D.
and the Zap Power Submissions and transitioned our focus to market our Internet
viewing software.
Since 1997, we have also engaged in a variety of transactions designed to expand
and broaden the scope of our business and operations. These transactions
included:
Our capital raising activities
- In January 1999, we concluded a direct public offering of
1,000,000 shares of our common stock on the Internet through a
Regulation A offering. We received $2.5 million in gross proceeds
from this offering. We used these proceeds to:
* fund the expansion of our operations,
* pay the costs associated with the acquisitions of
On-Line Bedding and PPI Capital, and
* provide working capital for the expansion of our
infrastructure, including investments in additional
equipment and systems, leasehold improvements, and
increased administrative costs related to the hiring
and expenses of additional personnel.
- Between March 1, 1999 and March 15, 1999 we sold 150,480 shares
of our common stock, at $2.50 per share, to a group of accredited
investors with whom we had pre-existing relationships. These
sales were made in a private placement which was exempt from
registration under the Securities Act of 1933 in reliance on
Section 4(2) and Rule 506, Regulation D. We received $376,200 in
gross proceeds from the sale of these shares. We used these
proceeds to launch our e-finance division.
11
<PAGE>
- Between April 1, 1999 and July 22, 1999, we sold 1,213,800 shares
of our common stock at $10.00 per share to a group of accredited
investors with whom we had pre-existing relationships. These
sales were made in a private placement exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) and
Rule 506, Regulation D. We received $12,138,000 in proceeds from
the sale of these shares. We used a portion of the proceeds for
the development and marketing of our Internet viewing software.
We have also set aside $1 million of the cash from this private
placement to contribute to the fund we decided to create to
invest in Illinois technology companies. The balance of these
proceeds will be used for general working capital.
Our acquisitions
- In January 1999, we acquired On-Line Bedding, a distributor of a
wide variety of bedding and disposable products. We are expanding
On-Line Bedding's sales and distribution channels to include
e-commerce.
- In February 1999, we acquired an 80% interest in the common stock
of PPI Capital, a shell corporation. We anticipate that we will
use PPI Capital as either a holding company, or as a candidate
for a reverse merger with an operating entity.
- In March 1999, we entered into an agreement to purchase all of
the stock of CIG Securities, a broker-dealer registered with the
SEC and a member in good standing of the NASD. This acquisition
closed in November 1999 after we received approval from the NASD
for the change in control.
On July 22, 1999, we effected a one for two forward split of our common stock.
All information contained in this prospectus gives proforma effect to this stock
split. Our B2B division operates in the corporate structure of Circle Group
Internet. Our e-finance division operates in the corporate structure of CIG
Securities. Our e-tailer division operates in the corporate structure of On-Line
Bedding. PPI is a shell corporation which has no operations as of the date of
this prospectus.
Information about the acquisitions
On-Line Bedding
On-Line Bedding, originally known as Hos-Pillow Corporation, is an Illinois
corporation formed in 1981 by affiliates of ours. Since its beginning, On-Line
Bedding has operated as a distributor of a wide variety of bedding and
disposable products. We wanted to make the acquisition of On-Line Bedding to
enhance our revenues, and because we believe we can increase its business
through the addition of an e-commerce site. After engaging in due diligence on
On-Line Bedding, we acquired all of the issued and outstanding stock of On-Line
Bedding from its shareholders in exchange for 400,000 shares of our common
stock. The purchase price was based upon a multiple of On-Line Bedding's
historic net income, utilizing a value of $2.50 per share for our stock issued
as the consideration for the share exchange. On-Line Bedding's assets, which we
acquired in this acquisition, included cash and cash equivalents, accounts
receivable, inventory, and office furniture and equipment. See "Certain
Relationships and Related Transactions."
Mr. Edward L. Halpern, who had served as president and CEO of On-Line Bedding
since its beginning, and was responsible for its day to day operations, remains
in those positions following our acquisition of On-Line Bedding. Mr. Edward L.
Halpern also joined our board of directors. On-Line Bedding has consolidated its
operations into our newly relocated principal offices, which occupy
approximately 22,000 square feet, that
12
<PAGE>
allows us to take advantage of various operating efficiencies including central
administrative and accounting personnel.
PPI Capital
PPI Capital was formed as an Illinois corporation in 1984 under the name Pain
Prevention, Inc. In November 1997, the corporation changed its name to PPI
Capital Corporation and reincorporated in Utah. PPI Capital was formerly a
wholly-owned subsidiary of Pain Prevention, Inc., a Utah corporation. In 1997,
Pain Prevention, Inc., the Utah corporation, transferred 80% of the capital
stock of PPI Capital to Meridian Enterprises, Inc., a Delaware corporation. Our
CEO, Greg Halpern, acquired the PPI Capital stock from Meridian in 1997. Pain
Prevention, Inc., the Utah corporation, also distributed the remaining 20% of
PPI Capital's stock to its shareholders. PPI Capital is a development stage
company which has had no operations since its formation. We purchased PPI
Capital as an investment. After engaging in due diligence on PPI Capital, we
acquired 80% of its issued and outstanding stock from Greg Halpern, for $20,000.
The purchase price was based on a 50% discount from the price paid for 80% of
the sister shell corporation of PPI Capital paid by an unaffiliated third party
in 1998. Since PPI Capital is a shell corporation, we acquired no assets in this
transaction. See "Certain Relationships and Related Transactions."
CIG Securities
CIG Securities had been formed in 1996 by Internet Broadcasting Company to take
advantage of the developing Internet direct public offering service market. CIG
Securities did not conduct business between its formation in October 1996 until
March 1999. Although it had not begun operations, it had secured the appropriate
regulatory approval from the NASD and the State of Florida. Our securities
counsel, who had represented Internet Broadcasting Company in the formation of
CIG Securities, introduced the principal of CIG Securities to us after we
decided to acquire a broker-dealer. After engaging in due diligence on CIG
Securities, we signed an agreement to purchase all of its issued and outstanding
stock from Internet Broadcasting Company, an unaffiliated third party, for
$35,000. CIG Securities' assets totaling approximately $13,495 which were
acquired in the transaction included deposits, prepaid expenses and capitalized
organizational costs. The purchase price was based upon the prevailing market
price set by the seller at the time of the transaction. CIG Securities has
received approval to conduct business as a broker-dealer in 43 states, and have
applications pending in the remaining states. We do not anticipate that the
costs of making and obtaining these additional approvals will be substantial.
We do not presently anticipate that we will operate CIG Securities as a
traditional brokerage firm, including employing retail stock brokers, handling
client investment accounts, acting as a market-maker, and other activities
normally undertaken by a broker-dealer. Rather, we acquired CIG Securities so
that we might undertake private placements and be permitted to structure the
compensation we will receive from our capital raising efforts to provide the
maximum benefit to us without overlooking the various applicable federal and
state securities laws which might apply to the FUNDS-IN(TM) Program.
CIG Securities' principal offices are located at our principal offices. Mr. Brad
Levine, the previous principal of CIG Securities, resigned all positions in
October, 1999. Mr. Erik Brown, our vice president of corporate development, was
appointed president of CIG Securities in May 1999, and remained in that position
following the closing of our purchase of CIG Securities. Mr. Brown is
responsible for its day to day operations. Mr. Arthur Tanner, our CFO, serves as
CIG Securities' CFO and financial operations principal, and Mr. Frank Menon, our
president, serves as CIG Securities' CEO. All of these individuals have already
obtained the required licenses from the NASD for the positions they will hold at
CIG Securities.
13
<PAGE>
Acquisition procedure
Once we identified the acquisition candidate, we generally followed the same
procedures for all of these transactions. Based on our due diligence results, we
negotiated a purchase price and a definitive agreement with the owners of the
acquisition candidates. The negotiations for the purchase of CIG Securities were
held at an arms-length basis. Because the owners of On-Line Bedding and PPI
Capital were our affiliates, these negotiations were not at arms-length. We
believe, however, that the terms of these transactions were no less favorable
than the sellers' might have received from an unaffiliated third party. In none
of these transactions did we seek or obtain a fairness opinion.
Our e-finance division
We believe the Internet is gradually changing the traditional models used by
companies to raise private and public financing by opening up the equity markets
to more individual investors. When we initially decided to raise capital for our
own expansion, we found the process generally unfriendly to smaller companies,
and the cost of the capital very high. We also became concerned that our
management would spend a significant amount of its time focusing on the capital
raising efforts causing our business development and operations to suffer. The
more we learned about the traditional methods of raising capital through
investment bankers and venture capitalists, the more we believed that an
alternative should be made available to companies like ours. This alternative
would allow the entrepreneur to complete the process in a timely and cost
conscious fashion, while retaining control of his/her company, and remaining
focused on its business, operations, and growth.
As a result of our own capital raising activities, we developed the FUNDS-IN(TM)
program which is designed to assist small to mid-size companies raise equity
capital in private placements or public offerings using electronic mail and the
Internet. CIG Securities' e-finance activities focus on the Internet sector
and, more generally, on issuers who seek to market their stock offerings to
online investors. CIG Securities has established a web site at
www.cgisecurities.com to electronically market the public offerings. CIG
Securities offers and sells securities in private placements through both
traditional investment banking methods as well as using the Internet. CIG
Securities has established a password-protected page in the web site, accessible
only to its members who have previously qualified as accredited investors.
Notices of private offerings are available on the web site only to those members
who became members before the offering began.
Sales of securities made through general public solicitations, like IPOs, are
required to be registered under federal and state securities laws. However,
offerings made privately to accredited investors are generally exempt from these
registration requirements if conducted under the terms of Rule 506 of Regulation
D of the Securities Act of 1933. The term accredited investor generally
includes:
* individuals whose income exceeded $200,000 annually in each of
the past two years, and who reasonably expect their income in the
current year to also exceed $200,000,
* married couples whose joint income exceeded $300,000 annually in
each of the past two years, and who reasonably expect their joint
income in the current year to also exceed $300,000, or
* individuals whose net worth exceeds $1,000,000.
To expand CIG Securities' membership base, through its web site, CIG Securities
will solicit individuals who meet the "accredited investor" standards of the
Securities Act of 1933. This process has many steps:
14
<PAGE>
* Prospective members will be required to complete an on-line
questionnaire which will allow CIG Securities, and any potential
issuer of securities sold in a private offering by CIG
Securities, to have a reasonable basis to believe that the person
meets the accredited investor test adopted under the Securities
Act of 1933.
* The questionnaire may be completed on-line in a secured manner,
or printed out and returned to CIG Securities in a hard copy
format.
* CIG Securities will then verify the information in the
questionnaire to determine that the person is an accredited
investor.
* Once a person is qualified and registered as an accredited
investor with CIG Securities, the member will be given a
confidential password which will allow the member to access a
password-protected page in CIG Securities' web site where private
offerings will be posted.
* CIG Securities' web site allows a member access to those private
offerings which are posted after the date on which the individual
is qualified as a CIG Securities member, so that the registration
as a member is not a solicitation for a particular private
offering.
* To maintain its members privacy, CIG Securities will contact its
members about new private offerings only if the member has
previously consented to these communications as part of the
registration process.
* CIG Securities will not release the names of its members to
issuers making the private offering unless the member
specifically consents to the release to a particular issuer. This
release may be given on-line.
CIG Securities membership is free and carries no obligation. CIG Securities
presently has approximately 23,120 accredited investors who are active members.
CIG Securities offers its members the opportunity to invest in private
placements made under Rule 506 of Regulation D where it will act as the
exclusive placement agent. Before making these investments available to its
members, CIG Securities will have undertaken substantially the same type of due
diligence on the issuers as is generally conducted by other investment banking
firms. This will satisfy its obligations under applicable federal securities
laws related to the accuracy and adequacy of the information about the issuer
contained in the offering materials.
Each issuer who wants to list a private offering on CIG Securities' web site
will be required to agree to issue the securities in the private offering in
strict compliance with Regulation D. The obligation to assure compliance with
Regulation D will rest on the issuer. CIG Securities, in turn, is responsible to
comply with the various federal and state rules, and regulations related to its
activities as a broker-dealer in the offer and sale of the securities. CIG
Securities will follow basic procedures for offering and selling shares to its
members in private placements described below.
* Once the private offering memorandum has been completed by the
issuer's counsel, reviewed and approved by CIG Securities'
counsel, CIG Securities will then post a notice of private
offering in a password protected page of its web site. This page
will only be accessible to investors who became our members
before the offering began.
15
<PAGE>
* If a member is interested in receiving more information about the
private offering, the member can contact the issuer directly or
forward an indication of interest to CIG Securities, either using
an on-line form, or printing out the form and returning the hard
copy to CIG Securities.
* CIG Securities, or the issuer, will then provide the member with
subscription documents for the private offering which will also
contain instructions regarding payment for the subscription. The
issuer will have previously established an escrow account with a
commercial financial institution into which the subscription
proceeds will be deposited, pending the acceptance of the
subscription by the issuer. In all instances, the issuer has the
final decision to accept or reject a subscription from a
particular investor, or to limit the number of securities the
investor may purchase.
* Once the issuer has accepted the subscription, the escrow agent
will send the subscription funds to the issuer who will then pay
CIG Securities a commission on the sale. CIG Securities will not
accept subscription proceeds or otherwise handle subscription
funds for the issuers.
At the beginning of each private offering in which CIG Securities acts as
placement agent, CIG Securities and the issuer of the securities will enter into
a placement agreement. The placement agreement will generally contain:
- the conditions of the offering,
- the obligations of each party,
- representations and warranties by the issuer as to the accuracy
and adequacy of the information contained in the private offering
memorandum,
- a requirement that an opinion be given to CIG Securities by the
issuer's counsel regarding a variety of matters, including the
validity of the issuance of the securities, the compliance of the
offering with the requirements of Regulation D, and that the
offering materials do not contain any material misstatements or
material omissions,
- a requirement that the issuer's independent auditors review the
interim financial statements included in the private offering
documents and provide an opinion to CIG Securities that the
interim financial statements appear to be prepared in conformity
with GAAP.
CIG Securities is able to significantly reduce its overhead and administrative
costs because it uses an Internet based strategy for its e-finance business.
These reduced costs allow CIG Securities to offer a reduced commission to
issuers. We believe CIG Securities' fee structure is competitive, in that:
- CIG Securities charges a 6% commission on the sale of the
securities in the private offerings in which it acts as the
exclusive placement agent. Unlike the customary practices in the
industry for private placements in the $1 million to $5 million
range, CIG Securities' commission is below the 10% to 13%
commission charged by other investment banking firms, and
- CIG Securities does not charge the issuer a non-accountable
expense allowance, generally 3% of the offering proceeds.
16
<PAGE>
CIG Securities believes its fee structure will enable it to attract a wide
variety of companies that seek assistance to raise capital privately. We believe
this will allow CIG Securities to undertake only those private placements in
which CIG Securities, based upon its internal analysis of the issuer, including
the issuer's business, management and prospects, believes will have a greater
than average likelihood of being successful following the closing of the private
offering.
We generally will require issuers to grant CIG Securities the right of first
refusal for an IPO of the issuer, upon terms and conditions to be negotiated at
the time of the IPO. CIG Securities will only agree to act as a placement agent
in private offerings in which it believes the issuer's business model and
industry will provide an opportunity to undertake an IPO in 12 to 18 months
following the private placement.
In the future, CIG Securities may elect to expand its e-finance activities to
include public offerings. These public offerings could include those in which
CIG Securities does not act as an underwriter, but rather participates in the
selling group with other NASD member firms as a selected dealer, or offerings in
which CIG Securities acts as the underwriter. We anticipate CIG Securities basic
procedures for offering and selling shares to individual investors in public
offerings will include:
- placing a tombstone advertisement and a digital version of the
preliminary prospectus on its web site, which will include the
names of the underwriters in the public offering. This page of
the web site will be accessible to CIG Securities' members, as
well as any other potential on-line investor. In cases where CIG
Securities does not act as an underwriter, its name will not
appear on the tombstone advertisement or preliminary prospectus.
Information will appear that CIG Securities is not an underwriter
of the securities, but is authorized to accept customer orders
for the purchase of the securities.
- CIG Securities will not purchase any securities from the issuer
for resale, and will not participate in the management of the
offering or perform any function normally performed by an
underwriter or underwriting syndicate.
- the web site will contain a form linked to each preliminary
prospectus. A visitor to the site will be asked to complete and
return the form to CIG Securities indicating the visitor's
interest in purchasing the security.
- in cases where CIG Securities does not act as an underwriter, the
securities will be sold through CIG Securities as a selected
dealer. CIG Securities will receive a commission to be determined
before the offering, and it will not exceed the usual and
customary selling commission. Disclosure of these selling
arrangements will be made to investors.
We have not established general procedures as of this date in instances in which
CIG Securities may act as the underwriter.
Special considerations which may affect our e-finance division
For our e-finance division to successfully grow, investor confidence in the
United States economy and the securities markets must remain high. If the United
States economy should slow, or if the securities markets should suffer a
significant and prolonged decline, it is likely investors would stop investing
in private placements and IPOs. Our revenues are likely to be lower during
periods of declining securities prices or securities markets inactivity. Our
business will be particularly dependent upon the availability of capital in the
public and private equity markets for companies in the Internet sector - the
focus of our e-finance division. The
17
<PAGE>
stock market in general, and the market prices for Internet-related companies in
particular, have experienced extreme volatility unrelated to the operating
performance of these companies. These broad market and industry fluctuations may
adversely effect our ability to raise capital for our clients, regardless of the
client's operating performance. In this event, it would be more difficult to
increase our revenues.
Our ability to grow this division is also tied to how successfully we manage
this division, including our ability to close public offerings. Our members will
need an exit strategy from the private placements in which they may invest as
these types of investments are illiquid. Generally, this strategy will be a
public offering. We may act as lead underwriter in the public offering, or we
may refer the issuer to another investment banking firm who will undertake the
public offering, and we will participate as a member of the selling group. We
must establish relationships with other investment banking firms who can either
participate with us in these public offerings, or who have the ability to
undertake and successfully close public offerings we refer to them. In this
instance, we would likely participate as a member of the selling group. If we
are unable to successfully close public offerings, either those we underwrite or
those in which we participate as a member of the selling group, we will not earn
the potential revenues from this participation and our future growth will be
impeded.
No-action request
Because Internet investment banking is an emerging area of review and regulation
by federal securities regulators, in June 1999 our counsel submitted a no-action
request to the SEC seeking assurance that CIG Securities' proposed methods of
conducting its e-finance business would not conflict with various rules and
regulations related to private offerings and direct public offerings. CIG
Securities' no-action request was patterned after the no-action request by
IPONet which previously received favorable treatment by the SEC. CIG Securities
is presently conducting its business under the guidelines set forth in the
IPONet no-action letter. While the SEC has not responded to CIG Securities'
no-action request as of the date of this prospectus, based upon precedents
previously established by other Internet investment bankers, we believe the SEC
will concur with our counsel's conclusions in the no-action request that CIG
Securities' proposed method of conducting its e-finance business is not conflict
with the applicable rules and regulations cited in the no-action request IPONet
no-action letter. We have included a copy of this no-action request as an
exhibit to the registration statement of which this prospectus is a part.
Our B2B division
This division develops distinctive web sites, engineers software, including our
Internet viewing software, and provides business-to-business consulting
services. We own all of our designs, software products, logos, names,
applications and proprietary technologies. We internally develop and design each
of our product's source codes, graphic interfaces, and web designs.
The Internet viewing software was designed to serve as a portal and delivery
system to provide service and advertising to Internet users, and create Internet
dial-up service revenues which can be shared with our clients. We completed the
engineering and development of our Internet viewing software in August 1998, and
have begun our initial market efforts. We market our Internet viewing software
as an alternative to Netscape and Microsoft Internet Explorer, which comprise
the majority of all Internet viewing software used in the current Internet
landscape.
We developed our Internet viewing software to provide clients a means to deliver
advertisements to those interested in what the client's company has to offer.
The Internet viewing software features include our automatic update feature,
which finds changes on our servers and feeds those changes to the user's
computer when they access the Internet. This feature allows our clients to
deliver premium promotions, freebies, loss
18
<PAGE>
leaders, two-for-one sales, marketing and sales promotions, and other
information its customers may want. The Internet viewing software can also be
customized with 22 defaults to pages selected by the customer, and can include a
custom name, slogan, theme, licensee's color scheme, logo identity, and animated
picture.
Our research and development expenses are expensed as incurred. The following
table provides information on our research and development expenses for the
periods indicated:
Fiscal year ended December 31, 1997 $6,844
Fiscal year ended December 31, 1998 $1,356
Nine months ended September 30, 1999 $ 0
Our web design services include developing, maintaining, and promoting a
user-friendly web site. Our web site designs can incorporate web site placement
technology, secured e-commerce transactions, elaborate statistic compilers,
animation, visual programming language, audio/visual compression software, and
sophisticated 3-D technology.
We offer a menu of business-to-business consulting services to assist companies
in many aspects of their business, including:
* Business plan development, including assistance in creating and
revising the client's business plan to accurately articulate
corporate intentions;
* Internet marketing strategy development to define business models
and branding strategies;
* Web site design to create a user-friendly a web site using
original content and design;
* Technology support to provide secure e-commerce business between
the client's customers and the client, and to construct and
maintain employee communication systems including the client's
networks and servers;
* Evaluation of professionals to ensure the client is properly
represented by attorneys and accountants with experience in all
areas of the client's current and proposed business and
operations;
* Debt management to assist the client to reduce or restructure the
client's debt to improve the client's valuation;
* Operations consulting to assist management in using the Internet
for day to day operations, and in the understanding, analyzing,
and management of the client's intellectual assets;
* Human resources consulting to help promote a management
philosophy and organizational structure tailored towards teamwork
and group contributions;
* Corporate communications to enhance the client's presentation;
* Sales training to assist management in proper sales techniques;
* Negotiation training;
19
<PAGE>
* Strategic networking to assist the client in linking its name
with beneficial contacts; and
* Strategy and planning consulting to assist the client in
identifying and analyzing market opportunities, as well as
anticipating competitive behavior.
We focus our business-to-business consulting solutions on providing economical
and cost-efficient services to developmental stage, technology companies. We
recognize that many of our potential clients may not have sufficient cash
available to pay the full value for these services. We have developed a
compensation structure which is a combination of restricted stock and a small
amount of cash. We believe this fee structure makes our services desirable to
developmental stage companies. We also believe that this fee structure will give
our shareholders an opportunity to benefit from the potential increased value of
a client's stock should the client ultimately be successful in its business.
The scope of business-to-business consulting services rendered by our B2B
division is limited to activities which do not require the registration of
Circle Group Internet as a broker-dealer. The offer and sale of a client's
securities, or other activities which would require registration as a
broker-dealer, will be undertaken by our e-finance division.
Our e-tailer division
On-Line Bedding distributes a wide variety of bedding and disposable products,
including:
- pillows
- blankets
- mattress pads
- pillow protectors and mattresses
- disposable airline sized pillows
- disposable pillowcases
- headrest covers
- airline blankets
- tray table covers
- napkins
- airsick bags
- hot and cold towels
Its customers include hospitals, nursing homes, hotels and motels, and
transportation-based companies like airlines, railroads, and motor coach
companies. On-Line Bedding's customers have included AMTRAK, Canadian Airlines,
Saudi Arabian Airlines, Piedmont Airlines, USAirways, Sunworld International,
and Laker Airline. On-Line Bedding does not have written contracts with its
customers. On-Line Bedding receives orders from its customers either verbally or
in the form of cancellable purchase orders.
Since our purchase of On-Line Bedding, we developed an e-commerce site to expand
On-Line Bedding's current operations. This web site, www.bedsandbeyond.com,
offers single and multi-pack quantities of pillows, blankets, mattress pads,
quilts, mattresses, and other products at factory direct prices.
On-Line Bedding purchases its products from various wholesale manufacturers, and
contracts production of its airline pillows and blankets with third party
manufacturers. On-Line Bedding maintains several sources for its products and
has never experienced any difficulty in obtaining raw materials. On-Line Bedding
warehouses a
20
<PAGE>
limited inventory, and drop ships its products from manufacturers or wholesale
suppliers in multiple locations in the United States to reduce freight costs for
its customers.
On-Line Bedding is on an electronic invoice system with the United States
military for a specialty pillow which is regularly purchased by the U.S. armed
forces. This pillow is anti-bacterial, self-deodorizing and fire retardant. It
is covered with a zippered, vinyl pillow protector. On-Line Bedding is also the
authorized pillow and related product vendor for Hospital Purchasing Service of
Michigan - a group of 500-plus members in eight states of hospitals and nursing
homes.
On-Line Bedding has historically direct marketed its products through regular
mailings of its catalog to existing customers, as well as hospitals, nursing
homes, airlines, and university housing directors. We anticipate expansion in
our marketing efforts using traditional marketing methods, the introduction of
our e-commerce site, and web-based marketing strategies. These include strategic
web site placement, keyword targeting, affiliate linking, and other on-line
promotional strategies.
Additional proposed activities
Our business and operations are located in Illinois. Based upon our research, we
believe a niche exists within Illinois to assist technology start-ups with their
capital needs. In addition to the activities of CIG Securities, in September
1999 we decided to create a new fund to invest in Illinois technology companies.
We have allocated $1 million of our working capital as an investment in this
to-be-created fund, with a target of raising $100 million from accredited and
institutional investors. We are currently reviewing a variety of structure
options for this fund, including those which will permit investments at the
state and federal level. As of the date of this prospectus we have not decided
on the structure, nor have we begun raising outside capital for this fund. We
have not identified any companies in which the to-be-created fund may invest, or
the structure of these future investments. Based upon the complexity of
establishing this fund, and the time involved in raising the additional capital
from outside investors, we cannot presently predict when this to-be-created fund
will begin making investments in Illinois technology companies, if ever.
Our intellectual property
Our success depends in part on our ability to protect our intellectual property.
To protect our proprietary rights, we rely generally on:
- copyright, trademark and trade secret laws,
- confidentiality and invention assignment agreements with
employees, and
- license agreements with vendors and customers.
We pursue the registration of our trademarks and service marks in the United
States. Although we have not secured registration of all our marks, we have made
application to the U.S. Patent and Trademark Office to register the FUNDS-IN
trademark. The laws of some foreign countries do not protect our proprietary
rights to the same extent as do the United States laws. In addition, effective
copyright, trademark and trade secret protection may be unavailable in foreign
jurisdictions. In general, there can be no assurance that our efforts to protect
our intellectual property rights through copyright, trademark and trade secret
laws will be effective to prevent misappropriation of our intellectual property.
Our failure or inability to protect our proprietary rights could materially
adversely effect our business, financial condition, and results of operations by
lessening the value of the intellectual property and possibly increasing
competition.
21
<PAGE>
Competition
Our e-finance division competes with numerous other securities and investment
banking firms. In particular, we compete with Internet investment bankers like
Wit Capital Corporation and W.R. Hambrecht & Company, LLC. which also focus
their efforts on Internet based offerings. Most of our competitors have
substantially greater capital, resources, experience, and name recognition.
In the event we should expand CIG Securities' operations to include wholesale
and/or retail trading, our competition would expand to established
broker-dealers. The wholesale execution business has become considerably more
competitive over the past few years as numerous highly visible, large, and
well-financed securities firms have expanded their businesses. In addition,
companies not engaged primarily in the securities business, but having
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with capital resources
greater than those of CIG Securities. The retail securities industry has
experienced substantial commission discounting by broker-dealers who compete for
institutional and individual brokerage business. In addition, an increasing
number of specialized firms and commercial banks now offer discount services to
individual customers. These firms generally conduct transactions for their
customers on an execution only basis without offering other services like
portfolio valuation, investment recommendations, and research.
Commercial banks and other financial institutions have become a competitive
factor by offering their customers corporate and individual financial services
traditionally provided by securities firms. The current trend toward
consolidation in the commercial banking industry could further increase
competition in all aspects of CIG Securities' business and could effect the
opportunities for CIG Securities to expand its operations. The Federal Reserve
Board has approved applications of several leading commercial banks to
underwrite some types of securities which commercial banks have previously been
prohibited to underwrite. Commercial banks generally are expanding their
securities activities, as well as their activities relating to the provision of
financial services. While it is not possible to predict the type and extent of
competitive services which commercial banks and other financial institutions
ultimately may offer, or whether administrative or legislative barriers will be
repealed or modified, securities firms like CIG Securities may be adversely
affected.
Competition effecting our B2B division is substantial. The market for Internet
products, particularly Internet advertising and Internet search and retrieval
services, is intensely competitive. The two primary competitors for our Internet
viewing software are Netscape and Microsoft Internet Explorer. Currently,
Netscape and Internet Explorer control over 90% of the Internet viewing software
market. Since there are no substantial barriers to entry, we expect competition
in these markets to intensify.
To compete with the established web designers, we use unique concepts to
increase the likelihood that visitors to a client's web site will be interested
in what they see, and have a reason to return. These concepts include:
* user-friendly web sites
* novel approaches to design work
* quick access to what the viewer wants
* emphasis on single page web sites to make viewing easier
* artistically pleasing layouts custom tailored to client needs
Many professionals, including other consulting firms, attorneys, and
accountants, offer business-to-business consulting services similar to those
offered by our B2B division. To provide a competitive advantage, we developed a
compensation package for our clients which is a combination of restricted common
stock and cash.
22
<PAGE>
We believe this compensation structure will be attractive to our potential
clients and provide us with some degree of competitive advantage.
Our existing competitors, as well as a number of potential new competitors, may
have longer operating histories in the Internet market, greater name
recognition, larger customer bases and databases, and significantly greater
financial, technical and marketing resources. These competitors may be able to
undertake more extensive marketing campaigns, and make more attractive offers to
potential employees, distribution partners, advertisers, and content providers.
There can be no assurance that we will be able to compete successfully against
our current or future competitors.
On-Line Bedding has historically competed with a variety of wholesale
distributors of similar products, including Celeste Industries Corporation and
Baxter Laboratories. Many of On-Line Bedding's competitors are more
established, better capitalized, and offer a wider variety of product offerings.
With our planned expansion of On-Line Bedding with its e-commerce site, On-Line
Bedding will compete with numerous other companies to offer similar products on
the web. We believe that by building on the combination of On-Line Bedding's
competitive pricing, prompt delivery of products, established customer base, use
of Internet for ordering and marketing, and dedication to customer service, we
will be able to effectively compete in the e-commerce area of its industry.
Government regulation
Although there are currently few laws and regulations directly applicable to the
Internet, it is likely that new laws and regulations will be adopted in the
United States and elsewhere that cover a variety of issues including:
- broadcast license fees
- copyrights
- privacy
- pricing
- sales taxes
- characteristics and quality of Internet services
It is possible that governments will enact legislation that may be applicable to
us in areas including:
- content
- network security
- encryption and the use of key escrow, data and privacy protection
- electronic authentication or "digital" signatures
- illegal and harmful content
- access charges
- retransmission activities
The applicability to the Internet of existing laws governing a variety of
issues, including property ownership, content, taxation, defamation, and
personal privacy is uncertain. The majority of these laws were adopted before
the widespread use and commercialization of the Internet, and do not contemplate
or address the unique issues of the Internet and related technologies. Any
export or import restrictions, new legislation or regulation, or governmental
enforcement of existing regulations may increase our cost of doing business or
increase our legal exposure.
23
<PAGE>
The securities industry in the United States is extensively regulated under
federal and state laws. The SEC is a federal agency charged with administration
of the federal securities laws. Much of the regulation of broker-dealers,
however, has been delegated to self-regulatory organizations, principally the
NASD and the stock exchanges. These self-regulatory organizations adopt rules,
which must be approved by the SEC, to govern the industry. These self-regulatory
organizations conduct periodic examinations of member broker-dealers. Securities
firms are also regulated by state securities commissions in the states in which
they do business.
Broker-dealers must follow rules which cover all aspects of the securities
business, including:
- sales methods
- trading practices among broker-dealers
- capital structure of securities firms
- record keeping
- the conduct of directors, officers, and employees
The broker-dealer's operations and profitability are often directly effected by
additional legislation, changes in rules adopted by the SEC and self-regulatory
organizations, or changes in the interpretation or enforcement of existing laws
and rules. The SEC, the self-regulatory authorities, and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, suspension or expulsion of a broker-dealer, along with its officers and/or
employees. Regardless of the findings, administrative proceedings may require
substantial expenditures. The principal purpose of regulation and discipline of
broker-dealers is for the protection of customers and the securities markets,
rather than for the protection of creditors and stockholders of broker-dealers.
CIG Securities is required by federal law to belong to the Securities Investor
Protection Corporation, or SIPC. When the SIPC fund falls below a minimum
amount, members are required to pay annual assessments. CIG Securities is
required to contribute to the SIPC fund. The SIPC fund provides protection for
securities held in customer accounts up to $500,000 per customer, with a
limitation of $100,000 on claims for cash balances. SIPC provides protection for
customers in the event of the insolvency of CIG Securities or, at the time as it
might expand its operations to include retail or wholesale trading, of its
clearing brokerage company. The annual SIPC fee is $150. This fee will remain
unchanged unless SIPC makes across the board increases which will effect all
broker-dealers.
CIG Securities must follow the SEC's Uniform Net Capital Rule, Rule 15c3-1 which
is designed to measure the financial integrity and liquidity of a broker-dealer
and the minimum net capital deemed necessary to meet its commitments to its
customers. Rule 15c3-1 provides that a broker-dealer doing business with the
public must not permit its aggregate indebtedness to exceed 15 times its net
capital or, alternatively, that it not permit its net capital to be less than 2%
of aggregate debit items as calculated by the rule.
Net capital rules, which are unique to the securities industry, impose financial
restrictions upon our business that are more severe than those imposed on other
types of businesses. Compliance with the net capital rules may limit the
operations of CIG Securities because they require minimum capital for purposes
like financing customer account balances, underwriting securities distributions,
and maintaining the inventory required for trading in securities. In addition,
we are restricted in the withdrawal of equity capital, and subordinated loans,
which may not be made if the withdrawal would impair net capital requirements.
As of this date, CIG Securities is required to maintain a minimum net capital of
$5,000. As of September 30, 1999, it had total net capital of $31,263, or
$26,263 in excess of the minimum net capital required. The minimum net capital
required is based upon the nature of CIG Securities' broker dealer business. If
CIG
24
<PAGE>
Securities remains principally engaged in the offer and sale of private
placement securities, then its net capital requirements remain at a minimum. In
the event CIG Securities ever becomes involved in the participation in public
underwritings, then net capital requirements will be increased to a minimum of
$100,000.
CIG Securities is in compliance with the Rule 15c3-1, as well as the applicable
minimum net capital requirements of the NASD. However, at the present time CIG
Securities has no customer accounts and, accordingly, compliance is based upon
meeting the minimum net capital requirements of the NASD. While we do not
presently anticipate CIG Securities will undertake retail brokerage operations,
we may choose to do so in the future.
If we elect to operate as a retail stockbroker, we would be required to increase
CIG Securities' net capital beyond the existing $5,000 minimum required net
capital. In computing net capital under Rule 15c3-1, various adjustments are
made to net worth to exclude assets not readily convertible into cash, and to
provide a conservative statement of other assets, like a firm's position in
securities. A deduction is made against the market value of securities to
reflect the possibility of a market decline before their disposition. For every
dollar that net capital is reduced, by means of these deductions or through
other deductions like operating losses or capital distributions, the maximum
aggregate debit items a firm may carry is reduced.
Any failure to maintain the required net capital may subject a broker-dealer to
suspension by the SEC or other regulatory bodies, and may ultimately require its
liquidation.
Facilities
Our principal offices are located in approximately 22,000 square feet of
commercial office space at 1011 Campus Drive, Mundelein, Illinois 60060. We
lease this space from an unrelated third party under two separate lease
agreements. Under the five year leases dated May 1999 and June 1999, we pay an
annual aggregate rent of approximately $95,730 during the first year, and
approximately $142,560 annually during the remaining four years of the lease
terms. We also pay a pro-rata share of common area maintenance and real estate
taxes. We have an option to renew our lease for an additional five year term at
annual rental payments beginning at $63,600 in the first year escalating to
$73,140 in the fifth year of the renewal term for approximately 9,325 square
feet of the space, with the balance to be at the then current market rate at the
time of renewal.
25
<PAGE>
Employees
As of November 30, 1999, we employ 38 persons, 35 full-time and three part-time.
The following table illustrates the breakdown of our employees by employer:
Name of employer Number of employees
Full-time Part-time
--------- ---------
Circle Group Internet 27 3
On-Line Bedding 3 0
CIG Securities 6 0
PPI Capital 0 0
None of our employees are represented by a labor union, and we are not governed
by any collective bargaining agreements. We have a satisfactory relationship
with our employees.
We presently plan to expand our employee base through the addition of
approximately 10 new employees including personnel for our e-finance and B2B
divisions. We also will seek to expand our management personnel.
Legal proceedings
We are not a party to any material legal proceedings.
How to get more information
We have filed with the SEC a registration statement on Form SB-2 which can be
read and copied at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Information about the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330. The registration statement is also available to the public from
commercial document retrieval services, or via EDGAR on the SEC's web site at
www.sec.gov.
Before the date of this prospectus we have been a non-reporting company under
the Securities Exchange Act of 1934. Upon effectiveness of the registration
statement, we will begin filing quarterly, annual and other reports with the
SEC. We intend to furnish our stockholders with annual reports, which will
include financial statements audited by independent accountants, and other
periodic reports as we may chose to provide, or as we are required by law.
26
<PAGE>
MANAGEMENT
Executive officers and directors
The following table sets forth the names, positions and ages of our executive
officers and directors.
<TABLE>
<CAPTION>
Name Age Positions Held
- ---- --- --------------
<S> <C> <C>
Gregory J. Halpern 41 Chairman and Chief Executive Officer
Frank K. Menon 35 Director and President
Dana L. Dabney 49 Director, Vice President of Human
Resources
Arthur C. Tanner 34 Chief Financial Officer
Michael J. Theriault 46 Chief Operating Officer
Edward L. Halpern 69 Director
Erik Brown 24 Vice President of Corporate
Development and President of CIG
Securities, Inc.
Charles S. Blumenfield 49 Director
Doron C. Levitas 41 Director
</TABLE>
Gregory J. Halpern is our founder and has been a director and chief executive
officer since our formation in May 1994. From May 1994 until March 1999, he also
served as our president. From 1981 to 1988, Mr. Halpern was a co-founder, member
of the board of directors and vice president of On-Line Bedding Corporation, a
company that distributes a wide variety of bedding and disposable products which
we acquired in January 1999. In 1984 he was co-founded Pain Prevention, Inc., an
Illinois company which sold electronic dental anesthesia for which Mr. Halpern
holds a patent. Pain Prevention, Inc. discontinued its operations in 1989 and
subsequently changed its name to PPI Capital Corp. We acquired 80% of the issued
and outstanding capital stock of PPI Capital in March 1999 from Mr. Halpern. Mr.
Halpern has served as an officer and director of PPI Capital since its inception
in 1984. Mr. Halpern also served as an officer and director of PPI Capital
Group, Inc., a Utah corporation of which he was a principal shareholder, from
1989 to May 1998. At the present time, PPI Capital, our subsidiary, and PPI
Capital Group, Inc. have no affiliation. Mr. Halpern developed clinical
protocols, and received two separate FDA clearances to market the technology.
From 1984 to June 1987, he was a director and the president of O.M. Corp., a
company which distributes proprietary computer animated health imaging video
products created by Mr. Halpern. Mr. Halpern has been a feature of more than 100
TV shows, newspapers, national magazines, and radio and is also a published
author of self-help books and an International Judo Champion. Gregory J. Halpern
is the son of Edward L. Halpern.
Frank K. Menon has been our president since March 1999 and a director since
February 1999. Mr. Menon previously served as our vice president of finance from
January 1999 until being elected president. Mr. Menon's
27
<PAGE>
background is in the securities industry, where he was a broker at Merrill
Lynch, Pierce, Fenner & Smith from 1992 to 1993, and a broker at J.E. Liss &
Company, Inc. from 1993 to 1995. Mr. Menon was Director of Finance for Invest
L'Inc. Partners, from 1995 to 1997. During 1998 Mr. Menon invested for his own
account. From 1996 until 1998, Mr. Menon served on the board of directors for
All Cajun Food Company.
Dana L. Dabney has been a member of our board of directors and has held various
offices, including vice president of sales and marketing, since January 1997.
Mr. Dabney has been our vice president of human resources since June 1999.
During our first two years of development, Mr. Dabney also was employed as a
mortgage broker. From 1994 until December 1997 he was employed by State
Financial Bank in Richmond, Illinois, which was formerly known as Richmond Bank,
and from January 1998 until December 1998 he was employed by Mortgage Market
Corporation, also in Illinois. From 1989 to 1995, Mr. Dabney was the president
of Across America Telemarketing Company, a company involved in the telemarketing
of retail consumer products. Mr. Dabney has also worked in the securities
industry. He was employed by Carl Icahn and Company from 1979 to 1984 as the
firm's primary options trader, and from 1984 to 1989 as a Market Maker, on the
Chicago Board Options Exchange.
Arthur C. Tanner has been our chief financial officer since March 1999. From
November 1998 until joining Circle Group Internet, he was vice president and
controller for UBM, Inc., a construction company with $50 million in annual
revenues. From October 1997 until September 1998, Mr. Tanner was a financial
consultant with Merrill Lynch, Pierce, Fenner & Smith Incorporated, and from
February 1997 until September 1997, he was a tax principal with R. Yeager & Co.,
certified public accountants, where his responsibilities included public
accounting, tax, and audit work. From October 1995 until December 1996, Mr.
Tanner was an international tax planner for Silicon Graphics Computer Systems,
where his responsibilities included planning and execution of international tax
strategies. Mr. Tanner received a B.A. from Walsh College in 1987 and a J.D.
from Ohio State University in 1995.
Michael J. Theriault has been our chief operating officer since June 1999. Mr.
Theriault professional experience includes progressive operations, programming,
design, support, consulting, project management, and department management
experience in manufacturing, insurance, medical, consulting, and mortgage
banking industries on both mainframe and personal computer equipment. From
September 1989 until June 1997, Mr. Theriault was employed by Recon Optical,
Inc., serving as Supervisor of Business Systems from June 1997 until May 1999,
and Senior Systems and Programming Specialist and Senior Project Leader of
Manufacturing from September 1989 until June 1997. Mr. Theriault received a B.S.
in Computer Science and Business Management from Northeastern Illinois
University in 1978 and an M.B.A. from Lake Forest Graduate School of Management
in 1987.
Edward L. Halpern has been a director since January 1999 and served as our COO
from January 1999 until March 1999. Mr. Halpern founded On-Line Bedding in 1981
and served as its president and CEO. He has continued his duties with On-Line
Bedding since our acquisition of it in January 1999. Edward L. Halpern is the
father of Gregory J. Halpern.
Erik Brown has been our vice president of corporate development since March 1999
and is president of CIG Securities since May 1999. Mr. Brown was a Financial
Consultant in the Private Client Group at Merrill Lynch, Pierce, Fenner & Smith
from August 1997 to March 1999. He earned a degree in finance in 1997 from the
Eli Broad College of Business, Michigan State University.
Charles S. Blumenfield has been a member of our board of directors since March
1999. Mr. Blumenfield, an attorney, has been a Municipal Judge for the Village
of Bayside, Wisconsin since 1986, and a member of firm of Shneidman, Myers,
Dowling, Blumenfield, Ehlke, Hawks & Domer since 1977. Mr. Blumenfield has been
a
28
<PAGE>
partner of the firm since 1980. From 1974 to 1977, Mr. Blumenfield was
Assistant District Attorney for Milwaukee County, Wisconsin. Mr. Blumenfield is
actively involved in many professional associations and committees, including as
president of the Wisconsin Municipal Judges Association from 1991 to 1993, a
member of the Wisconsin Supreme Court, Office of Judicial Education, Judicial
Manual Committee since 1994, Governor of the State Bar of Wisconsin since 1992,
and a board Member of the Wisconsin Academy of Trial Lawyers since 1988. Mr.
Blumenfield received a B.A. in Political Science and Hebrew from the University
of Wisconsin-Milwaukee in 1971 and a J.D. from the University of Wisconsin in
1974.
Doron C. Levitas has been a member of the board of directors since June 1999.
Mr. Levitas co-founded Sabratek Corporation, Nasdaq NMS: SBTK, in 1989 and has
served as vice chairman of the board and secretary since 1994, vice president of
international operations since 1993 and chief administrative officer since 1998.
Sabratek Corporation, a web-enabled clinical connectivity company consisting of
eight divisions and subsidiaries, develops, produces and markets interactive,
Internet enabled medical systems. From 1986 to 1988, Mr. Levitas served as
president of a division of Chicago-based Andeans of Illinois, Inc., a medical
supplies company which assembled and marketed hospital operating room supply
kits. From 1984 to 1986, Mr. Levitas served as president of Headings, Inc., an
international apparel marketing firm based in New York, New York which was later
sold to Andeans of Illinois. Mr. Levitas received a B.A. in International
Business and Finance from Baruch College in New York. In 1998, Mr. Levitas was
co-named Illinois High Tech Entrepreneur of the Year.
Other than the father-son relationship between Mr. Edward L. Halpern and Mr.
Gregory J. Halpern described above, there is no family relationship between any
of our executive officers and directors. Each director is elected at our annual
meeting of shareholders and holds office until the next annual meeting of
shareholders, or until his successor is elected and qualified. Officers are
elected annually by the board of directors and their terms of office are at the
discretion of the board. Our officers devote their full time to our business.
Committees of the board of directors
In July 1999 we established an audit committee and a compensation committee of
our board of directors. The audit committee will recommend the firm to be
employed as our independent public accountants, and will review the scope of the
audit and audit fees. In addition, the audit committee will consult with the
independent auditors with regard to the plan of audit, the audit report and the
management letter, and will confer with the independent auditors with regard to
the adequacy of internal accounting controls, as appropriate, out of the
presence of management. The members of the audit committee are Messrs. Gregory
J. Halpern, Blumenfield and Levitas.
The compensation committee will administer our 1999 Stock Option Plan, and is
charged with monitoring, reporting and recommending to the board of directors on
all matters concerning compensation and benefits of our executive officers and
senior staff. The compensation committee consists of Messrs. Gregory J. Halpern,
Blumenfield and Levitas; in matters considered by the compensation committee
which directly relate to Mr. Gregory J. Halpern, the compensation committee
consists of Messrs. Menon, Blumenfield and Levitas.
29
<PAGE>
Employment agreements
To ensure their continued contribution to our growth and development, we have
entered into employment agreements with our executive officers. The material
terms of each are described below.
Gregory J. Halpern. We are a party to a three year employment agreement with Mr.
Halpern which expires in January 2002. Mr. Halpern is paid an annual salary of
$76,000, and we granted him 30,000 stock options exercisable at $2.50 per share
under our 1999 Stock Option Plan that expire in January 2003.
Frank K. Menon. We are a party to a three year employment agreement with Mr.
Menon which expires in February 2002. Mr. Menon is paid an annual salary of
$72,000, and we granted him 40,000 stock options exercisable at $2.50 per share
under our 1999 Stock Option Plan that expire in February 2002. We also issued
Mr. Menon 10,000 shares of our common stock as a signing bonus.
Dana L. Dabney. We are a party to a three year employment agreement with Mr.
Dabney, which expires in January 2002. Mr. Dabney is paid an annual salary of
$60,000, and we granted him 24,000 stock options exercisable at $2.50 per share
under our 1999 Stock Option Plan that expire in January 2003.
Arthur C. Tanner. We are a party to a three year employment agreement with Mr.
Tanner which expires in March 2002. Mr. Tanner is paid an annual salary of
$60,000, and we granted him 20,000 stock options exercisable at $2.50 per share
which expire in March 2002. We subsequently granted Mr. Tanner an additional
10,000 stock options exercisable at $10.00 per share which expire in July 2003.
All of these options were granted under our 1999 Stock Option Plan. We also
issued Mr. Tanner 10,000 shares of our common stock as a signing bonus.
Michael J. Theriault. We are a party to a three year employment agreement with
Mr. Theriault which expires in June 2002. Mr. Theriault is paid an annual salary
of $68,000, and we granted him 20,000 stock options exercisable at $10.00 per
share. We subsequently granted Mr. Theriault an additional 10,000 stock options
exercisable at $10.00 per share. All of these options were granted under our
1999 Stock Option Plan and expire in June 2003. We also issued Mr. Theriault
10,000 shares of our common stock as a signing bonus.
Erik J. Brown. We are a party to a three year employment agreement with Mr.
Brown which expires in March 2002. Mr. Brown is paid an annual salary of
$42,500, and we granted him 20,000 stock options exercisable at $2.50 per share.
We subsequently granted Mr. Brown an additional 10,000 stock options exercisable
at $10.00 per share. All of these stock options were granted under our 1999
Stock Option Plan and expire in March 2002. We also issued Mr. Brown 10,000
shares of our common stock as a signing bonus.
All of these employment agreements also provide, among other things:
- participation in any profit-sharing or retirement plan and in
other employee benefits applicable to our employees and
executives;
- benefits in the event of disability or death; and
- contain non-disclosure and non-competition provisions. A state
court, however, may determine not to enforce, or only
partially enforce, the non-compete provisions of these
employment agreements.
30
<PAGE>
Under the terms of the employment agreements, we may terminate the employment of
the employee with cause, as defined in the employment agreement, in which event
he would receive no severance benefits.
Key-man insurance
We are the beneficiary of a $5 million life insurance policy on the life of Mr.
Gregory Halpern.
Executive compensation
We began our operations in 1997. The following table summarizes all compensation
accrued and paid by us in each of the last two fiscal years to our chief
executive officer and each other executive officer serving as executive officers
whose annual compensation exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Compensation Awards
Options
Name and Other Annual Number of All Other
Principal Position Year Salary Bonus Compensation Shares Compensation
- ------------------ ---- ------ ----- ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gregory J. Halpern 1997 $88,903 0 0 0 0
1998 $76,000 0 0 0 0
</TABLE>
Of the total $88,903 reported for Mr. Halpern for 1997, $12,903 represents
actual compensation paid to him and the balance of $52,000 represents the
estimate of the fair value of his services to us for which he did not receive
compensation. The $88,903 has been recognized by us as an expense during 1997.
We did not pay Mr. Halpern any compensation for services he rendered to us in
1998. The amount in the above table represents our estimate of the fair value of
the services and this amount has been recognized by us as an expense during
1998.
Directors compensation
In August 1999, we adopted a compensation policy for our outside directors,
which includes:
* options will be granted annually under our 1999 Stock Option
Plan to purchase 15,000 shares of our common stock,
exercisable at the fair market value on the date of grant, to
each outside director;
* these options will vest at the rate of 5,000 options on each
of the first, second and third anniversary date of the grant
date, and will be exercisable for three years from the grant
date,
* directors and officers insurance coverage in an amount
reasonably acceptable to us, and
* reimbursement for all reasonable out-of-pocket expenses the
outside director incurs in attending our board of directors
meetings.
Messrs. Blumenfield and Levitas are currently our outside directors. We granted
each of them 15,000 options, exercisable at $10.00 per share, as compensation
for their board service.
Members of our board of directors who are our executive officers do not receive
any additional compensation for their services to us in their capacity as a
member of our board of directors, other than coverage under our directors and
officers insurance policy.
31
<PAGE>
1999 Incentive Stock Option Plan
On January 1, 1999 our board of directors and a majority of our stockholders
adopted the Circle Group Internet, Inc. 1999 Stock Option Plan. The purpose of
the plan is to increase the employees', advisors and non-employee directors'
proprietary interest in Circle Group Internet, and to align more closely their
interests with the interests of our stockholders. An additional purpose of the
plan is also to enable us to attract and retain the services of experienced and
highly qualified employees and non-employee directors.
We have reserved an aggregate of 1,000,000 shares of common stock for issuance
upon the exercise of options granted under the plan. As of the date of this
prospectus, grants for 319,000 under the plan are outstanding. The compensation
committee of the board of directors will administer the plan including the
selection of the persons who will be granted plan options under the plan, the
type of plan options to be granted, the number of shares which may be granted
under each plan option and the plan option price.
Plan options granted under the plan include:
- incentive stock options under Section 422 of the Internal
Revenue Code of 1986,
- non-qualified options, and
- reload options, which permit an eligible person to pay the
exercise price of the plan option with shares of common stock
owned by the eligible person, and receive a new plan option to
purchase shares of common stock equal in number to the
tendered shares.
Any incentive option granted under the plan must provide for an exercise price
of at least 100% of the fair market value of the underlying shares on the date
of grant, but the exercise price of any incentive option granted to an eligible
employee owning more than 10% of our common stock must be at least 110% of the
fair market value as determined on the date of the grant.
The term of each plan option and the manner in which it may be exercised is
determined by the compensation committee of the board of directors, provided
that no plan option may be exercisable more than 10 years after the date of its
grant and, in the case of an incentive option granted to an eligible employee
owning more than 10% of our common stock, no more than five years after the date
of the grant. The exercise price of non-qualified options shall be determined by
compensation committee of the board of directors.
The per share purchase price of shares in plan options granted under the plan
may be adjusted in the event of changes in our capitalization, but any
adjustment will not change the total purchase price payable upon the exercise in
full of plan options granted under the plan. Our officers, directors and key
employees will be eligible to receive non-qualified options under the plan. Only
our officers, directors and employees who are employed by us, including any
subsidiary, are eligible to receive incentive options.
All plan options are non-assignable and nontransferable, except by will or by
the laws of descent and distribution. Plan options may only be exercised by the
optionee during the lifetime of the optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, the plan option granted to him shall lapse to the extent unexercised on
the earlier of the expiration date or 30 days following the date of termination.
If the optionee dies during the term of his employment, the plan option granted
to him shall lapse to the extent unexercised on the earlier of the expiration
date of the plan option or the date one year following the date of the
optionee's death. If the optionee is permanently and totally disabled within the
meaning of Section 22(c)(3) of the Internal Revenue Code, the plan option
granted to him lapses to
32
<PAGE>
the extent unexercised on the earlier of the expiration date of the option or
one year following the date of the disability. The same type of termination
provisions apply to options granted to our board members in the event they
resign their board seats, or are not reelected by our shareholders.
The board of directors or the compensation committee of the board of directors
may amend, suspend or terminate the plan at any time, except that no amendment
shall be made which:
- increases the total number of shares which we may granted
under the plan or changes the minimum purchase price, except
in either case in the event of adjustments due to changes in
our capitalization,
- effects outstanding plan options or any of their exercise
rights,
- extends the term of any plan option beyond 10 years, or
- extends the termination date of the plan.
Unless the plan shall have been suspended or terminated, the plan shall
terminate on approximately 10 years from the date of the plan's adoption. Any
termination of the plan shall not affect the validity of any plan options
previously granted.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Illinois Business Corporations Act provides for indemnification of
directors, employees, officers and agents of Illinois corporations. Our articles
of incorporation and bylaws provide that we shall indemnify our directors and
officers to the fullest extent permitted by the Illinois Business Corporation
Act. Because indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers or persons by these provisions,
we have been informed that, in the opinion of the SEC, indemnification is
against public policy as expressed and the Securities Act of 1933 and is
therefore unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1997 Mr. Gregory Halpern received 6,494,000 shares and Mr. Dana Dabney
received 500,000 shares of our common stock for the nominal consideration of par
value $.0001 per share as founders of Circle Group Internet. Messrs. Gregory
Halpern and Dabney as its founders are considered promoters of Circle Group
Internet, and the stock was issued to them in connection with the organization
of Circle Group Internet.
During fiscal 1997 we established a note payable in the principal amount of
$16,403 to Mr. Gregory J. Halpern, our founder and CEO, to purchase furniture
and fixtures, including computer equipment for our offices. The note provided
for interest at 18% per annum and was unsecured. We repaid the note in full
before December 31, 1998.
From January 1997 until July 1999, we leased office space from Mr. Gregory J.
Halpern at a monthly rental amount of approximately $2,700. This office location
was within Mr. Halpern's residence.
In January 1999, we acquired 100% of the issued and outstanding stock of On-Line
Bedding from Mr. Edward L. Halpern, one of our officers and directors, and his
wife in exchange for 400,000 shares of our common stock. Mr. Gregory J. Halpern,
our president and CEO, was a co-founder of On-Line Bedding. We accounted for our
acquisition of On-Line Bedding as a combination of related party interest
interests. For accounting purposes,
33
<PAGE>
we have recorded a dividend of $954,214 which represents the excess of the
purchase price paid over the net assets we received.
On-Line Bedding was an S corporation prior to our acquisition of its capital
stock. On-Line Bedding distributed all of its retained earnings to its
shareholders at the end of each fiscal year. Total distributions for the fiscal
years ended December 31, 1998 and 1997 were $275,709 and $72,033. At June 30,
1999 we owed Mr. and Mrs. Edward Halpern $80,018 which represented shareholder
distributions prior to our acquisition of On-Line Bedding. We have issued Mr.
and Mrs. Edward Halpern a demand promissory note bearing interest at 8% per
annum.
In addition, in March 1999 we acquired 3,200,000 shares of the common stock, or
approximately 80% of the issued and outstanding capital stock of PPI Capital, a
shell corporation, from Mr. Gregory J. Halpern, one of our officers and
directors, in exchange for $20,000. The remaining approximate 20% of PPI Capital
is owned by the shareholders of Pain Prevention, Inc., a Utah corporation which
was formerly PPI Capital's sole shareholder. Mr. Dana Dabney, one of our
officers and directors, owns 70,286 shares, or approximately 1.7% of the
remaining 20% of PPI Capital's stock not owned by Circle Group Internet . We
anticipate that we will use PPI Capital as either a holding company or as a
candidate for a reverse merger with an operating entity. We do not, however,
presently have any agreements or understandings with any third parties regarding
PPI Capital.
As a term of employment agreements we have with four of our executive officers,
we issued each of these individuals shares of our common stock as a signing
bonus. The following table sets forth the names, date of issuance and the number
of shares issued to each individual and value attributed to the shares issued.
<TABLE>
<CAPTION>
Name Date No. of Shares Value Attributed
- ---- ---- ------------- ----------------
<S> <C> <C> <C>
Frank K. Menon February 1, 1999 10,000 $ 25,000
Erik J. Brown March 1, 1999 10,000 $ 25,000
Arthur C. Tanner March 1, 1999 10,000 $ 25,000
Michael Theriault June 1, 1999 10,000 $ 100,000
</TABLE>
On March 1, 1999 we issued a warrant to purchase 123,860 shares of our common
stock, exercisable for three years at $2.50 per share, to Paradigm Fund C.,
L.P., an unaffiliated third party, as compensation for services rendered to us.
These services included consulting with us on investment advisory matters. As of
October 15, 1999, Paradigm Fund C., L.P. owned approximately 6.5% of our common
stock.
On August 1, 1999 Mr. Gregory J. Halpern, our president and CEO, borrowed
$935,000 from us under a secured promissory note. This note bore interest at 8%
per annum. As collateral for the note, Mr. Halpern granted us a first mortgage
on his principal residence. This residence had a fair market value which
exceeded the principal amount of the note and, with the exception of our
mortgage, was unencumbered. Mr. Halpern is an accredited investor. The note was
satisfied in full on December 7, 1999 and we have released our mortgage on the
property.
In 1996 CIG Securities was formed by its parent company, Internet Broadcasting
Company, Inc. a Delaware corporation, to take advantage of the developing
Internet direct public offering service market. Prior to our acquisition of CIG
Securities in November 1999, it was a wholly-owned subsidiary of Internet
Broadcasting Company, Inc. Messrs. Bradley M. Levine, James W. Dwyer, Cort A.
Neimark, Edmund Allen Tubbs, and Leonard Simon are the controlling persons of
Internet Broadcasting Company, Inc. On behalf of Internet Broadcasting Company,
Inc., Mr. Levine took the initiative in founding and organizing CIG Securities,
and he was the original officer and director of CIG Securities. Because of
these actions, he would be considered CIG
34
<PAGE>
Securities' promoter. Mr. Levine, however, did not individually receive anything
of value for his actions in the formation and organization of CIG Securities.
Upon its organization, Internet Broadcasting Company, Inc. became CIG
Securities' sole shareholder, receiving 100 shares of its common stock which
represented all the issued common stock.
Our policy regarding transactions with our affiliates
Transactions with our officers, directors and principal shareholders have been
made upon terms no less favorable to us that we might receive from unaffiliated
third parties. In September 1999 we adopted a policy which requires the approval
of a majority of our disinterested directors for any future transaction
involving an officer, director or 5% of greater shareholder.
OUR PRINCIPAL SHAREHOLDERS
As of November 30, 1999 there were 9,840,680 shares of our common stock issued
and outstanding, without giving effect to the exercise of outstanding options or
warrants to acquire an additional 546,180 shares of our common stock. The
following table sets forth information as of October 15, 1999 with respect to
the beneficial ownership of shares of common stock currently issued and
outstanding by:
- each person known to us to be the owner of more than 5% of the
outstanding shares of common stock,
- each officer and director, and
- all officers and directors as a group.
Unless otherwise indicated, the address for each individual listed is 1011
Campus Drive Mundelein, Illinois 60060.
<TABLE>
<CAPTION>
Name No. of Shares % of Ownership
- ---- ------------- --------------
<S> <C> <C>
Gregory J. Halpern 6,524,000 66.1%
Dana L. Dabney 524,000 5.3%
Frank K. Menon 50,000 *
Erik Brown 30,000 *
Edward L. Halpern 400,000 4.1%
Michael J. Theriault 30,000 *
Charles Blumenfield 6,000 *
Arthur C. Tanner 30,000 *
Doron C. Levitas 0 n/a
Paradigm Fund C. L.P. 643,090 6.5%
All officers and directors
as a group (nine persons) 7,594,000 75.8%
</TABLE>
* represents less than 1%
35
<PAGE>
In the preceding table:
- - Mr. Halpern's shares include 494,000 shares held in the name of HF Trust, a
trust of which Mr. Halpern is the trustee, and options to purchase 30,000 shares
of our common stock expiring in January 2003. 247,000 shares held by HF Trust
are being registered for resale under this prospectus.
- - Mr. Dabney's shares includes options to purchase 24,000 shares of our common
stock expiring in January 2003.
- - Mr. Menon's shares includes options to purchase 40,000 shares of our common
stock expiring in February 2002.
- - Mr. Brown's shares includes options to purchase 20,000 shares of our common
stock expiring in March 2002, but excludes options to purchase 10,000 shares of
our common stock which have not yet vested.
- - Mr. Edward L. Halpern's shares include 196,000 shares owned of record by Mr.
Halpern and 204,000 shares owned of record by Diane Halpern, his wife.
- - Mr. Theriault's shares includes options to purchase 20,000 shares of our
common stock expiring in June 2002, but excludes options to purchase 10,000
shares of our common stock which have not yet vested..
- - Mr. Blumenfield's shares are being registering for resale under this
prospectus. The total for Mr. Blumenfield does not include options to purchase
15,000 shares of our common stock at $10.00 per share, vesting 5,000 options on
the first, second and third anniversary date of the date of grant, awarded to
him in September 1999 as compensation for his service as an outside director.
Mr. Blumenfield's address is 9025 North Iroquois Road, Bayside, Wisconsin 53217.
- - Mr. Tanner's shares includes options to purchase 20,000 shares of our common
stock expiring in May 2002, but excludes options to purchase 10,000 shares of
our common stock which have not yet vested.
- - The total for Mr. Levitas does not include options to purchase 15,000 shares
of our common stock at $10.00 per share, vesting 5,000 options on the first,
second and third anniversary date of the date of grant, awarded to him in
September 1999 as compensation for his service as an outside director. Mr.
Levitas' address is 8111 North St. Louis Avenue, Skokie, Illinois 60076.
- - Messrs. Sheldon Drobny, Ruben Rosenberg and Aaron J. Fischer are the general
partners of Paradigm Fund C.,L.P. We have registered in this prospectus for
resale 519,230 shares owned by Paradigm Fund C., L.P., together with 123,860
shares of our common stock underlying an outstanding warrant exercisable at
$2.50 per share. Paradigm Fund C., L.P.'s address is 3000 Dundee Road, Suite
105, Northbrook, Illinois 60061.
MARKET FOR OUR SECURITIES
There has previously been no market for our common stock. We have applied for
listing of our common stock on The Nasdaq National Market System and The
American Stock Exchange. We do not know if our application for listing on either
exchange will be accepted. Even if our common stock is accepted for listing on
one of these exchanges, we do not know if a market for our common stock will
ever be established. Because we did not undertake an IPO, we do not have the
support of an underwriter who could help us in gaining recognition with
individual investors. We do not know of any analysts who intend to institute
coverage on our common stock if it should be included for listing on a national
exchange. Both of these factors are important in establishing a liquid trading
market for our common stock. The absence of any meaningful market in our common
stock will adversely affect your ability to sell the common stock in the future.
36
<PAGE>
We have approximately 411 record shareholders of our common stock. Based upon
the records of our transfer agent, we believe we have in excess of 560
beneficial owners of our common stock.
SELLING SECURITY HOLDERS
The following table sets forth the name of each selling security holder, the
number or shares of common stock beneficially owned by the selling security
holder as of November 30, 1999, and the number of shares being offered by each
selling security holder. During the past three years no selling security holder
has been our officer, director or affiliate, nor has any selling security holder
had any material relationship with us during the period, other than as set forth
below.
As a term of our two private placements, for one year from the date of the
purchase we have agreed to notify the purchasers of the filing of a registration
statement under the Securities Act of 1933, except those filed on Forms S-4 or
S-8, and give the purchasers the opportunity to include the shares of common
stock owned by them registration statement so as to permit the public resale of
those shares. The registration statement of which this prospectus forms a part
is being filed by us in satisfaction of the registration rights. The
registration statement has been prepared and filed at our expense, including our
legal and accounting fees, and printing expenses. We will not pay brokerage
commissions, transfer taxes and the fees of counsel to the selling security
holders. In connection with filing the registration statement, the selling
security holders will be required to furnish information to us and to indemnify
us against civil liabilities, including liabilities arising under the Securities
Act of 1933 with respect to the information provided to us.
The shares of common stock being offered by this prospectus are being registered
to permit public secondary trading, and the selling security holders may offer
all or part of the shares for resale from time to time. However, the selling
security holders are under no obligation to sell all or any portion of the
shares of common stock immediately under this prospectus. Because the selling
security holders may sell all or a portion of their shares of common stock, no
estimate can be given as to the number of shares of common stock that will be
held by any selling security holder upon termination of any offering made under
this prospectus; accordingly, the following table assumes the exercise of the
warrants and the sale of all shares of common stock by the selling security
holders immediately following the date of this prospectus.
37
<PAGE>
<TABLE>
<CAPTION>
No. of Shares No. of Shares %
No. of Shares of Common of Common Stock Owner-
of Common Stock Stock Beneficially ship
Name of Selling Beneficially Owned Offered Owned After
Security Holder as of Nov. 30, 1999 By This Prospectus After Offering Offering
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David Abrahams 1,000 1,000 0 *
Louise Abrahams 2,000 2,000 0 *
Richard L. and Louise
Abrahams, Trustees 20,000 20,000 0 *
Amity Enterprises 50,000 50,000 0 *
Joseph Anthony 1,000 1,000 0 *
Kevin J. Bauer 600 600 0 *
Myron Basch 1,000 1,000 0 *
Marc Bear 2,000 2,000 0 *
Bruce F. Berkowitz 5,000 5,000 0 *
Ivo Beelen 4,000 4,000 0 *
Ivka Berry 2,000 2,000 0 *
Joel and Trixie Bode 3,000 3,000 0 *
Jacqueline Burgess 200 200 0 *
Marshall S. Blackham 5,000 5,000 0 *
Charles Blumenfield 6,000 6,000 0 *
Lucille T. Brown 2,500 2,500 0 *
E. Ann Burke and
Marc Burke, JTWROS 10,000 10,000 0 *
James Campagna 2,500 2,500 0 *
Daniel I. Caplan, M.D. 5,000 5,000 0 *
Ronald Carlson 1,000 1,000 0 *
Kwanzu Chen 1,000 1,000 0 *
John T. Colvin and
Gail Covin, JTWROS 10,000 10,000 0 *
Congregation of Hakoil
Koil Yakov 40,000 40,000 0 *
Delta Energy Corp. 25,000 25,000 0 *
Dillion Capital LLC 5,000 5,000 0 *
Connie E. Donaldson 2,000 2,000 0 *
Steven Donia 4,000 4,000 0 *
Gary S. Ducharme 2,000 2,000 0 *
Gary J. Elkins and
Abigail Elkins, JTWROS 5,000 5,000 0 *
Shaun M. Emerson 10,000 10,000 0 *
Paul T. Evans 20,000 20,000 0 *
Stewart Flink 21,600 21,600 0 *
Isaac Friedman
and Philip Katz, JT 10,000 10,000 0 *
Mordechai Friedman 10,000 10,000 0 *
Ronald L. Fauconniere 5,000 5,000 0 *
Anthony Fiore 2,000 2,000 0 *
Jeffrey K. Forgacs 2,000 2,000 0 *
Javier Garcia, Jr. 200 200 0 *
Edward Giuntini 2,000 2,000 0 *
Caroline G. Graddon 5,000 5,000 0 *
Daniel K. Grice 2,500 2,500 0 *
George D. Guritz 10,000 10,000 0 *
HF Trust 494,000 247,000 247,000 2.5%
Kevin R. Hitzeman 15,000 15,000 0 *
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
No. of Shares No. of Shares %
No. of Shares of Common of Common Stock Owner-
of Common Stock Stock Beneficially ship
Name of Selling Beneficially Owned Offered Owned After
Security Holder as of Nov. 30, 1999 By This Prospectus After Offering Offering
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sean W. Hitzeman 15,000 15,000 0 *
Claudia S. Horty 18,000 18,000 0 *
Enamul Islem 400 400 0 *
Alison Jarret 7,500 7,500 0 *
JRF Investments II, Ltd. 5,000 5,000 0 *
JRF Investments III, Ltd. 5,000 5,000 0 *
JRF Investments IV, Ltd. 5,000 5,000 0 *
Ramesh Kannan 1,000 1,000 0 *
Clarence Kanthak 1,000 1,000 0 *
Thomas J. Kanthek 1,000 1,000 0 *
James A. Kasch 5,000 5,000 0 *
Mark Kaufman 2,500 2,500 0 *
Jay Kaufman 7,800 7,800 0 *
John Kaufman SEP IRA 624 624 0 *
James Kemp 4,000 4,000 0 *
Kollel Alta Faige 17,400 17,400 0 *
Kollel Alta Faige, Philip
Katz and Isaac
Friedman, JT 1,500 1,500 0 *
Daniel Korshak 400 400 0 *
Lawrence Lacerte 50,000 50,000 0 *
Eddie Lee 13,920 13,920 0 *
Stanford J. Levin 20,000 20,000 0 *
Shaqqian Lu 100 100 0 *
Mary Lytle 200 200 0 *
Stewart L. Macklin 2,500 2,500 0 *
William McClure 16,000 16,000 0 *
Alakesh Mitra 10,000 10,000 0 *
Thomas Molnar 4,000 4,000 0 *
Ismael Morales 800 800 0 *
Stephen Morris 600 600 0 *
Lawrence A. Mulvaney,
Trustee 1,000 1,000 0 *
Larry Mulvaney IRA 1,500 1,500 0 *
Khalid M. Mursi 5,000 5,000 0 *
Ramanaprasad Nandigama 400 400 0 *
Nguyen Hoi 4,000 4,000 0 *
George E. Orfanos 6,000 6,000 0 *
Harry Orfanos and
Vasso Orfanos, JTWROS 500 500 0 *
Nancy Page 1,000 1,000 0 *
Paradigm Fund C., L.P. 643,160 643,160 0 *
Points Partnership 2,500 2,500 0 *
Joanne Pontarelli 400 400 0 *
Patricia Ann Richard 2,400 2,400 0 *
Phillip Rose 3,000 3,000 0 *
Robert Rosin 50,000 50,000 0 *
Tom Rosenquist 2,000 2,000 0 *
Steven Salgam 40,000 40,000 0 *
Susan Schaumberger 10,000 10,000 0 *
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
No. of Shares No. of Shares %
No. of Shares of Common of Common Stock Owner-
of Common Stock Stock Beneficially ship
Name of Selling Beneficially Owned Offered Owned After
Security Holder as of Nov. 30, 1999 By This Prospectus After Offering Offering
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mary Alice Schmidtke IRA 2,500 2,500 0 *
Mary Schmidtke 4,000 4,000 0 *
Jeffery and Julie Schlesinger JTWROS 624 624 0 *
Oskar Schneider 12,000 12,000 0 *
Vincent G. Secontine
Revocable Living Trust 2,000 2,000 0 *
Ralph Sesso IRA 2,500 2,500 0 *
Jitendra Shah and Neha
Shah, JTWROS 2,200 2,200 0 *
Sami Sheeshia 600 600 0 *
Geoffrey M. Shotton 10,000 10,000 0 *
Hardayal Singh 400 400 0 *
Mark Slezak 10,000 10,000 0 *
Martin Straus and
Mercedes Straus, TIE 10,000 10,000 0 *
Erik Surono 280 280 0 *
Erica Swerdlow and
Brian Swerdlow 3,000 4,500 0 *
Kenneth Swiggart 2,500 2,500 0 *
Peter G. Szinte 24,000 24,000 0 *
Phillip Tallman 2,000 2,000 0 *
Isaac Teitelbaum 20,000 20,000 0 *
Stanford F. Terry and
Ruth A. Terry, JTWROS 2,000 2,000 0 *
Michelle L. Tiburzi 5,000 5,000 0 *
Kyaw Myo Tin 2,000 2,000 0 *
Erik Travelstea 2,000 2,000 0 *
Donna Mae Turrentle 624 624 0 *
Mario Valente 4,000 4,000 0 *
Mario Valente and
Guiseppe Valente,
JTWROS 4,000 4,000 0 *
Vijay Vemuri 400 400 0 *
Anthony R. Verrecchia 1,200 1,200 0 *
Ed Wodziak Jr. 1,000 1,000 0 *
Mali H. Wu 2,000 2,000 0 *
Eugene Young 2,000 2,000 0 *
Farhad Zaghi 120,000 120,000 0 *
---------
Total 1,825,532
=========
</TABLE>
* represents less than 1%
In the preceding table:
- - Beneficial ownership is determined in compliance with the rules of the SEC and
generally includes voting or investment power with respect to securities and
includes any securities which the person has the right to acquire within 60 days
of October 15, 1999 through the conversion or exercise of any security or other
right.
40
<PAGE>
- - Mr. Joseph A. Rosin is the controlling person of Amity Enterprises.
- - The information concerning Mr. Bear assumes the exercise of a warrant to
purchase 2,000 shares of our common stock at $2.50 per share.
- - Mr. Blumenfield is a member of our board of directors. The total for Mr.
Blumenfield does not include options to purchase 15,000 shares of our common
stock at $10.00 per share, vesting 5,000 options on the first, second and third
anniversary date of the date of grant, awarded to him in September 1999 as
compensation for his service as an outside director.
- - The information concerting Mr. Flink assumes the exercise of an outstanding
warrant to purchase 21,600 shares of our common stock at $2.50 per share.
- - Congregation of Hakoil Koil Yakov is a not-for-profit entity which is
controlled by Mrs. Gitta Brull.
- - HF Trust is a trust of which Mr. Gregory Halpern, one of our executive
officers and a member of our board of directors, is trustee. Because HF Trust is
an affiliate of ours, the number of shares it may sell during any three month
period will be subject to the volume limitations of Rule 144 of Securities Act
of 1933
- - Mr. James Kokenis is the beneficial owner of Delta Energy Corp.
- - Mr. Stewart Flink is the beneficial owner of Dillion Capital LLC.
- - Mr. John Fox is the controlling person of JRF Investments II, Ltd., JRF
Investments III, Ltd. and JRF Investments IV, Ltd.
- - The information concerning Mr. Jay Kaufman assumes the exercise of an
outstanding warrant to purchase 7,800 shares of our common stock at $2.50 per
share.
- - Kollel Alta Faige is a not-for-profit entity which is controlled by Jay
Kaufman and Isaac Friedman.
- - The information concerning Mr. Lee assumes the exercise of a warrant to
purchase 13,920 shares of our common stock exercisable at $2.50 per share.
- - The information concerning Mr. Levin assumes the exercise of a warrant to
purchase 20,000 shares of our common stock exercisable at $2.50 per share.
- - Messrs. Sheldon Drobny, Ruben Rosenberg and Aaron J. Fischer are the general
partners of Paradigm Fund C., L.P. The number of shares of common stock
beneficially owned includes warrants exercisable at $2.50 per share to purchase
123,860 shares of our common stock. The common stock underlying these warrants
is being registered for resale under this prospectus.
- - Messrs. Richard M. Finger and Timothy M. Finger are the general partners
Points Partnership.
- - The number of shares of common stock beneficially owned by Ms. Schmidtke
includes warrants exercisable at $2.50 per share to purchase 2,000 shares of our
common stock. The common stock underlying these warrants is being registered for
resale under this prospectus.
41
<PAGE>
- - Mr. and Mrs. Swerdlow are the principals of EBS Public Relations, Inc. In
March 1999 we entered into a one year agreement with EBS Public Relations, Inc.
to provide public relations services to us and under the agreement agreed to
issue to EBS Public Relations, Inc. 500 shares of our common stock per month as
compensation for its services. In addition, we agreed pay out-of-pocket expenses
including overnight mails, postage, phone changes, photocopies, travel, etc. The
agreement may be terminated on 60 days prior notice by either party. EBS Public
Relations, Inc. has requested that the stock be issued directly to Mr. and Mrs.
Swerdlow. The number of shares of common stock shown as beneficially owned
reflects the payments to date. We are registering under this prospectus an
additional 1,000 shares which would be due if we canceled the agreement as of
November 30, 1999. These additional 1,000 shares, plus any additional shares we
are obligated to issue during the term of the agreement, will be issued on a
monthly basis, when due, during the remaining term of the agreement.
- - The number of shares of common stock beneficially owned by Mr. Szinte includes
warrants exercisable at `$2.50 per share to purchase 4,000 shares of our common
stock. The common stock underlying these warrants is being registered for resale
under this prospectus.
- - The number of shares of common stock beneficially owned by Mr. Valente
includes warrants exercisable at $2.50 per share to purchase 2,000 shares of our
common stock. The common stock underlying these warrants is being registered for
resale under this prospectus.
- - The number of shares of common stock beneficially owned by Mr. Zaghi includes
warrants exercisable at $2.50 per share to purchase 20,000 shares of our common
stock. The common stock underlying these warrants is being registered for resale
under this prospectus.
PLAN OF DISTRIBUTION
We have made application for listing of our common stock on the Nasdaq National
Market and the American Stock Exchange. We do not know if either of these
applications will ever be approved. We intend to seek effectiveness of the
registration statement which includes this prospectus as soon as possible once
the SEC has advised us that it has no further comments on the registration
statement. This may occur before a determination is made by either The Nasdaq
Stock Market, Inc. or The American Stock Exchange, LLC. regarding our listing
applications. Without an approval for listing of our common stock on one of
these markets, we will seek a listing of our common stock on another exchange or
quotation system. Until such time as a listing is obtained on any one market or
exchange, there will be no public market for our common stock. In that event,
the selling security holders will have no means available to them to publicly
sell the shares of our common stock owned by them.
If we are eventually successfuly in obtaining a listing of our common stock on
either the Nasdaq National Market or the American Stock Exchange, the shares of
our common stock offered by this prospectus may be then sold from time to time
by the selling security holders, who consist of the persons named under "Selling
Security Holders" above and those persons' pledgees, donees, transferees or
other successors in interest. The selling security holders may sell the shares
on the exchange on which our common stock is then listed or otherwise, at market
prices or at negotiated prices. They may sell the shares of common stock by one
or a combination of the following:
* a block trade in which a broker or dealer so engaged will
attempt to sell the shares as agent, but may position and
resell a portion of the block as principal to facilitate the
transaction;
42
<PAGE>
* purchases by a broker or dealer as principal and resale by the
broker or dealer for its account under this prospectus;
* ordinary brokerage transactions and transactions in which a
broker solicits purchasers;
* an exchange distribution in compliance with the rules of the
exchange;
* privately negotiated transactions;
* short sales;
* if a sale qualifies, in compliance with Rule 144 of the
Securities Act of 1933 rather than under this prospectus; and
* any other method permitted by applicable law.
From time to time, one or more of the selling security holders may pledge,
hypothecate or grant a security interest in some or all of the shares of common
stock owned by them, and the pledgees, secured parties or persons to whom the
shares have been hypothecated shall, upon foreclosure in the event of default,
be deemed to be selling security holders under this prospectus. The number of
selling security holders' shares of common stock beneficially owned by those
selling security holders who transfer, pledge, donate or assign the shares will
decrease when they take that action. The plan of distribution for selling
security holders' shares of common stock sold under this prospectus will
otherwise remain unchanged, except that the transferees, pledgees, donees or
other successors will be selling security holders under this prospectus.
A selling security holder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the common
stock in the course of hedging the positions they assume with the selling
security holder, including in connection with distributions of the common stock
by broker-dealers. A selling security holder may also enter into option or other
transactions with broker-dealers that involve the delivery of the shares of
common stock to the broker-dealers, who may then resell or otherwise transfer
the shares. A selling security holder may also loan or pledge the shares of
common stock to a broker-dealer and the broker-dealer may sell the shares which
were loaned to the broker-dealer or upon a default may sell or otherwise
transfer the pledged shares of common stock.
Brokers, dealers, underwriters or agents participating in the distribution of
the shares of common stock as agents may receive compensation in the form of
commissions, discounts or concessions from the selling security holders and/or
purchasers of the common stock for whom broker-dealers may act as agent, or to
whom they may sell as principal, or both. The compensation as to a particular
broker-dealer may be less than or in excess of customary commissions. The
selling security holders and any broker-dealers who act in connection with the
sale of the shares of common stock under this prospectus may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, and any
commission they receive and proceeds of any sale of the shares of common stock
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933. Neither we nor any selling security holder can presently estimate
the amount of compensation. CIG Securities will not participate in any way in
the distribution of the shares of common stock offered by this prospectus. We
know of no existing arrangements between any selling security holder, any other
stockholder, broker, dealer, underwriter or agent relating to the sale or
distribution of the shares of common stock included in this prospectus.
We will pay substantially all of the expenses incident to the registration,
offering and sale of the shares of common stock included in this prospectus to
the public, which includes our legal, accounting and printing
43
<PAGE>
expenses. We will not pay commissions or discounts of underwriters,
broker-dealers or agents, or any other costs incurred by the selling security
holders.
We have advised the selling security holders that during the time as they may be
engaged in a distribution of the shares of common stock included in this
prospectus they are required to comply with Regulation M adopted under the
Exchange Act. With some exceptions, Regulation M precludes any selling security
holder, any affiliated purchasers, and any broker-dealers or other person who
participates in the distribution from bidding for or purchasing, or attempting
to induce any person to bid for or purchase any security which is the subject of
the distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made to stabilize the price of a security in
connection with the distribution of that security. All of the factors may affect
the marketability of the shares of our common stock.
DESCRIPTION OF SECURITIES
Our authorized capitalization consists of 50,000,000 shares of common stock,
$.0001 par value per share, of which 9,840,680 shares are issued and outstanding
as of November 30, 1999. We have no other classes of securities authorized.
Common stock
Holders of our common stock are entitled to one vote for each share held of
record. There are no cumulative voting rights. Each holder of our common stock
is also entitled to receive ratably dividends, if any, as may be declared by the
board of directors out of funds legally available for the payment of dividends.
We have never paid any dividends on our common stock, and we do not anticipate
declaring or paying dividends in the foreseeable future. It is anticipated that
any earnings which may be generated from our operations will be used to finance
our growth.
The holders of our common stock are also entitled to share ratably in any
distribution of our assets after payment of all debts and liabilities. All of
the outstanding shares of common stock are fully paid and non-assessable. There
are no preemptive rights, conversion rights, redemption provisions or sinking
fund provisions with respect to our shares of common stock.
Options and warrants
As of the date of this prospectus, we have outstanding options under our 1999
Stock Option Plan to acquire an aggregate of 319,000 shares of the common stock.
We also have outstanding warrants to purchase an aggregate of 227,180 shares of
our common stock, exercisable at $2.50 per share, which are exercisable until
March 2002 which were issued by us in March 1999 to consultants who rendered
various services to us. The services provided to us by these consultants
included general business matters, investments, real estate, business
development, acquisitions, marketing and market research, international
business, vehicle brokerage, transportation, and banking and financial matters.
There are 11 holders of these warrants. The warrants may be exercised from time
to time by the holders until their expiration date, and may be transferred at
the discretion of the holders. The warrants also contain customary anti-dilution
provisions in the event that we declare a stock split or stock dividend or that
we otherwise recapitalize Circle Group Internet.
44
<PAGE>
Shares eligible for future sale
As of the date of this prospectus, an aggregate of 7,015,148 outstanding shares
of our common stock, including the remaining 6,247,000 shares owned or
controlled by Gregory J. Halpern which are not registered for resale under this
prospectus, are restricted securities within the meaning of the federal
securities laws, and in the future may be sold in compliance with Rule 144
adopted under the Securities Act of 1933, assuming a public market exists for
the securities, of which there are no assurances. The 247,000 shares of our
common stock owned of record by a trust controlled by Mr. Gregory Halpern which
are registered for resale under this prospectus must also be resold in
compliance with Rule 144, even though the shares are registered, because Mr.
Halpern is our affiliate. Rule 144 provides in part that a person who is not our
affiliate and who holds restricted securities for a period of one year may sell
all or part of the securities in ordinary brokerage transactions, in compliance
with volume limitations and the availability of current public information on
Circle Group Internet.
Assuming a public market should develop for our common stock, of which there can
be no assurance, our shareholders are not contractually prohibited from selling
any of their shares of common stock, if and when a sales opportunities arise
consistent with the provisions of Rule 144. We cannot predict the effect, if
any, that any sales of common stock, or the availability of common stock for
sale, may have on the market value of our common stock prevailing from time to
time. Sales of substantial amounts of common stock by shareholders, particularly
if they are our affiliates, could have a material adverse effect upon the market
value of our common stock.
Transfer agent
Our transfer agent is Pacific Stock Transfer Co., 5844 South Pecos, Suite D, Las
Vegas, Nevada 89120.
LEGAL MATTERS
Legal matters in connection with this registration statement will be passed upon
for us by Atlas, Pearlman, Trop & Borkson, P.A., 200 East Las Olas Boulevard,
Suite 1900, Fort Lauderdale, Florida 33301.
EXPERTS
Our audited financial statements as of December 31, 1998 and 1997, and for the
fiscal years then ended, and pro forma condensed consolidated financial
statements at December 31, 1998, and for the fiscal year then ended, as well as
the audited financial statements of Hos-Pillow Corporation, now known as On-Line
Bedding Corporation, as of December 31, 1998 and 1997, and for the fiscal years
then ended which are included elsewhere in this prospectus have been audited by
Harold Y. Sector, independent certified public accountant, as indicated in his
reports. These financial statements are included in this prospectus in reliance
upon the authority of Mr. Sector as an expert in accounting and auditing.
45
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 AND
1998
CONDENSED CONSOLIDATED BALANCE SHEETS F2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME F4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS F5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS F7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 AND
DECEMBER 31, 1998
CONDENSED CONSOLIDATED BALANCE SHEETS F20
CONDENSED CONSOLIDATED STATEMENTS OF INCOME F22
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS F23
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS F25
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET F38
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME F39
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS F40
AUDITED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997
INDEPENDENT AUDITOR'S REPORT F42
BALANCE SHEETS F43
STATEMENTS OF INCOME AND RETAINED EARNINGS F44
SELLING EXPENSES F45
ADMINISTRATIVE EXPENSES F46
STATEMENT OF STOCKHOLDERS' EQUITY F47
STATEMENTS OF CASH FLOWS F48
NOTES TO FINANCIAL STATEMENTS F49
HOS-PILLOW CORPORATION
AUDITED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997
INDEPENDENT AUDITOR'S REPORT F53
BALANCE SHEETS F54
STATEMENTS OF INCOME AND RETAINED EARNINGS F56
COST OF SALES F57
OPERATING EXPENSES F58
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY F59
STATEMENTS OF CASH FLOWS F60
NOTES TO FINANCIAL STATEMENTS F61
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 1999 and 1998
1999 1998
(Pro forma)
ASSETS
Current Assets
Cash $10,920,121 $ 103,186
Restricted Cash 1,097,000 0
Accounts Receivable 142,952 129,478
Note Receivable - Chairman 935,000 0
Employee Loans and Advances 32,120 0
Inventory 129,761 121,831
Prepaid and Others 50,753 6,375
----------- ----------
Total Current Assets 13,307,707 360,870
----------- ----------
Property & Equipment, net 614,124 104,549
----------- ----------
Other Assets
Investments - Stocks for Services 3,783,000 0
Other Investments 500,000 0
Other Assets 76,771 770
----------- ----------
Total Other Assets 4,359,771 770
----------- ----------
TOTAL ASSETS $18,281,602 $ 466,189
=========== ==========
F2
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 1999 and 1998
1999 1998
(Pro forma)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses $ 269,736 $ 282,991
Income Tax Payable 965,659 0
Line of Credit 500,000 0
Note Payable-Shareholder 60,788 2,344
------------ ----------
Total Current Liabilities 1,796,183 285,335
------------ ----------
Long-Term Liabilities 0 0
----------- ----------
Total Liabilities 1,796,183 285,335
----------- ----------
Stockholders' Equity
Common Stock, $.00005 par value;
50,000,000 shares authorized;
9,837,180 shares issued and outstanding
in 1999 and 7,007,200 in 1998 492 350
Paid in Capital 16,115,211 272,154
Retained Earnings 1,343,932 (91,650)
Dividend (974,216) 0
Minority Interest - PPI 0 0
----------- ----------
Total Stockholders' Equity 16,485,419 180,854
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,281,602 $ 466,189
=========== ==========
F3
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For Nine Months Ended September 30, 1999
1999 1998
(Pro forma)
Sales $3,765,618 $ 783,743
Cost of Sales 522,946 382,213
---------- ----------
Gross Profit 3,242,672 401,530
Operating Expenses 2,087,583 434,397
---------- ----------
Income (Loss) from Operations 1,155,089 (32,867)
Other Income (Expenses) 1,300,739 1,957
---------- ----------
Income (Loss) Before Taxes 2,455,828 (30,910)
Provision for Income Taxes 955,645 0
---------- ----------
Net Income (Loss) $1,500,183 $ (30,910)
========== ==========
Earnings per share - Primary $ 0.175 $ (0.0044)
========== ==========
Earnings per share - Fully Diluted $ 0.165 $ (0.0044)
========== ==========
Weighted Average Number of Common Shares
Outstanding 8,595,310 7,000,800
========== ==========
F4
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For Nine Months Ended September 30, 1999 and 1998
1999 1998
(Pro forma)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 1,500,183 $ (30,910)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and Amortization 32,544 11,724
Compensation-stock, signing bonus 495,000 0
Unrealized Gain on Investments (1,044,000) 0
(Increase) Decrease in:
Accounts Receivable (60,661) (51,625)
Employee Loans (32,120) 0
Inventory (77,547) (76,250)
Prepaid and Others (40,572) (488)
Investments - Stocks for Services (2,739,000) 0
Deposits (76,001) 0
Increase (Decrease) in:
Accounts Payable & Accrued Expenses 151,159 166,801
Income Taxes Payable 946,448 (6,452)
----------- ----------
Net cash provided (used) by operating
activities (944,567) 12,800
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (620,764) (14,383)
Restricted Cash (1,097,000) 0
Other Investments (500,000) 0
Accumulated Depreciation Adjustment 0 (3,420)
----------- ----------
Net cash (used) by investing activities (2,217,764) (17,803)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Line of Credit 500,000 0
Proceeds from sales of stock 13,432,430 18,000
Note Receivable - Chairman (935,000) 0
Note Payable-Shareholder 70,178 (14,234)
Dividend Paid (20,000) 0
----------- ----------
Net cash provided by financing activities 13,047,608 3,766
----------- ----------
NET INCREASE (DECREASE) IN CASH 9,885,277 (1,237)
CASH BALANCE AT BEGINNING OF PERIOD 1,034,844 104,423
----------- ----------
CASH BALANCE AT END OF PERIOD $10,920,121 $ 103,186
=========== ==========
F5
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For Nine Months Ended September 30, 1999 and 1998
1999 1998
(Pro forma)
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest $ 0 $ 0
======= ==========
Cash paid for income taxes $ 9,241 $ 10,167
======= ==========
Noncash investing and financing activities:
Issuance stock for signing bonuses $ 495,000
==========
Issuance stock for acquisition of a business
from a related party $1,000,000
==========
Dividend incurred for the excess of cost over
the net assets acquired $ 954,214
==========
F6
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Circle Group Internet, Inc. (the "Company") is an Internet company with
e-finance, business-to-business and e-tailer divisions
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company uses the accrual basis of accounting for financial reporting, in
accordance with generally accepted accounting principles.
Presentation of Interim Information
In the Opinion of the management of Circle Group Internet, Inc. & Subsidiaries
(the Company), the accompanying unaudited consolidated financial statements
include all normal adjustments considered necessary to present fairly the
financial positions as of September 30, 1999 and 1998, and the results of
operations and cash flows for the nine months then ended. Interim results are
not necessarily indicative of results for a full year.
The accompanying pro forma condensed consolidated financial statements as of
September 30, 1998 is presented for comparison.
Principle of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of Circle Group Internet, Inc. (the "Company") and its subsidiaries,
On-Line Bedding Corporation and PPI Capital Corp. The accompanying condensed
consolidated income statement and cash flows include only the subsidiaries'
earnings since the date of acquisition, and for comparative periods, the
previous year includes the same period. All significant intercompany balances,
transactions and stockholdings have been eliminated.
Acquisitions
The condensed consolidated financial statements include the net assets of
businesses purchased at their book value at the acquisition date. The excess of
acquisition costs over the book value of net assets acquired is included in and
has been recorded as a dividend, due to the transactions occurring between
related parties.
F7
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimate
In preparing condensed financial statements in conformity with GAAP, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Revenue Recognition
Revenue from sales is recognized when the products are shipped and/or the
services are performed.
Accounts Receivable
No allowance for uncollectible accounts has been provided. Management has
evaluated all accounts and they are all collectible. There was no bad debt
expense for nine months ended September 30, 1999 or 1998.
Inventories
Costs incurred for materials and shipping are capitalized as inventories and
charged to cost of sales when revenue is recognized. Inventories consist of
finished goods and are stated at the lower of cost or market, using the
first-in, first-out method.
Fixed Assets
Fixed assets are stated at cost. Depreciation is calculated on the accelerated
method over the estimated useful lives of the assets. Total depreciation expense
for nine months ended September 30, 1999 and 1998 was $32,544 and $11,724.
Investments - Stock Received for Services
The Company receives a combination of cash and common stock as compensation from
its client companies for its web design and business-to-business consulting
services. The valuation process used by the Company is as follows:
F8
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments - Stock Received for Services (Continued)
a.) Common stock received from a client company that is trading on an
exchange, is valued based upon the closing price on the day of receipt
of the shares of the stock.
b.) Common stock received in a transaction from a client company where
there has been no prior public offering, but whose shares have been
offered and sold in private placement within the last 90 days, is
valued based upon the last sale price of shares in the private
placement. The Company assumes that the liquidity issues relating to
the shares are factored into the private placement offering/sale price.
c.) Common stock received in a transaction from a client company where
there has been no public or private placement offering, is valued based
upon the value placed on like companies in the same or similar industry
with a reduction in value applied in recognition of the illiquidity of
the shares.
The Company evaluates monthly the carrying value of each investment in the
companies for a possible increase or decrease in value based on the market
conditions, for a traded security, or other changes in the issuer for securities
in which no trading market exists. Factors considered by the Company in
evaluating the carrying value of investments for which no trading market exists
includes subsequent private placements by the issuers, achievement of business
plan objectives and milestones, the financial condition and prospects for the
client company, management team, major contracts, and other valuation factors.
Investments will be valued on a quarterly basis. The increased/decreased
valuation will flow through the income statement, as non-operating income/loss
on investments. Per Paragraph 20 of APB No. 29 and SFAS 121, certain of these
investments may not be able to be liquidated because of the lack of a readily
available trading market. Those investments will be written down accordingly.
F9
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statement of Cash Flows
The Company prepares its statement of cash flows using the indirect method as
defined under Financial Accounting Standards Board Statement No. 95. For purpose
of the statement of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less to be cash equivalents.
Income Taxes
The Company and its subsidiaries will file a consolidated federal income tax
return. The subsidiaries provide for income taxes on a separate-return basis and
remit to or receive from the Company amounts currently payable or receivable.
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board Statement No. 109.
Deferred income taxes are provided on temporary difference between book and tax
income, arising primarily from the recognition of depreciation methods and
periods, and officers' compensation. As of September 30, 1999 and 1998, the
Company had a deferred tax asset of $10,181 and $5,887, respectively.
NOTE 3 - ACQUISITION OF BUSINESS
On January 29, 1999, the Company acquired 100% of the issued and outstanding
stock of On-Line Bedding Corporation (FKA Hos-Pillow Corporation, an Illinois
corporation) from a related party, in exchange for 400,000 shares of the
Company's common stock. The acquisition of On-Line Bedding Corporation has been
accounted for as a combination of related party interest and the results of
operations of On-Line Bedding are included in the historical financial
statements from the date of acquisition.
Aggregate purchase price, 400,000 shares of
common stock @ $2.50 per share $1,000,000
----------
Less: Net assets acquired
Working Capital 45,016
Property and equipment 0
Other 770
----------
Total 45,786
Excess of purchase price over net assets acquired $ 954,214
==========
F10
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - ACQUISITION OF BUSINESS (Continued)
This transaction was treated as a combination of related party interest, not a
purchase combination. The excess cost over the book value, of $954,214, was
treated as a dividend to the related party.
On February 1, 1999, the Company acquired 80% or 3,200,000 issued and
outstanding common shares of PPI Capital Corp. (a shell corporation), from a
related party, the Chairman of the Board of Directors, for $20,000. This
transaction was also accounted for as a dividend, with the assets and
liabilities assumed recorded at book values.
NOTE 4 - INVESTMENTS
As of September 30, 1999, Investments in stock received for services totaled
$3,783,000, and the unrealized gain on these investments was $1,044,000, stated
as follows:
No. of
Date of shares Fair Value Valuation Revenue Unrealized
Valuation Entity Receive at 9/30/99 Method Booked Gain(Loss)
- --------- ------ ------- ---------- ------ ------ ----------
3/23/99 Company I* 272,000 $ 272,000 b $ 272,000 $ 0
6/30/99 Company I 544,000 b 0 544,000
5/7/99 Company II** 250,000 500,000 b 500,000 0
9/30/99 Company II 500,000 b 0 500,000
4/27/99 Company III 60,000 75,000 c 75,000 0
5/28/99 Company IV 90,000 180,000 b 180,000 0
9/30/99 Company V 160,000 352,000 c 352,000 0
9/30/99 Company VI 340,000 1,360,000 b 1,360,000 0
--------- ---------- ---------- ---------
Total 1,172,000 $3,783,000 $2,739,000 $1,044,000
========= ========== ========== ==========
(*)Stock received from Company I was initially booked as revenue at a valuation
of $1.00 per share based on the last sale price in a prior private placement.
Subsequently, the company initiated another private placement where shares are
currently being sold at $3.00 per share. The $2.00 increase in share price is
reflected at 6/30/99 in the above table.
(**)Stock received from Company II was initially booked as revenue at a
valuation of $2.50 per share based on the last sale price in a prior private
placement. Subsequently, the company initiated another private placement where
the offering is 44% subscribed at $5.00 per share. The $2.50 increase in share
price is reflected at 9/30/99 in the above table.
F11
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - INVESTMENTS (Continued)
The valuation method used by the Company for each investment above is as
follows:
a) Common stock received from a client company that is trading on an
exchange, is valued based upon the closing price on the day of receipt
of the shares of the stock.
b) Common stock received in a transaction from a client company where
there has been no prior public offering, but whose shares have been
offered and sold in a private placement within the last 90 days, is
valued based upon the last sale price of shares in the private
placement. The Company assumes that the liquidity issues relating to
the shares are factored into the private placement offering/sale price.
c) Common stock received in a transaction from a client company where
there has been no public or private placement offering, is valued based
upon the value placed on like companies in the same or similar industry
with a reduction in value applied in recognition of the illiquidity of
the shares.
NOTE 5 - OTHER INVESTMENTS
In September 1999, the Company invested in an unregistered corporate preferred
stock. These securities are convertible into common shares and are reported at
fair value, with the unrealized gains and losses included in non-operating
income. As of September 30, 1999, these securities had a fair value of $500,000,
with no unrealized gain or loss. The securities carry demand and piggyback
registration rights as of October 15, 1999. At September 30, 1998, the Company
did not have an investment in securities.
NOTE 6 - RESTRICTED CASH
Restricted cash represents the encumbered portion of a certificate of deposit
set aside for securing a line of credit (See Note 9).
F12
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - NOTE RECEIVABLE - CHAIRMAN
The Company loaned the Chairman of the Board the sum of $935,000. This loan was
approved by the Board of Directors and is evidenced by a secured promissory note
and first mortgage on a residence. The loan shall be paid in full by December 6,
1999. Interest at 8.00% per annum is payable monthly. The collateral for the
loan exceeds the face amount of the loan. This loan is being refinanced with an
outside lending institution, and will become a personal obligation of the
Chairman.
NOTE 8 - NOTE PAYABLE - SHAREHOLDER
As of September 30, 1999, On-Line Bedding had a note payable to the President of
On-Line Bedding in the amount of $60,788, payable at 8.25% per annum, due and
payable by December 31, 1999.
NOTE 9 - LINE OF CREDIT
The Company has a line of credit with a bank in the amount of $1,000,000. The
line carries a variable rate of interest (7.09% at September 30, 1999), matures
on June 15, 2000 and requires monthly interest payments. As of September 30,
1999, the Company owes $500,000 against the line. The loan is secured by a
certificate of deposit in excess of the line of credit.
NOTE 10 - PROVISION FOR INCOME TAXES
Provision for Income Taxes as of September 30, 1999 consist of:
Federal $783,737
State 171,908
--------
Total $955,645
========
NOTE 11 - REGULATION A OFFERING
In January 1999, the Company completed a self-underwritten offering of 1,000,000
shares of its common stock at $2.50 per share, pursuant to Regulation A of the
Securities Act of 1933 as amended, resulting in gross proceeds of $2,500,000.
F13
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 12 - REGULATION D OFFERING - FIRST
In March 1999, the Company completed a private placement offering of 154,480
shares of its common stock at $2.50 per share or an aggregate of $386,200
pursuant to Rule 506 of Regulation D of the Securities Act of 1933 as amended.
NOTE 13 - REGULATION D OFFERING - SECOND
The Company completed another private placement offering of 1,213,800 shares of
its common stock at $10 per share or an aggregate of $12,138,000 pursuant to
Rule 506 of Regulation D of the Securities Act of 1933 as amended.
Total expenses related to the offerings were $132,065.
NOTE 14 - STOCK SPLITS
On July 22, 1999, the Board of Directors declared a split of the outstanding and
issued stock from each one(1) share into two(2) shares, thereby increasing the
number of issued and outstanding shares to 9,811,480, and decreasing the par
value of each share to $0.00005. According to GAAP, stock splits refer to stock
dividends that generally are in excess of 20 to 25% of currently outstanding
shares. In a stock split, no part of retained earnings should be transferred to
capital stock or additional paid-in capital, other than as required by state
law. Instead, the number of shares of stock outstanding is increased and the par
value per share is decreased accordingly (ARB 43, Ch. 7B, paras. 11 and 13-16).
(Move to SEC comment letter) All references in the accompanying financial
statements to the number of common shares and per share amounts for 1999 and
1998 have been restated to reflect the stock splits.
NOTE 15 - STOCK OPTIONS AND WARRANTS
Stock Options Granted to Employees
The Company established the 1999 Stock Option Plan (the Plan) effective January
2, 1999 which provides for the issuance of qualified options to all employees
and non-qualified options to consultants and other service providers. The
Company has reserved 1,000,000 shares of common stock for issuance under the
Plan. The Company granted 290,000 options under the Plan as of September 30,
1999. The range of exercise prices were from $2.50 to $10.00. The options may be
exercised no later than three years
F14
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 15 - STOCK OPTIONS AND WARRANTS (Continued)
from the date of issuance. The weighted average fair value of share of options
granted by the Company as of September 30, 1999 was $5.97. None of these options
have been exercised to date.
A summary of the status of stock options issued by the Company as of September
30, 1999 is presented in the following table. There were no options issued or
outstanding at September 30, 1998.
Weighted
Average
Exercise
Number of Price Per
Shares Share
------ ---------
Outstanding at beginning of period - -
Granted 290,000 $5.97
Exercised - -
Canceled - -
--------- -----
Outstanding at end of period 290,000 $5.97
=========
Exercisable at end of period 290,000 $5.97
=========
The Company accounts for equity-based instruments issued or granted to employees
using the intrinsic method as prescribed under APB No. 25 Accounting for Stock
Issued to Employees.
During 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), which defines a fair value based method of
accounting for stock options or similar equity instruments. The Company has
elected to adopt the disclosure-only provisions of SFAS 123 in accounting for
its stock-based compensation plan under APB No. 25; however the Company has
computed for pro forma disclosure purposes, the value of all options granted
during the period ended September 30, 1999 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 and the weighted average assumptions
as follows. No options were granted in year 1998.
Nine months ended
September 30, 1999
------------------
Risk-free interest rate 6.00%
Expected dividend yield 0.00%
Expected Lives 3.00
Expected volatility 0.00
F15
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 15 - STOCK OPTIONS AND WARRANTS (Continued)
The following table sets forth additional information about stock options
outstanding at September 30, 1999:
Weighted
Number Avg. Weighted Number
Range of Outstanding Remaining Avg. Exercisable
Exercise as of Contractual Exercise as of
Prices Sep 30, 1999 Life Price Sep 30, 1999
- -------- ------------ ----------- -------- ------------
$ 2.50 156,000 1.61 years $ 2.50 156,000
$10.00 134,000 2.91 years $10.00 134,000
------- ---- -------
290,000 2.21 years 290,000
======= ==== =======
There is no readily available trading market for the common stock of the
Company. The options to purchase the common stock have been valued at the price
at which the options were granted.
Stock Warrants Granted in Exchange for Services
During 1999, the Company granted warrants to purchase 227,180 shares of common
stock at the price of $2.50 per share in exchange for legal, financial and
operational consulting services. These warrants will expire by March, 2003.
NOTE 16 - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of common
stock and common stock outstanding during the period. Earnings per share is
computed using the treasury stock method. Had the stock options and warrants
(See Note 15) been exercised as of September 30, 1999, earnings per share as of
September 30, 1999 would have been $0.165, fully diluted.
NOTE 17 - LEASE COMMITMENTS
The Company leased facilities from an officer/shareholder on a month-to-month
basis until July 31, 1999. The lease required monthly payments of $2,697
including utilities and maintenance.
Commencing August 15, 1999 the Company leases its office facilities for $6,030
per month. Rental increases occur every three months for the first year.
Thereafter the monthly rental is $11,555. Taxes, insurance and maintenance shall
be billed when due.
F16
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 17 - LEASE COMMITMENTS (Continued)
As of September 30, 1999, the minimum commitments under these leases are as
follows:
December 31, Amount
------------ ---------
1999 $ 34,665
2000 117,545
2001 143,410
2002 142,560
2003 142,560
2004 92,440
--------
Total $673,180
========
Rent expense for nine months ended September 30, 1999 and 1998 was $15,104 and
$23,217, respectively.
NOTE 18 - RELATED PARTY TRANSACTIONS
The Company acquired businesses from related parties(See Note 3). The Chairman
was a co-founder of On-Line Bedding Corporation, which was acquired by the
Company from the parents of the Chairman. This transaction was accounted for as
a combination of related party interest, and the excess cost over the net assets
acquired are treated as a dividend to the related party.
The Company acquired PPI Capital Corp. (a shell corporation) from the Chairman
of the Board of Directors. This transaction was accounted for as a dividend.
As of September 30, 1999, the Company had a note receivable from the Chairman,
in the amount of $935,000, and a note payable from a shareholder, in the amount
of $60,788, payable at 8.25% per annum. The notes are due and payable by
December 6 and December 31, 1999,respectively.
The Company leased facilities from an officer/shareholder on a month-to-month
basis until July 31, 1999. The lease required monthly payments of $2,697
including utilities and maintenance.
As of September 30, 1999, the Company issued 78,000 shares of its common stock
to employees as a signing bonus of $495,000. The compensation was expensed.
F17
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 19 - YEAR 2000
The year 2000 issue affects the company's internal systems, including IT
systems. The Company has assessed the readiness of its critical systems for
handling the year 2000. Testing and remediation of all systems has been
completed. Management believes that all critical systems are year 2000
compliant. The financial impact of making the replacements and modifications to
the Company's systems was not material to the Company's financial position or
results of operations. Management does not rely on outside vendors for any
products or services that would adversely affect the Company's ability to
function, should those outside vendor's products or services not be Year 2000
compliant.
NOTE 20 - SUBSEQUENT EVENTS
On November 10, 1999, a request for the return of stock received by Circle Group
Internet, Inc. for services provided was received from a client company. The
Company believes that the request is without merit and will vigorously defend
and forthcoming legal action. Management and management's counsel currently
believes that resolving the matter will not have a material adverse impact on
the Company's financial position or its results of operations.
On November 12, 1999, the Company acquired, from a non-affiliated third party,
100% of the issued and outstanding stock of CIG Securities, Inc. (a
broker-dealer in Florida) for $35,000. This transaction will be allocated or as
a purchase, and accordingly, the purchase price was allocated to the net assets
acquired based on their fair market values. The cost in excess of net assets
acquired will be capitalized as goodwill.
In November 1999 CIG Securities lent $2,000,000 to an unaffiliated third party.
Under the terms of a 12% Convertible Promissory Note, the loan bears interest at
12% per annum. The principal and any accrued but unpaid interest are due in full
on the earlier of the date on which the borrower receives at least $5,000,000 in
gross proceeds through the sale of its securities in a pending private placement
or April 30, 2000. CIG Securities has entered into a separate agreement with the
borrower to act as the borrower's exclusive placement agent in the best efforts
private placement. The loan is secured by a first mortgage on certain real
property owned by the borrower, and the borrower granted CIG Securities a
security interest in and to any of its
F18
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 20 - SUBSEQUENT EVENTS (Continued)
otherwise unencumbered assets. At the option of CIG Securities, the principal
and interest due under the 12% Convertible Promissory Note are convertible into
shares of the borrower' common stock at a conversion price of $4.00 per share.
There is no public market for the borrower's securities.
F19
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Sep 30,1999 Dec 31,1998
(Proforma)
ASSETS
Current Assets
Cash $10,921,121 $1,048,293
Restricted Cash 1,097,000 0
Accounts Receivable 142,952 40,051
Note Receivable - Chairman 935,000 0
Employee Loans and Advances 32,120 0
Inventory 129,761 46,328
Prepaid and Others 50,753 10,181
----------- ----------
Total Current Assets 13,307,707 1,144,853
----------- ----------
Property & Equipment, net 614,124 25,904
----------- ----------
Other Assets
Investments - Stocks for Services 3,783,000 0
Other Investments 500,000 0
Other Assets 76,771 770
----------- ----------
Total Other Assets 4,359,771 770
----------- ----------
TOTAL ASSETS $18,281,602 $1,171,527
=========== ==========
F20
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Sep 30,1999 Dec 31,1998
(Pro forma)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses $ 269,736 $ 152,600
Income Tax Payable 965,659 5,951
Line of Credit 500,000 0
Note Payable-Shareholder 60,788 0
----------- -----------
Total Current Liabilities 1,796,183 158,551
----------- -----------
Long-Term Liabilities 0 0
----------- -----------
Total Liabilities 1,796,183 158,551
----------- -----------
Stockholders' Equity
Common Stock, $.00005 par value;
50,000,000 shares authorized;
9,837,180 shares issued and outstanding
in 1999 and 7,751,340 in 1998 492 387
Paid in Capital 16,115,211 2,187,886
Retained Earnings 1,343,932 (156,251)
Dividend (974,216) (1,019,046)
Minority Interest - PPI 0 0
----------- -----------
Total Stockholders' Equity 16,485,419 1,012,976
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $18,281,602 $ 1,171,527
=========== ===========
F21
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Twelve Mos.
Ended Ended
Sep 30,1999 Dec 31,1998
(Pro forma)
Sales $3,765,618 $1,212,046
Cost of Sales 522,946 649,596
---------- ----------
Gross Profit 3,242,672 562,450
Operating Expenses 2,087,583 532,220
---------- ----------
Income (Loss) from Operations 1,155,089 30,230
Other Income (Expenses) 1,300,739 (278,014)
---------- ----------
Income (Loss) Before Taxes 2,455,828 (247,784)
Minority Interest - PPI 0 280
Provision for Income Taxes 955,645 0
---------- ----------
Net Income (Loss) $1,500,183 $ (247,504)
========== ==========
Earnings per share - Primary $ 0.175 $ (0.0033)
========== ==========
Earnings per share - Fully Diluted $ 0.165 $ (0.0033)
========== ==========
Weighted Average Number of Common Shares
Outstanding 8,595,310 7,432,328
========== ==========
F22
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Twelve Mos.
Ended Ended
Sep 30,1999 Dec 31,1998
(Pro forma)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 1,500,183 $247,504)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 32,544 16,130
Compensation-stock, signing bonus 495,000 0
Paid-in Capital for Officers' Compensation 0 104,980
Unrealized Gain on Investments (1,044,000) 0
Loss on Disposal of Assets 0 6,464
Shareholders' Draw on disposal of Assets 0 67,312
Minority Interest 0 (280)
(Increase) Decrease in:
Accounts Receivable (60,661) 30,724
Employee Loans (32,120) 0
Inventory (77,547) (4,891)
Prepaid and Others (40,572) (4,294)
Investments - Stocks for Services (2,739,000) 0
Deposits (76,001) 0
Increase (Decrease) in:
Accounts Payable & Accrued Expenses 151,159 66,256
Income Taxes Payable 946,448 (3,889)
----------- --------
Net cash provided (used) by operating activities (944,567) 31,008
----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (620,764) (16,978)
Restricted Cash (1,097,000) 0
Other Investments (500,000) 0
----------- --------
Net cash (used) by investing activities (2,217,764) (16,978)
----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Line of Credit 500,000 0
Proceeds from sales of stock 13,432,430 982,750
Note Receivable - Chairman (935,000) 0
Note Payable - Shareholder 70,178 (16,578)
F23
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For Nine Months Ended September 30, 1999
Nine Months Twelve Mos.
Ended Ended
Sep 30,1999 Dec 31,1998
(Pro forma)
Dividend Paid (20,000) (20,000)
----------- ----------
Net cash provided by financing activities 13,047,608 946,172
----------- ----------
NET INCREASE (DECREASE) IN CASH 9,885,277 960,202
CASH BALANCE AT BEGINNING OF PERIOD 1,034,844 88,091
----------- ----------
CASH BALANCE AT END OF PERIOD $10,920,121 $1,048,293
=========== ==========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest $ 0 $ 0
=========== ==========
Cash paid for income taxes $ 9,241 $ 7,907
=========== ==========
Noncash investing and financing activities:
Issuance stock for signing bonuses $ 495,000 $ 0
=========== ==========
Issuance stock for acquisition of a
business from a related party $ 1,000,000 $1,000,000
=========== ==========
Dividend incurred for the excess of
cost over the net assets acquired $ 954,214 $ 999,046
=========== ==========
Paid-in Capital for Officers' Compensation $ 0 $ 104,980
=========== ==========
F24
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Circle Group Internet, Inc. (the "Company") is an Internet company with
e-finance, business-to-business and e-tailer divisions.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company uses the accrual basis of accounting for financial reporting, in
accordance with generally accepted accounting principles.
Presentation of Interim Information
In the Opinion of the management of Circle Group Internet, Inc. & Subsidiaries
(the Company), the accompanying unaudited consolidated financial statements
include all normal adjustments considered necessary to present fairly the
financial positions as of September 30, 1999, and the results of operations and
cash flows for the nine months then ended. Interim results are not necessarily
indicative of results for a full year.
The accompanying pro forma condensed consolidated financial statements as of
December 31, 1998 illustrate the effect of the acquisitions ("Pro Forma") on the
Company's financial position and results of operations. The condensed
consolidated balance sheet as of December 31, 1998 is based on the historical
balance sheets of the Company, "HOS" and "PPI" as of that date and assumes the
acquisitions took place on that date. The condensed consolidated statements of
income and cash flows for the year ended December 31, 1998 are based on the
historical statements of income of the Company, "HOS" and "PPI" for that period.
The pro forma condensed consolidated statements of income and cash flows assume
the acquisitions took place on January 1, 1998, and "HOS" as if a C-corporation.
Principle of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of Circle Group Internet, Inc. (the "Company") and its subsidiaries,
On-Line Bedding Corporation and PPI Capital Corp. The accompanying condensed
consolidated income statement and cash flows include only the subsidiaries'
earnings since the date of acquisition. All significant intercompany balances,
transactions and stockholdings have been eliminated.
F25
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Acquisitions
The condensed consolidated financial statements include the net assets of
businesses purchased at their book value at the acquisition date. The excess of
acquisition costs over the book value of net assets acquired is included in and
has been recorded as a dividend, due to the transactions occurring between
related parties.
Use of Estimate
In preparing condensed financial statements in conformity with GAAP, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Revenue Recognition
Revenue from sales is recognized when the products are shipped and/or the
services are performed.
Accounts Receivable
No allowance for uncollectible accounts has been provided. Management has
evaluated all accounts and they are all collectible. There was no bad debt
expense for nine months ended September 30, 1999 nor for year ended December 31,
1998.
Inventories
Costs incurred for materials and shipping are capitalized as inventory and
charged to cost of sales when revenue is recognized. Inventories consist of
finished goods and are stated at the lower of cost or market, using the
first-in, first-out method.
Fixed Assets
Fixed assets are stated at cost. Depreciation is calculated on the accelerated
method over the estimated useful lives of the assets. Total depreciation expense
for nine months ended September 30, 1999 was $32,544, and for year ended
December 31, 1998 was $16,130.
F26
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments - Stock Received for Services
The Company receives a combination of cash and common stock as compensation from
its client companies for its web design and business-to-business consulting
services. The valuation process used by the Company is as follows:
a) Common stock received from a client company that is trading on an exchange,
is valued based upon the closing price on the day of receipt of the shares
of the stock.
b) Common stock received in a transaction from a client company where there
has been no prior public offering, but whose shares have been offered and
sold in private placement within the last 90 days, is valued based upon the
last sale price of shares in the private placement. The Company assumes
that the liquidity issues relating to the shares are factored into the
private placement offering/sale price.
c) Common stock received in a transaction from a client company where there
has been no public or private placement offering, is valued based upon the
value placed on like companies in the same or similar industry with a
reduction in value applied in recognition of the illiquidity of the shares.
Investments - Stock Received for Services
The Company evaluates monthly the carrying value of each investment in the
companies for a possible increase or decrease in value based on the market
conditions, for a traded security, or other changes in the issuer for securities
in which no trading market exists. Factors considered by the Company in
evaluating the carrying value of investments for which no trading market exists
includes subsequent private placements by the issuers, achievement of business
plan objectives and milestones, the financial condition and prospects for the
client company, management team, major contracts, and other valuation factors.
Investments will be valued on a quarterly basis. The increased/decreased
valuation will flow through the income statement, as non-operating income/loss
on investments. Per Paragraph 20 of APB No. 29 and SFAS 121, certain of these
investments may not be able to be liquidated because of the lack of a readily
available trading market. Those investments will be written down accordingly.
F27
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statement of Cash Flows
The Company prepares its statement of cash flows using the indirect method as
defined under Financial Accounting Standards Board Statement No. 95. For purpose
of the statement of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less to be cash equivalents.
Income Taxes
The Company and its subsidiaries will file a consolidated federal income tax
return. The subsidiaries provide for income taxes on a separate-return basis and
remit to or receive from the Company amounts currently payable or receivable.
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board Statement No. 109.
Deferred income taxes are provided on temporary difference between book and tax
income, arising primarily from the recognition of depreciation methods and
periods, and officers' compensation. As of September 30, 1999 and December 31,
1998, the Company had a deferred tax asset of $10,181 and $10,181, respectively.
NOTE 3 - ACQUISITION OF BUSINESS
On January 29, 1999, the Company acquired 100% of the issued and outstanding
stock of On-Line Bedding Corporation (FKA Hos-Pillow Corporation, an Illinois
corporation) from a related party, in exchange for 400,000 shares of the
Company's common stock. The acquisition of On-Line Bedding Corporation has been
accounted for as a combination of related party interest and the results of
operations of On-Line Bedding are included in the historical financial
statements from the date of acquisition.
Aggregate purchase price, 400,000 shares of
common stock @ $2.50 per share $1,000,000
----------
Less: Net assets acquired
Working Capital 45,016
Property and equipment 0
Other 770
----------
Total 45,786
----------
Excess of purchase price over net assets acquired $ 954,214
==========
F28
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - ACQUISITION OF BUSINESS (Continued)
This transaction was treated as a combination of related party interest, not a
purchase combination. The excess cost over the book value, of 954,214, was
treated as a dividend to the related party.
On February 1, 1999, the Company acquired 80% or 3,200,000 issued and
outstanding common shares of PPI Capital Corp. (a shell corporation), from a
related party, the Chairman of the Board of Directors, for $20,000. This
transaction was also accounted for as a dividend, with the assets and
liabilities assumed recorded at book values.
NOTE 4 - INVESTMENTS
As of September 30, 1999, Investments in stock received for services totaled
$3,783,000, and the unrealized gain on these investments was $1,044,000, stated
as follows:
<TABLE>
<CAPTION>
No. of
Date of shares Fair Value Valuation Revenue Unrealized
Valuation Entity Received at 9/30/99 Method Booked Gain(Loss)
<S> <C> <C> <C> <C> <C> <C>
3/23/99 Company I* 272,000 $ 272,000 b $ 272,000 $ 0
6/30/99 Company I 544,000 b 0 544,000
5/7/99 Company II** 250,000 500,000 b 5O0,000 0
9/30/99 Company II 500,000 b 0 500,000
4/27/99 Company III 60,000 75,000 c 75,000 0
5/28/99 Company IV 90,000 180,000 b 180,000 0
9/30/99 Company V 160,000 352,000 c 352,000
9/30/99 Company VI 340,000 1,360,000 b 1,360,000
------- ---------- ---------- ----------
Total 1,172,000 $3,783,000 $2,739,000 $1,044,000
========= ========== ========== ==========
</TABLE>
(*)Stock received from Company I was initially booked as revenue at a valuation
of $1.00 per share based on the last sale price in a prior private placement.
Subsequently, the company initiated another private placement where shares are
currently being sold at $3.00 per share. CIG Securities, Inc. acted as placement
agent for this offering. The $2.00 increase in share price is reflected at
6/30/99 in the above table.
(**)Stock received from Company II was initially booked as revenue at a
valuation of $2.50 per share based on the last sale price in a prior private
placement. Subsequently, the company initiated another private placement where
the offering is 44% subscribed at $5.00 per share. The placement agent was an
unaffiliated third party. The $2.50 increase in share price is reflected at
9/30/99 in the above table.
F29
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - INVESTMENTS (Continued)
The valuation method used by the Company for each investment above is as
follows:
a) Common stock received from a client company that is trading on an exchange,
is valued based upon the closing price on the day of receipt of the shares
of the stock.
b) Common stock received in a transaction from a client company where there
has been no prior public offering, but whose shares have been offered and
sold in a private placement within the last 90 days, is valued based upon
the last sale price of shares in the private placement. The Company assumes
that the liquidity issues relating to the shares are factored into the
private placement offering/sale price.
c) Common stock received in a transaction from a client company where there
has been no public or private placement offering, is valued based upon the
value placed on like companies in the same or similar industry with a
reduction in value applied in recognition of the illiquidity of the shares.
NOTE 5 - OTHER INVESTMENTS
In September 1999, the Company invested in an unregistered corporate preferred
stock. These convertible preferred securities are convertible into the common
shares and are reported at fair value, with the unrealized gains and losses
included in non-operating income. As of September 30, 1999, these securities had
a fair value of $500,000, with no unrealized gain or loss. The securities carry
demand and piggyback registration rights as of October 15, 1999. At December 31,
1998, the Company did not have an investment in securities.
NOTE 6 - RESTRICTED CASH
Restricted cash represents the encumbered portion of a certificate of deposit
set aside for securing a line of credit (See Note 9).
NOTE 7 - NOTE RECEIVABLE - CHAIRMAN
The Company loaned the Chairman of the Board the sum of $935,000. This loan was
approved by the Board of Directors and is evidenced by a secured promissory note
and first mortgage on a residence. The loan shall be paid in full by December 6,
1999. Interest at 8.00% per annum is payable monthly. The collateral for the
loan exceeds the face amount of the loan. This loan is being refinanced with an
outside lending institution, and will become a personal obligation of the
Chairman.
F30
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - NOTE PAYABLE - SHAREHOLDER
As of September 30, 1999, On-Line Bedding had a note payable to the President of
On-Line Bedding in the amount of $60,788, payable at 8.25% per annum, due and
payable by December 31, 1999.
NOTE 9 - LINE OF CREDIT
The Company has a line of credit with a bank in the amount of $1,000,000. The
line carries a variable rate of interest (7.09% at September 30, 1999), matures
on June 15, 2000 and requires monthly interest payments. As of September 30,
1999, the Company owes $500,000 against the line. The loan is secured by a
certificate of deposit in excess of the line of credit.
NOTE 10 - PROVISION FOR INCOME TAXES
Provision for Income Taxes as of September 30, 1999 consist of:
Federal $783,737
State 171,908
--------
Total $955,645
========
NOTE 11 - REGULATION A OFFERING
In January 1999, the Company completed a self-underwritten offering of 1,000,000
shares of its common stock at $2.50 per share, pursuant to Regulation A of the
Securities Act of 1933 as amended, resulting in gross proceeds of $2,500,000.
NOTE 12 - REGULATION D OFFERING - FIRST
In March 1999, the Company completed a private placement offering of 154,480
shares of its common stock at $2.50 per share or an aggregate of $386,200
pursuant to Rule 506 of Regulation D of the Securities Act of 1933 as amended.
F31
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13 - REGULATION D OFFERING - SECOND
The Company completed another private placement offering of 1,213,800 shares of
its common stock at $10 per share or an aggregate of $12,138,000 pursuant to
Rule 506 of Regulation D of the Securities Act of 1933 as amended.
Total expenses related to the offerings were $132,065.
NOTE 14 - STOCK SPLITS
On July 22, 1999, the Board of Directors declared a split of the outstanding and
issued stock from each one(1) share into two(2) shares, thereby increasing the
number of issued and outstanding shares to 9,811,480, and decreasing the par
value of each share to $0.00005. According to GAAP, stock splits refer to stock
dividends that generally are in excess of 20 to 25% of currently outstanding
shares. In a stock split, no part of retained earnings should be transferred to
capital stock or additional paid-in capital, other than as required by state
law. Instead, the number of shares of stock outstanding is increased and the par
value per share is decreased accordingly (ARB 43, Ch. 7B, paras. 11 and 13-16).
All references in the accompanying financial statements to the number of common
shares and per share amounts for 1999 and 1998 have been restated to reflect the
stock splits.
NOTE 15 - STOCK OPTIONS AND WARRANTS
Stock Options Granted to Employees
The Company established the 1999 Stock Option Plan (the Plan) effective January
2, 1999 which provides for the issuance of qualified options to all employees
and non-qualified options to consultants and other service providers. The
Company has reserved 1,000,000 shares of common stock for issuance under the
Plan. The Company granted 290,000 options under the Plan as of September 30,
1999. The range of exercise prices were from $2.50 to $10.00. The options may be
exercised no later than three years from the date of issuance. The weighted
average fair value of share of options granted by the Company as of September
30, 1999 was $5.97. None of these options have been exercised to date.
A summary of the status of stock options issued by the Company as of September
30, 1999 is presented in the following table. There were no options issued or
outstanding at December 31, 1998.
F32
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 15 - STOCK OPTIONS AND WARRANTS (Continued)
Weighted
Average
Exercise
Number of Price Per
Shares Share
------ -----
Outstanding at beginning of period -
Granted 290,000 $ 5.97
Exercised - -
Canceled - -
------- ------
Outstanding at end of period 290,000 $ 5.97
======== ======
Exercisable at end of period 290,000 $ 5.97
======== ======
The Company accounts for equity-based instruments issued or granted to employees
using the intrinsic method as prescribed under APB No. 25 Accounting for Stock
Issued to Employees.
During 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), which defines a fair value based method of
accounting for stock options or similar equity instruments. The Company has
elected to adopt the disclosure-only provisions of SFAS 123 in accounting for
its stock-based compensation plan under APB No. 25; however the Company has
computed for pro forma disclosure purposes, the value of all options granted
during the period ended September 30, 1999 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 and the weighted average assumptions
as follows. No options were granted in year 1998.
Nine months ended
September 30, 1999
------------------
Risk-free interest rate 6.00%
Expected dividend yield 0.00%
Expected Lives 3.00
Expected volatility 0.00
F33
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 15 - STOCK OPTIONS AND WARRANTS (Continued)
The following table sets forth additional information about stock options
outstanding at September 30, 1999:
Weighted
Number Avg. Weighted Number
Range of Outstanding Remaining Avg. Exercisable
Exercise as of Contractual Exercise as of
Prices Sep 30, 1999 Life Price Sep 30, 1999
- ------- ------------ ----------- -------- ------------
$ 2.50 156,000 1.61 years $ 2.50 156,000
$10.00 134,000 2.91 years $10.00 134,000
------- ---- -------
290,000 2.21 years 290,000
======= ==== =======
There is no readily available trading market for the common stock of the
Company. The options to purchase the common stock have been valued at the price
at which the options were granted.
Stock Warrants Granted in Exchange for Services
During 1999, the Company granted warrants to purchase 227,180 shares of common
stock at the price of $2.50 per share in exchange for legal, financial and
operational consulting services. These warrants will expire by March, 2003.
NOTE 16 - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of common
stock and common stock outstanding during the period. Earnings per share is
computed using the treasury stock method. Had the stock options and warrants
(See Note 15) been exercised as of September 30, 1999, earnings per share as of
September 30, 1999 would have been $0.165, fully diluted.
NOTE 17 - LEASE COMMITMENTS
The Company leased facilities from an officer/shareholder on a month-to-month
basis until July 31, 1999. The lease required monthly payments of $2,697
including utilities and maintenance.
F34
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 17 - LEASE COMMITMENTS (Continued)
Commencing August 15, 1999 the Company leases its office facilities for $6,030
per month. Rental increases occur every three months for the first year.
Thereafter the monthly rental is $11,555. Taxes, insurance and maintenance shall
be billed when due.
As of September 30, 1999, the minimum commitments under these leases are as
follows:
December 31, Amount
------------- -------
1999 $ 34,665
2000 117,545
2001 143,410
2002 142,560
2003 142,560
2004 92,440
--------
Total $673,180
========
Rent expense for nine months ended September 30, 1999 and for year ended
December 31, 1998 was $15,104 and $34,635, respectively.
NOTE 18 - RELATED PARTY TRANSACTIONS
The Company acquired businesses from related parties(See Note 3). The Chairman
was a co-founder of On-Line Bedding Corporation, which was acquired by the
Company from the parents of the Chairman. This transaction was accounted for as
a combination of related party interests, and the excess cost over the net
assets acquired are treated as a dividend to the related party.
The Company acquired PPI Capital Corp. (a shell corporation) from the Chairman
of the Board of Directors. This transaction was accounted for as a dividend.
As of September 30, 1999, the Company had a note receivable from the Chairman,
in the amount of $935,000, and a note payable from a shareholder, in the amount
of $60,788, payable at 8.25% per annum, the notes are due and payable by
December 6 and December 31, 1999, respectively.
F35
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 18 - RELATED PARTY TRANSACTIONS (Continued)
The Company leased facilities from an officer/shareholder on a month-to-month
basis until July 31, 1999. The lease required monthly payments of $2,697
including utilities and maintenance.
As of September 30, 1999, the Company issued 78,000 shares of its common stock
to employees as a signing bonus of $495,000. The compensation was expensed.
NOTE 19 - YEAR 2000
The year 2000 issue affects the company's internal systems, including IT
systems. The Company has assessed the readiness of its critical systems for
handling the year 2000. Testing and remediation of all systems has been
completed. Management believes that all critical systems are year 2000
compliant. The financial impact of making the replacements and modifications to
the Company's systems was not material to the Company's financial position or
results of operations. Management does not rely on outside vendors for any
products or services that would adversely affect the Company's ability to
function, should those outside vendor's products or services not be Year 2000
compliant.
NOTE 20 - SUBSEQUENT EVENTS
On November 10, 1999, a request for the return of stock received by Circle Group
Internet, Inc. for services provided was received from a client company. The
Company believes that the request is without merit. The company has valued the
stock received in this transaction at $1,000,000.
In November, 1999, the Company acquired, from a non-affiliated third party, 100%
of the issued and outstanding stock of CIG Securities, Inc. (a broker-dealer in
Florida) for $35,000. This transaction will be allocated as a purchase, and
accordingly, the purchase price will be allocated to the net assets acquired
based on their fair market values. The cost in excess of net assets acquired
will be capitalized as goodwill.
F36
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 20 - SUBSEQUENT EVENTS (Continued)
In November 1999 the Board of Directors of Circle Group Internet, Inc, approved
the transfer of $2,000,000 to CIG Securities, Inc. for the purpose of
capitalizing a Bridge Loan Financing Fund. CIG Securities loaned $2,000,000 to
an unaffiliated third party, under the terms of a 12% Convertible Promissory
Note, which bears interest at 12% per annum. The principal and any accrued but
unpaid interest are due in full on the earlier of the date on which the borrower
receives at least $5,000,000 in gross proceeds through the sale of its
securities in a pending private placement or April 30, 2000. CIG Securities has
entered into a separate agreement with the borrower to act as the borrower's
exclusive placement agent in the best efforts private placement. The loan is
secured by a first mortgage on certain real property owned by the borrower, and
the borrower granted CIG Securities a security interest in and to any of its
otherwise unencumbered assets.
At the option of CIG Securities, the principal and interest due under the 12%
Convertible Promissory Note are convertible into shares of the borrower' common
stock at a conversion price of $4.00 per share. There is no public market for
the borrower's securities.
F37
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31, 1998
<TABLE>
<CAPTION>
ASSETS
- ------
"CGI" "HOS" "PPI" Adjustments Pro Forma
---------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cash $1,031,532 $ 36,761 $ 0 (20,000) (2) $1,048,293
Accounts Receivable 0 40,051 0 40,051
Inventory 0 46,328 0 46,328
Deferred Tax Assets 10,181 0 0 10,181
---------- -------- -------- ---------
Total Current Assets 1,041,713 123,140 0 1,144,853
Property & Equipment, net 25,904 0 0 25,904
Other 0 770 0 770
---------- -------- -------- ---------
TOTAL $1,067,617 $123,910 $ 0 $1,171,527
========== ======== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
- --------------------
Accounts Payable &
Accrued Expenses $ 31,500 $121,100 $ 0 $ 152,600
Income Tax Payable 4,095 1,856 0 5,951
---------- -------- -------- ---------
Total Current Liabilities 35,595 122,956 0 158,551
Stockholders' Equity 1,032,022 954 0 999,046 (1) 2,032,022
(2)
Dividend Paid 0 0 0 (999,046)(1) (1,019,046)
(20,000)(2)
Minority Interest 0 0 0 (2) 0
---------- -------- -------- ---------
TOTAL $1,067,617 $123,910 $ 0 $1,171,527
========== ======== ======== ==========
</TABLE>
F38
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
"CGI" "HOS" "PPI" Adjustments Pro Forma
--------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Sales $338,333 $873,713 $ 0 $1,212,046
Cost of Sales 0 649,596 0 649,596
--------- -------- -------- ---------
Gross Profit 338,333 224,117 0 562,450
Operating Expenses 435,287 95,533 1,400 532,220
--------- -------- -------- ---------
Income (Loss) from
Operations (96,954) 128,584 (1,400) 30,230
Other Income (Expenses) 1,443 (3,748) 0 (275,709) (3) (278,014)
--------- -------- -------- ----------
Income (Loss) Before Taxes (95,511) 124,836 (1,400) (247,784)
Provision for Income Taxes 0 1,856 0 (1,856) (4) 0
Minority Interest in
PPI Capital Corp. 0 0 0 280 (5) 280
--------- -------- -------- ----------
Net Income (Loss) $(95,511) $122,980 ($ 1,400) $ (247,504)
========= ======== ======== ==========
Earnings per share $(0.014) $ (0.033)
========= ==========
Weighted Average Shares
of Outstanding 7,032,328 7,432,328
========= ==========
</TABLE>
F39
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - ACQUISITION OF BUSINESS
On January 29, 1999, Circle Group Internet, Inc. ("the Company" or "CGI")
acquired all the issued and outstanding shares of common stock of Hos-Pillow
Corporation ("HOS", an Illinois S-corporation) in exchange for 400,000 shares of
the Company's common stock, which will be issued before year end of 1999. The
acquisition will be accounted for as a combination of related party interests.
The excess cost over the book value will be treated as a dividend to the related
party, and the results of HOS's operations included in the Company's
consolidated financial statements from the date of acquisition. In connection
with the acquisition, HOS elects to terminate its S-corporation status in 1999.
On February 1, 1999, the Company acquired 3,200,000 shares of the common stock,
or 80% of the issued and outstanding capital stock of PPI Capital Corp. ("PPI",
FKA Pain Prevention, Inc., a shell corporation in the Illinois state) for a cash
purchase price of $20,000. The acquisition will be accounted for as a dividend.
The accompanying condensed consolidated financial statements illustrate the
effect of the acquisitions ("Pro Forma") on the Company's financial position and
results of operations. The condensed consolidated balance sheet as of December
31, 1998 is based on the historical balance sheets of the Company, "HOS" and
"PPI" as of that date and assumes the acquisitions took place on that date. The
condensed consolidated statements of income for the year ended December 31, 1998
are based on the historical statements of income of the Company, "HOS" and "PPI"
for that period. The pro forma condensed consolidated statements of income
assume the acquisitions took place on January 1, 1998, and "HOS" as if a
C-corporation.
NOTE 2 - The pro forma adjustments to the condensed consolidated balance sheet
are as follows:
(1) To reflect the acquisition of Hos-Pillow Corporation ("HOS") on the
basis of the book value of the assets acquired and liabilities assumed:
Issuance 400,000 shares of CGI's stock
at $2.50 per share $1,000,000
Eliminate stockholders' equity of HOS (954)
----------
Cost in excess of net assets acquired,
Treated as Dividend $ 999,046
==========
F40
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
NOTE 2 - The pro forma adjustments to the condensed consolidated balance sheet
are as follows: (Continued)
(2) To reflect the acquisition of PPI Capital Corp. ("PPI") on the basis of
the book value of the assets acquired and liabilities assumed:
Total purchase price in cash $ 20,000
Less: Dividend Paid (20,000)
Less: 80% of PPI's stockholders equity 0
--------
Cost in excess of net assets acquired $ 0
========
NOTE 3 - The pro forma adjustments to the condensed consolidated statements of
income are as follows:
(3) Adjustment to Other Expenses:
Treatment of shareholders' distributions
as officers' compensation, assume "HOS" as
if a C-corporation. $275,709
========
(4) To adjust tax expense to reflect the income tax effect at the Company's
effective tax rate of the pro forma adjustments to income before income
taxes after consideration of the following:
(a.) HOS was a C-corporation in 1998.
(b.) PPI's fiscal year ended on December 31st.
(5) To reflect minority interest of PPI Capital Corp. as of December 31,
1998:
Net Loss $1,400 * 20% minority interest = $280
====
NOTE 4: RELATED PARTY TRANSACTIONS
The Company acquired both businesses from related parties. The Chairman of the
Board had been a co-founder of the business, and "Hos" was acquired by the
Company from the parents of the Chairman. "PPI" was acquired from the Chairman.
The acquisitions will be treated as a combination of related party interests,
and accordingly, the cost in excess of net assets acquired will be treated as a
dividend to the related party.
F41
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Circle Group Internet, Inc.
I have audited the accompanying balance sheet of Circle Group Internet, Inc. (an
Illinois corporation) as of December 31, 1998 and 1997, and the related
statements of income, retained earnings, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted this audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provided a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Circle Group Internet, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Operations commenced January 1, 1997.
Pasadena, CA
March 8, 1999
(Except for Notes 1 & 3, the date is October 6, 1999, and Except for Notes 2,4,6
& 8, the date is November 24, 1999)
F42
<PAGE>
CIRCLE GROUP INTERNET, INC.
BALANCE SHEETS (RESTATED)
DECEMBER 31, 1998 and 1997
ASSETS
1998 1997
---------- ---------
Current Assets
Cash $1,031,532 $ 36,993
Deferred Tax Asset 10,181 5,887
---------- ---------
Total Current Assets 1,041,713 42,880
---------- ---------
Fixed Assets
Computer Equipment 47,463 33,643
Office Equipment 5,366 5,256
Office Furnishings 8,363 8,323
---------- ---------
61,192 47,222
Less: Accumulated Depreciation (35,288) (23,544)
---------- ---------
Total Fixed Assets 25,904 23,678
---------- ---------
TOTAL ASSETS $1,067,617 $ 66,558
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
---------- ---------
Current Liabilities
Accounts Payable $ 7,500 $ 2,500
Accrued Expenses 24,000 0
Income Taxes Payable 4,095 6,452
Note Payable to Stockholder 0 16,403
---------- ---------
Total Current Liabilities 35,595 25,355
---------- ---------
Long-Term Liabilities 0 0
---------- ---------
Total Liabilities 35,595 25,355
---------- ---------
Stockholders' Equity
Common Stock, $.00005 par value;
50,000,000 shares authorized; 7,351,340
shares issued and outstanding in 1998,
7,000,000 shares in 1997 367 350
Paid-in Capital 1,187,906 90,443
Accumulated Deficit (156,251) (60,740)
---------- ---------
Total Stockholders' Equity 1,032,022 41,203
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,067,617 $ 66,558
========== =========
F43
<PAGE>
CIRCLE GROUP INTERNET, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS (RESTATED)
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
1998 1997
--------- ---------
Sales $ 338,333 $ 282,362
--------- ---------
Cost and Expenses:
Selling Expenses - Schedule A 101,027 73,064
Administrative Expenses - Schedule B 334,260 264,896
Total Cost and Expenses 435,287 337,960
--------- ---------
Income (Loss) from Operations (96,954) (55,598)
--------- ---------
Other Income (Expenses)
Interest Income 1,732 0
Interest Expense 0 (4,577)
Penalties and Late Charge (289) (565)
--------- ---------
Total Other Income (Expenses) 1,443 (5,142)
--------- ---------
Income (Loss) before Taxes (95,511) (60,740)
Provision for Income Taxes 0 0
--------- ---------
Net Income (Loss) (95,511) (60,740)
Accumulated Deficit
Beginning Balance (60,740) 0
--------- ---------
Ending Balance $(156,251) $ (60,740)
========= =========
Net Income per share $ 0.014 $ 0.009
========= =========
Weighted average shares outstanding 7,032,328 7,000,000
========= =========
F44
<PAGE>
CIRCLE GROUP INTERNET, INC.
SELLING EXPENSES (RESTATED)
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
Schedule A
1998 1997
---------- ----------
SELLING EXPENSES
Commissions $ 4,269 $ 27,290
Entertainment 20 0
Internet Connections 5,568 8,123
Mailings 4,998 3,829
Outside Consultants 0 3,999
Printing 14,759 0
Research and Development 1,356 6,844
Service Fees 0 3,368
Software 42,687 7,684
Sub-Contractor Fees 21,142 11,927
Travel 6,228 6,228
---------- ----------
Total Selling Expenses $ 101,027 $ 73,064
========== ==========
F45
<PAGE>
CIRCLE GROUP INTERNET, INC.
ADMINISTRATIVE EXPENSES (RESTATED)
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
Schedule A
1998 1997
---------- ----------
ADMINISTRATIVE EXPENSES
Accounting $ 24,029 $ 7,376
Advertising 662 0
Bank Charges 1,800 0
Charitable Contributions 0 73
Depreciation 11,744 23,544
Dues and Subscriptions 125 0
Equipment Rental 300 0
Insurance 7,080 5,227
Legal 43,005 6,169
Maintenance 4,395 9,146
Miscellaneous 0 8,687
Officers' Compensation 136,000 136,000
Office Supplies 22,727 17,720
Outside Services 740 0
Rent 25,456 32,364
Security 0 576
Stocks Fees & Promotion 19,939 0
Telephone 17,237 18,014
Utilities 5,324 0
Vehicle 13,697 0
---------- ----------
Total Administrative Expenses $ 334,260 $ 264,896
========== ==========
F46
<PAGE>
CIRCLE GROUP INTERNET, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
-------------------------------------------------------
Balance at 12/31/96 0 $ 0 $ 0 $ 0 $ 0
Issuance of stocks 3,500,000 350 11,150 11,500
Paid in Capital for
Officers' Compensation 90,443 (90,443) 0
Net Income (Restated) 29,703 29,703
-------------------------------------------------------
Balance at 12/31/97 3,500,000 $ 350 $101,593 $(60,740) $ 41,203
Issuance of stocks 175,670 17 981,333 981,350
Paid in Capital for
Officers' Compensation 104,980 (104,980) 0
Net Income (Restated) 9,469 9,469
-------------------------------------------------------
Balance at 12/31/98 3,675,670 $ 367 $1,187,906 $(156,251) $1,032,022
Stock Split 2-for-1 3,675,670
-------------------------------------------------------
Retroactive Balance
as of 12/31/98 7,351,340 $ 367 $1,187,906 $(156,251) $1,032,022
=======================================================
F47
<PAGE>
CIRCLE GROUP INTERNET, INC.
STATEMENT OF CASH FLOWS (RESTATED)
FOR Years ENDED DECEMBER 31, 1998 and 1997
1998 1997
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (99,511) $ (60,740)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 11,744 23,544
Paid-in Capital for Officers' Compensation 104,980 90,443
(Increase) Decrease in:
Deferred Tax Assets (4,294) (5,887)
Increase (Decrease) in:
Accounts Payable 5,000 2,500
Accrued Expenses 24,000 0
Income Taxes Payable (2,357) 6,452
---------- ---------
Net cash provided by operating activities 43,562 56,312
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (13,970) (9,783)
---------- ---------
Net cash (used) by investing activities (13,970) (9,783)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment to Officer's Loans (16,403) (21,036)
Issuance of Common Stocks 981,350 11,500
---------- ---------
Net cash provided (used) by financing
activities 964,947 (9,536)
---------- ---------
NET INCREASE IN CASH 994,539 36,993
CASH BALANCE AT BEGINNING OF YEAR 36,993 0
---------- ---------
CASH BALANCE AT END OF YEAR $1,031,532 $ 36,993
========== =========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest $ 0 $ 4,757
========== =========
Cash paid for income taxes $ 6,375 $ 0
========== =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Property and equipment purchased from
officer's Loans $ 0 $ 37,439
========== =========
Paid In Capital for Officers' Compensation $ 104,980 $ 90,443
========== =========
F48
<PAGE>
CIRCLE GROUP INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
NOTE 1 - GENERAL
Circle Group Internet, Inc. (the "Company") is an Internet company with
e-finance business-to-business and e-tailer divisions. The Company was organized
under the laws of the state of Illinois on May 5, 1994. The Company had no
activities and operations until 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company uses the accrual basis of accounting for financial reporting, in
accordance with generally accepted accounting principles.
Use of Estimate
In preparing financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Revenue Recognition
Revenue from sales is recognized when services are performed.
Fixed Assets
Fixed assets are stated at cost. Depreciation is calculated on the accelerated
method over the estimated useful lives of the assets. Management also elected to
expense the fixed assets under Section 179 of the Internal Revenue Code.
Total depreciation expense for years ended December 31, 1998 and 1997 was
$11,744 and $23,544.
Research and Development
Research and development expenditures are charged to expense as incurred.
F49
<PAGE>
CIRCLE GROUP INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company accounts income taxes in accordance with Financial Accounting
Standards Board Statement No. 109.
Statement of Cash Flows
The Company prepares its statement of cash flows using the indirect method as
defined under Financial Accounting Standards Board Statement No. 95. For purpose
of the statement of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less to be cash equivalents.
Reclassification
Certain reclassification have been made to the 1997 financial statements to
conform with the 1998 financial statement presentation. Such reclassification
had no effect on net income as previously reported.
Restatement
The accompanying financial statements for years ended December 31, 1998 and 1997
were restated to reflect the stock split (See Note 8), and the accrual of
Officers' Compensation (See Note 6).
The accompanying financial statements for year ended December 31, 1997 were also
restated for the prior period adjustment (See Note 3).
NOTE 3 - PRIOR PERIOD ADJUSTMENT
An understatement of 1997 reported penalties and late charge was discovered
during 1998. The fiscal year 1997 financial statements have been restated to
account for these charges. Correction of this error resulted in a decrease of
previously reported net income of $565.
F50
<PAGE>
CIRCLE GROUP INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
NOTE 4 - PROVISION FOR INCOME TAXES
The components of income tax expense as of December 31, 1998 and 1997 were as
follows:
1998 1997
-------- --------
Current $ 4,294 $ 5,887
Deferred (4,294) (5,887)
-------- --------
Total $ 0 $ 0
======== ========
Provision for deferred taxes has been made for temporary differences existing in
the recognition of depreciation and officers' compensation for tax purposes and
financial reporting purposes.
NOTE 5 - REGULATION A OFFERING
The Company conducted an offering pursuant to Regulation A of the Securities Act
of 1933 as amended, and sold 351,340 shares of common stock, for $2.50 per share
in 1998. Total proceeds received related to the offering were $981,350. Expenses
related to the offering were $19,939.
NOTE 6 - RELATED PARTIES TRANSACTIONS
Note Payable to Stockholder
A note payable to an officer/stockholder was established to purchase various
property and equipment during the years. The note bears interest at 18% per
annum and is unsecured. Loan payments are made through the monthly payment to
the officer's various credit cards. The outstanding balance of the note as of
December 31, 1998 and 1997 was $0 and $16,403, respectively. Total interest paid
in 1997 was $4,577. None in 1998.
Lease Commitments
The Company leases facilities from an officer/stockholder on a month-to-month
basis. The lease requires monthly payments of $2,697, including utilities and
maintenance.
Rent expense incurred under this lease for years ended December 31, 1998 and
1997 was $25,456 and $32,364, respectively.
F51
<PAGE>
CIRCLE GROUP INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
NOTE 6 - RELATED PARTY TRANSACTIONS (Continued)
Officers' Compensation
The Company paid and accrued $31,020 and $45,557 in 1998 and 1997, respectively.
The balances of $104,980 and $90,443 for 1998 and 1997, respectively, were
booked as paid in capital.
NOTE 7 - YEAR 2000
The Company believes that it has identified each of its computer systems that
will require modifications to enable it to perform satisfactorily on and after
January 1, 2000. The financial impact of making such modifications to the
Company's systems is not expected to be material to the Company's financial
position or results of operations. In addition, the Company is currently
corresponding with vendors that provide products and systems to the Company in
order to determine if such products and systems will be required to be upgraded
or replaced. Although management believes the Company has an adequate program in
place to address the year 2000 issue, the costs of upgrades to, or replacements
of, its purchased products or systems has not been determined and there can be
no assurance that the program will ultimately be successful.
NOTE 8 - SUBSEQUENT EVENT
Stock Offering
The Regulation A offering in Note 5 was completed in 1999. Total proceeds
received in 1999 related to the offering were $1,518,650. The offering of
1,000,000 shares was fully subscribed and proceeds in the aggregate of
$2,500,000 was received.
Stock Split
On July 22, 1999, the Board of Directors declared a split of the outstanding and
issued stock from each(1) share into two(2) shares. Accordingly, the number of
issued and outstanding shares increased to 7,351,340, and the par value of each
share decreased to $.00005. All references in the accompanying financial
statements to the number of common shares and per share amounts for 1998 and
1997 have been restated to account for the stock split.
F52
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and stockholders
of Hos-Pillow Corporation
I have audited the accompanying balance sheets of Hos-Pillow Corporation (an
Illinois S-corporation), as of December 31, 1998 and 1997, and the related
statements of income, retained earnings and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial statements based
on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audits have a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial positions of Hos-Pillow Corporation as of
December 31, 1998 and 1997, and the results of its operation and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Pasadena, CA
June 4, 1999
(Except for Note 9, the
date is October 6, 1999)
F53
<PAGE>
F61
HOS-PILLOW CORPORATION
BALANCE SHEETS
DECEMBER 31, 1998 and 1997
ASSETS
1998 1997
--------- ---------
(As Restated)
Current Assets
Cash and Cash Equivalents $ 36,761 $ 51,098
Accounts Receivable 40,051 70,775
Inventories 46,328 41,437
--------- ---------
Total Current Assets 123,140 163,310
--------- ---------
Property and Equipment
Office Furniture and Equipment 24,209 21,201
Automobiles - 75,816
--------- ---------
24,209 97,017
Less: Accumulated Depreciation (24,209) (21,863)
--------- ---------
Total Property and Equipment 0 75,154
--------- ---------
Other Assets
Deposits 770 770
--------- ---------
Total Other Assets 770 770
--------- ---------
TOTAL ASSETS $ 123,910 $ 239,234
========= =========
F54
<PAGE>
HOS-PILLOW CORPORATION
BALANCE SHEETS
DECEMBER 31, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
--------- ---------
(As Restated)
Current Liabilities
Accounts Payable $ 118,761 $ 81,568
Accrued Expenses 2,239 2,276
State Tax Payable 1,856 1,532
Note Payable - Officer - 175
--------- ---------
Total Current Liabilities 122,956 85,551
--------- ---------
Long-Term Liabilities 0 0
--------- ---------
Total Liabilities 122,956 85,551
--------- ---------
Stockholders' Equity
Common Stock, no par value; 1000 shares
authorized; 100 shares issued and
outstanding 1,000 1,000
Retained Earnings (46) 152,683
--------- ---------
Total Stockholders' Equity 954 153,683
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 123,910 $ 239,234
========= =========
F55
<PAGE>
HOS-PILLOW CORPORATION
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
1998 1997
----------- -----------
(As Restated)
SALES $ 873,713 $ 1,028,719
COST OF SALES - SCHEDULE A 649,596 828,046
----------- -----------
GROSS PROFIT 224,117 200,673
OPERATING EXPENSES - SCHEDULE B 95,533 100,839
----------- -----------
INCOME (LOSS) FROM OPERATIONS 128,584 99,834
----------- -----------
OTHER INCOME (EXPENSES)
Dividend Income 2,716 3,195
Interest Expense - (38)
Loss on Disposal of Assets (6,464) -
----------- -----------
Total Other Income (Expenses) (3,748) 3,157
----------- -----------
NET INCOME (LOSS) BEFORE TAXES 124,836 102,991
PROVISION FOR INCOME TAXES 1,856 1,426
----------- -----------
NET INCOME (LOSS) 122,980 101,565
RETAINED EARNINGS
Beginning Balance 152,683 123,151
Less: Distributions (275,709) (72,033)
----------- -----------
Ending Balance $ (46) $ 152,683
=========== ===========
F56
<PAGE>
HOS-PILLOW CORPORATION
COST OF SALES
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
SCHEDULE A
1998 1997
--------- ---------
(As Restated)
COST OF SALES
Beginning Inventory $ 41,437 $ 46,854
Purchases 639,724 795,010
Freight & Shipping 14,763 27,619
--------- ---------
695,924 869,483
Less: Ending Inventory (46,328) (41,437)
--------- ---------
Total Cost of Sales $ 649,596 $ 828,046
========= =========
F57
<PAGE>
HOS-PILLOW CORPORATION
OPERATING EXPENSES
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
SCHEDULE B
1998 1997
-------- --------
(As Restated)
OPERATING EXPENSES
Accounting $ 4,650 $ 4,850
Automobile 213 456
Bank Charge 865 589
Depreciation 4,386 2,214
Dues and Subscriptions 35 166
Insurance 1,143 2,483
Legal - 1,826
Miscellaneous 60 575
Office Supplies 3,500 3,174
Officer's Salaries 14,500 13,500
Postage 2,081 2,322
Rent 9,179 10,700
Salaries and Wages 37,737 37,657
Taxes/Franchise 50 50
Taxes/Payroll 7,090 6,223
Telephone 5,345 6,745
Travel 3,022 5,596
Utilities 1,677 1,713
-------- --------
Total Operating Expenses $ 95,533 $100,839
======== ========
F58
<PAGE>
HOS-PILLOW CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
Common Stock Retained
Shares Amount Earnings Total
---------------------------------------------
Balance at December 31, 1996 100 $1,000 $ 123,151 $ 124,151
Net Income (As Restated) 101,565 101,565
Shareholders' Distributions (72,033) (72,033)
---------------------------------------------
Balance at December 31, 1997 100 $1,000 $ 152,683 $ 153,683
Net Income 122,980 122,980
Shareholders' Distributions (275,709) (243,458)
---------------------------------------------
Balance at December 31, 1998 100 $1,000 $ (46) $ 954
=============================================
F59
<PAGE>
HOS-PILLOW CORPORATION
STATEMENT OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
1998 1997
---------- ----------
(As Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 122,980 $ 101,565
Adjustments to reconcile net income to
net cash provided by operating
activities
Depreciation 4,386 2,214
Loss on Disposal of Assets 6,464 -
(Increase) Decrease in:
Accounts Receivable 30,724 30,361
Inventories (4,891) 5,417
Increase (Decrease) in:
Accounts Payable 37,193 (68,713)
Accrued Expenses 63 396
State Tax Payable 324 544
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 197,243 71,784
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment (3,008) (14,392)
---------- ----------
NET CASH (USED) BY INVESTING ACTIVITIES (3,008) (14,392)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment to Officers' Loan (175) -
Distributions to Shareholders (208,397) (72,033)
---------- ----------
NET CASH (USED) BY FINANCING ACTIVITIES (208,572) (72,033)
---------- ----------
NET INCREASE (DECREASE) IN CASH (14,337) (14,641)
BEGINNING OF YEAR 51,098 65,739
---------- ----------
END OF YEAR $ 36,761 $ 51,098
========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash Paid During the Year for:
Interest $ 0 $ 38
========== ==========
Income Tax $ 1,532 $ 882
========== ==========
Noncash investing and financing activities:
A shareholder's draw of $67,312 is accrued for a disposal of an
automobile:
Net book value of Automobile $ 73,776
Loss on Disposal of (6,464)
Assets --------
$ 67,312
========
F60
<PAGE>
HOS-PILLOW CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
NOTE 1 - GENERAL
Hos-Pillow Corporation ("the Company") was formed under the laws of Illinois on
January 23, 1981.
Hos-Pillow Corporation is engaged in sales of blankets and pillows to airlines
and railroad transportation companies.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company uses the accrual basis of accounting in accordance with generally
accepted accounting principles.
Use of estimates
The preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that directly affect the results of reported assets,
liabilities, revenue, and expenses. Actual results may differ from these
estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
The Company prepares its statements of cash flows using the indirect method as
defined under Financial Accounting Standards Board Statement No. 95.
Accounts Receivable
The Company has not established an allowance for doubtful accounts and does not
use reserve method for recognizing bad debts. Bad debts are treated as direct
write-offs in the period management determines that collection is not probable.
There was no bad debt expense neither in 1998 nor 1997.
Inventories
Costs incurred for materials, technology and shipping are capitalized as
inventories and charged to cost of sales when revenue is recognized. Inventories
consist of finished goods and are stated at the lower of cost or market, using
the first-in, first-out method.
F61
<PAGE>
HOS-PILLOW CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and Equipment are valued at cost. Maintenance and repair costs are
charged to expenses as incurred. Depreciation is computed on the accelerated
method based on the estimated useful lives of the assets. Management also
elected to expense the fixed assets under Section 179 of the Internal Revenue
Code. Depreciation expense in 1998 and 1997 was $4,386 and $2,214, respectively.
Income Taxes
The Company is taxed as an S corporation under the Internal Revenue Code and
applicable state statutes. Under an S Corporation election, the income of the
Corporation flows through to the stockholders to be taxed at the individual
level rather than the corporate level. Accordingly, no provision or liability
for federal income taxes has been included in the financial statements. State
income taxes are provided based on statutory rates.
NOTE 3 - NOTE PAYABLE - OFFICER
As of December 31, 1997, the Company had a note payable to an officer in the
amount of $175. The note was paid in full in 1998. Interest charged to the note
was $0 and $38 for years ended December 31, 1998 and 1997, respectively.
NOTE 4 - DISTRIBUTIONS
The Company distributed all of its retained earnings to the shareholders at the
end of each year. Total distributions in 1998 and 1997 was $243,458 and $72,033,
respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company sold its automobile (in which the Company had 25% interest) to a
shareholder for $41,800. The Company included the payment as a Distribution.
This transaction resulted in a net loss of $6,464.
F62
<PAGE>
HOS-PILLOW CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
NOTE 6 - PRIOR YEARS' ADJUSTMENT
Certain errors, resulting in both the overstatement and understatement of
assets, stockholders' equity and expenses of the prior year were corrected in
1997. These errors had no effects on 1998. The changes to retained earnings as
of December 31, 1997 and the related statement of income for the year then ended
are summarized as follows:
Retained Net
Earnings Income
-------- ------
As previously reported, December 31, 1997 $152,857 $101,739
Adjustments:
Understatement of Accumulated Depreciation (142) (142)
Understatement of state income taxes (32) (32)
-------- --------
As restated and adjusted, December 31, 1997 $152,683 $101,565
======== ========
NOTE 7 - LEASE COMMITMENTS
The Company leases its office facilities for $898 per month. The lease expires
September 2001. Rent expense charged to operations was $9,179 and $10,700 for
years ended December 31, 1998 and 1997, respectively.
As of December 31, 1998, the minimum commitments under these leases are as
follows:
Year ended
December 31, Amount
------------ ------
1999 $10,488
2000 10,872
2001 8,370
-------
Total $29,730
=======
NOTE 8 - YEAR 2000
The Company believes that it has identified each of its computer systems that
will require modifications to enable it to perform satisfactorily on and after
January 1, 2000. The financial impact of making such modifications to the
Company's systems is not expected to be material to the Company's financial
position or results of operations. In addition, the Company is currently
corresponding with vendors that provide products and systems to the Company in
order to determine if such products and systems will be required to be upgraded
or replaced. Although management believes the Company has an adequate program in
place to address the Year 2000 issue, the costs of upgrades to, or replacements
of, its purchased products or systems has not been determined and there can be
no assurance that the program will ultimately be successful.
F63
<PAGE>
HOS-PILLOW CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1998 and 1997
NOTE 9 - SUBSEQUENT EVENT
On January 29, 1999, the Company entered into an agreement provided that the
Company will be acquired by Circle Group Internet, Inc. ("CGI", an Illinois
corporation) in a stock for stock transaction. CGI will acquire all of the
issued and outstanding shares of the Company in exchange for 200,000 common
shares of CGI. This transaction will be accounted for as a purchase. This is a
related party transaction; in addition, both parties, son-father, are officers
of CGI. The father becomes the officer of CGI after the acquisition.
F64
<PAGE>
===============================================================================
Dealer Prospectus Delivery Obligation
Until , 2000, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
We have not authorized any dealer, salesperson, or other person to provide any
information or make any representations about us, except the information or
representations contained in this prospectus. You should not rely on any
additional information or representation.
This prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities:
- except the common stock offered by this prospectus;
- in any jurisdiction in which the offer or solicitation is not
authorized;
- in any jurisdiction where the dealer or other salesperson is
not qualified to make the offer or solicitation;
- to any person to whom it is unlawful to make the offer or
solicitation; or
- to any person who is not a United States resident or who is
outside the jurisdiction of the United States.
The delivery of this prospectus or any accompanying sales does not imply that:
- there have been no changes in the affairs of Circle Group
Internet after the date of this prospectus; or
- the information contained in this prospectus is correct after
the date of this prospectus.
1,825,532 shares
common stock
---------------------
Prospectus
---------------------
Circle Group Internet, Inc.
____________ , 1999
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The articles of incorporation of Circle Group Internet, Inc. provide
indemnification of directors and officers and other corporate agents to the
fullest extent permitted under the laws of Illinois. The articles of
incorporation also limit the personal liability of the Circle Group Internet,
Inc.'s directors to the fullest extent permitted by the Illinois Business
Corporation Act contains provisions entitling our directors and officers to
indemnification from judgments, fines, amounts paid in settlement and reasonable
expenses, including attorneys' fees, as the result of an action or proceeding in
which they may be involved by reason of being or having been a director or
officer of Circle Group Internet, provided said officers or directors acted in
good faith.
Because indemnification or liabilities arising under the Securities Act of 1933
may be permitted to our directors, officers or controlling persons by these, or
otherwise, we have been advised that in the opinion of the SEC this
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable. In the event that a claim for
indemnification against liabilities, other than the payment by us of expenses
incurred or paid by one of our directors, officers or controlling persons in the
successful defense of any action, suit or proceeding, is asserted by a director,
officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether indemnification by us is against public policy as expressed
in the Securities Act of 1933 and will be governed by the final adjudication of
the issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the issuance and resale of the securities offered by this
prospectus. We are responsible for the payment of all expenses set forth below.
Registration fee $ 5,075
Application fee for the Nasdaq Stock Market, Inc. 75,625
Blue Sky filing fees and expenses 0
Printing and engraving expenses 8,000
Legal fees and expenses 50,000
Accounting fees and expenses 29,000
Miscellaneous 1,000
--------
Total $168,700
========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On October 9, 1996 CIG Securities issued 1,000 shares of its common stock to
Internet Broadcasting Company, Inc., formerly known as Capital Internet Group,
Inc., for par value, as founders shares. The issuance of these shares was exempt
from registration in reliance on Section 4(2) of the Securities Act of 1933.
Internet Broadcasting Company, Inc. was a sophisticated investor and had full
access to, or was otherwise provided with, all relevant information reasonably
necessary to evaluate CIG Securities.
II-1
<PAGE>
In 1997 Mr. Gregory Halpern received 6,494,000 shares and Mr. Dana Dabney
received 500,000 shares of our common stock for the nominal consideration of par
value $.0001 per share as founders of Circle Group Internet. These issuances of
the shares of common stock were exempt from registration under Section 4(2) of
the Securities Act of 1933. Messrs. Halpern and Dabney were accredited
investors.
During fiscal 1997 we established a note payable in the principal amount of
$16,403 to Mr. Gregory J. Halpern, our founder and CEO, to purchase furniture
and fixtures, including computer equipment for our offices. The note provided
for interest at 18% per annum and was unsecured. We repaid the note in full
before December 31, 1998. Mr. Halpern was an accredited investors.
Between June 1998 and January 1999, we sold an aggregate of 1,000,000 shares of
our common stock in an offering exempt from registration under the Securities
Act of 1933 which was conducted according to Regulation A. The offering, which
was a self-underwritten direct public offering conducted by us via the Internet,
resulted in gross proceeds to us of $2,500,000 from approximately 402 investors.
We paid no underwriting fees, discounts or commissions in connection therewith.
The proceeds from this offering were used to fund the expansion of our
operations, to pay costs associated with our acquisitions of On-Line Bedding and
PPI Capital, and to provide working capital for the expansion of our
infrastructure.
Between January 1999 and October 1999 we issued options to purchase an aggregate
of 319,000 shares of our common stock, at exercise prices ranging from $2.50 per
share to $10.00 per share, under our 1999 Stock Option Plan to 16 of our
executive officers, directors and employees. Subsequent to their issuance,
options for an aggregate of 7,000 shares were canceled when the employment of
one of the optionees was terminated. In each instance, the exercise price of the
options was equal to the fair market value of our common stock on the date of
grant. None of the options have been exercised. ^The issuance of these
securities was exempt from the registration requirements of the Securities Act
of 1933 in reliance on the exemption set forth in Section 4(2) of the Securities
Act of 1933. All of the optionees, who are our employees, are accredited
investors.
In January 1999 we issued 400,000 shares of our common stock to Mr. Edward L.
Halpern and his wife, Diane Halpern, in a private transaction exchange for all
the issued and outstanding capital stock of On-Line Bedding. Mr. Halpern is an
affiliate of ours and Mr. and Mrs. Halpern are accredited investors. The
transaction was exempt from registration under the Securities Act of 1933 in
reliance on the exemption provided by Section 4(2) of the Securities Act of
1933. We paid no underwriting fees, discounts or commissions in connection
therewith.
In March 1999 we issued warrants to purchase an aggregate of 227,110 shares of
our common stock, exercisable at $2.50 per share, which are exercisable until
March 2002, to consultants who rendered various consulting services to us on a
variety of business issues, including general business matters, investments,
real estate, business development, acquisitions, marketing and market research,
international business, vehicle brokerage, transportation, and banking and
financial matters. These consultants are sophisticated and had full access to,
or were otherwise provided with, all relevant information reasonably necessary
to evaluate Circle Group Internet. There are 11 holders of these warrants which
were issued without registration under the Securities Act of 1933 in reliance on
Section 4(2) of the Securities Act of 1933. We paid no underwriting fees,
discounts or commissions in connection therewith.
Between March 1 and March 15, 1999, we sold 150,480 shares of common stock to 47
accredited investors who had preexisting relationships with us and access to
relevant information concerning Circle Group Internet in a private placement
exempt from registration in reliance on Section 4(2) and Rule 506, Regulation D,
of the Securities Act of 1933, resulting in gross proceeds to us of $376,200. We
paid no underwriting fees, discounts or commissions in connection therewith. The
proceeds from this offering were used to launch our e-finance division.
II-2
<PAGE>
Between April 1, 1999 and October 7, 1999 , we have issued an aggregate of 3,500
shares of common stock to EBS Public Relations, Inc. for public relations
services rendered to us under an agreement dated March 4, 1999. At the request
of EBS' principals, Erica and Brian Swerdlow, these shares have been issued to
them individually. EBS is a sophisticated investor and had full access to, or
was otherwise provided with, all relevant information reasonably necessary to
evaluate Circle Group Internet. Accordingly, the issuance of the shares of
common stock were exempt from registration under Section 4(2) of the Securities
Act of 1933.
On April 1, 1999; May 1, 1999; June 1, 1999 and July 1, 1999, we issued 200
shares of common stock to Ms. Mary Lytle for tutoring services rendered in
connection with the testing of our management for their broker-dealer licenses.
Ms. Lytle is a sophisticated investor and had full access to, or was otherwise
provided with, all relevant information reasonably necessary to evaluate Circle
Group Internet. Accordingly, the issuance of the shares of common stock were
exempt from registration under Section 4(2) of the Securities Act of 1933.
Between April 1, 1999 and July 22, 1999, we sold 1,213,800 shares of our common
stock to 63 accredited investors in a private placement exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) and Rule 506,
Regulation D, of the Securities Act of 1933. Each of these investors had a
pre-existing relationship with us and had access to relevant information
concerning Circle Group Internet. We received $12,138,000 in gross proceeds in
the private placement and paid no underwriting fees, discounts or commissions in
connection therewith. We used a portion of the proceeds from this offering for
the development and marketing of our Internet viewing software. We have also set
aside $1 million of these proceeds to contribute to the fund we are creating.
The balance of the funds will be used for general working capital.
In April 1999 we issued Mr. and Mrs. Edward Halpern a demand promissory note in
the principal amount of $80,018, bearing interest at 8% per annum, which
represented shareholder distributions prior to our acquisition of On-Line
Bedding. Mr. and Mrs. Halpern are accredited investors.
On August 1, 1999 Mr. Gregory J. Halpern, our president and CEO, borrowed
$935,000 from us under a secured promissory note. This note bore interest at 8%
per annum. As collateral for the note, Mr. Halpern granted us a first mortgage
on his principal residence. This residence had a fair market value which
exceeded the principal amount of the note and, with the exception of our
mortgage, was unencumbered. Mr. Halpern is an accredited investor. The note was
satisfied in full on December 7, 1999 and we have released our mortgage on the
property.
ITEM 27. EXHIBITS.
Exhibit No. Description of Exhibits
- ----------- -----------------------
3.1* Articles of Incorporation of Circle Group Internet, Inc.
3.2* Articles of Amendment dated December 8, 1997 to the Articles
of Incorporation of Circle Group Internet, Inc.
3.3* Articles of Amendment dated December 15, 1997 to the Articles
of Incorporation of Circle Group Internet, Inc.
3.4* By-Laws of Circle Group Internet, Inc.
4.1* Specimen Common Stock Certificate
5* Opinion of Atlas, Pearlman, Trop & Borkson, P.A.
10.1* Employment Agreement dated January 2, 1999 between Circle
Group Internet, Inc. and Gregory J. Halpern
10.2* Employment Agreement dated January 2, 1999 between Circle
Group Internet, Inc. and Dana L. Dabney
10.3* Employment Agreement dated February 1, 1999 between Circle
Group Internet, Inc. and Frank K. Menon
II-3
<PAGE>
10.4* Employment Agreement dated March 1, 1999 between Circle Group
Internet, Inc. and Arthur C. Tanner
10.5* Employment Agreement dated March 1, 1999 between Circle Group
Internet, Inc. and Erik J. Brown
10.6* Employment Agreement dated June 1, 1999 between Circle Group
Internet, Inc. and Michael J. Theriault
10.7** 1999 Stock Option Plan of Circle Group Internet, Inc.
10.8* Stock Purchase Agreement dated January 2, 1999 between the
shareholders of On-Line Bedding Corporation and Circle Group
Internet, Inc.
10.9* Stock Purchase Agreement dated March 8, 1999 between Circle
Group Internet, Inc., Internet Broadcasting Company, Inc. and
CIG Securities, Inc.
10.10* Extension Agreement dated May 25, 1999 between Circle Group
Internet, Inc., Internet Broadcasting Company and CIG
Securities, Inc.
10.11* Stock Purchase Agreement dated February 1, 1999 between
Gregory Halpern and Circle Group Internet, Inc.
10.12* Extension Agreement dated August 25, 1999 between Circle Group
Internet, Inc., Internet Broadcasting Company and CIG
Securities, Inc.
10.13* Client Agreement dated March 4, 1999 between EBS Public
Relations, Inc. and Circle Group Internet, Inc.
10.14* Industrial lease agreement dated May 20, 1999 between CLO
Enterprises and Circle Group Internet, Inc.
10.15* Industrial lease agreement dated June 18, 1999 between CLO
Enterprises and Circle Group Internet, Inc.
10.16* Amendment No. 1 to the Stock Purchase Agreement between the
shareholders of On-Line Bedding Corporation and Circle Group
Internet, Inc.
10.17* Secured Promissory Note dated August 1, 1999 from Gregory J.
Halpern
10.18* Mortgage dated August 6, 1999 between Gregory J. Halpern and
Karen S. Halpern and Circle Group Internet, Inc.
10.19* Form of Placement Agency Agreement
10.20* Form of Business Consulting Agreement
10.21* Demand Promissory Note dated April 1, 1999
21* Subsidiaries of the Registrant
23.1** Consent of Harold Y. Sector, Certified Public Accountant
23.2* Consent of Atlas, Pearlman, Trop & Borkson, P.A. is included
in Exhibit 5
27** Financial Data Schedule
99* Letter dated July 14, 1999 to the Securities and Exchange
Commission requesting no-action regarding CIG Securities, Inc.
* Previously filed
** Filed herewith.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS
(a) We undertake:
(1) To file, during any period in which we offer or sell
securities, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
which, individually or together, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any additional or changed material
information with respect to the plan of distribution.
(2) For determining any liability under the Securities Act of 1933, as
amended, treat each post-effective amendment as a new registration statement
relating to the securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
(3) To file a post-effective amendment to remove any of the securities
that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of Circle Group Internet, Inc., we have been
advised that, in the opinion of the SEC, indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by us
of expenses incurred or paid by a director, officer or controlling
person of Circle Group Internet, Inc. in the successful defense of
any action, suit or proceeding) is asserted by a director, officer
or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether indemnification by
it is against public policy as expressed in the Securities Act of
1933 and will be governed by the final adjudication of the issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of
Mundelein, State of Illinois, on December 10, 1999.
CIRCLE GROUP INTERNET, INC.
By: /s/ Gregory J. Halpern
----------------------------
Gregory J. Halpern, Chief
Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to the registration statement was signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Gregory J. Halpern Director and Chief Executive Officer December 10, 1999
- ------------------------
Gregory J. Halpern
/s/Frank K. Menon Director and President December 10, 1999
- ------------------------
Frank K. Menon
/s/Dana L. Dabney Director, Vice President of Human Resources December 10, 1999
- ------------------------
Dana L. Dabney
/s/ Arthur C. Tanner Chief Financial Officer December 10, 1999
- ------------------------
Arthur C. Tanner
/s/ Michael J. Theriault Chief Operating Officer December 10, 1999
- -------------------------
Michael J. Theriault
/s/ Edward J. Halpern Director December 10, 1999
- -------------------------
Edward L. Halpern
Director
- -------------------------
Charles S. Blumenfield
Director
- -------------------------
Doron C. Levitas
</TABLE>
The foregoing represents a majority of the Board of Directors
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibits
- ----------- -----------------------
3.1* Articles of Incorporation of Circle Group Internet, Inc.
3.2* Articles of Amendment dated December 8, 1997 to the Articles
of Incorporation of Circle Group Internet, Inc.
3.3* Articles of Amendment dated December 15, 1997 to the Articles
of Incorporation of Circle Group Internet, Inc.
3.4* By-Laws of Circle Group Internet, Inc.
4.1* Specimen Common Stock Certificate
5* Opinion of Atlas, Pearlman, Trop & Borkson, P.A.
10.1* Employment Agreement dated January 2, 1999 between Circle
Group Internet, Inc. and Gregory J. Halpern
10.2* Employment Agreement dated January 2, 1999 between Circle
Group Internet, Inc. and Dana L. Dabney
10.3* Employment Agreement dated February 1, 1999 between Circle
Group Internet, Inc. and Frank K. Menon
10.4* Employment Agreement dated March 1, 1999 between Circle Group
Internet, Inc. and Arthur C. Tanner
10.5* Employment Agreement dated March 1, 1999 between Circle Group
Internet, Inc. and Erik J. Brown
10.6* Employment Agreement dated June 1, 1999 between Circle Group
Internet, Inc. and Michael J. Theriault
10.7** 1999 Stock Option Plan of Circle Group Internet, Inc.
10.8* Stock Purchase Agreement dated January 2, 1999 between the
shareholders of On-Line Bedding Corporation and Circle Group
Internet, Inc.
10.9* Stock Purchase Agreement dated March 8, 1999 between Circle
Group Internet, Inc., Internet Broadcasting Company, Inc. and
CIG Securities, Inc.
10.10* Extension Agreement dated May 25, 1999 between Circle Group
Internet, Inc., Internet Broadcasting Company and CIG
Securities, Inc.
10.11* Stock Purchase Agreement dated February 1, 1999 between
Gregory Halpern and Circle Group Internet, Inc.
10.12* Extension Agreement dated August 25, 1999 between Circle Group
Internet, Inc., Internet Broadcasting Company and CIG
Securities, Inc.
10.13* Client Agreement dated March 4, 1999 between EBS Public
Relations, Inc. and Circle Group Internet, Inc.
10.14* Industrial lease agreement dated May 20, 1999 between CLO
Enterprises and Circle Group Internet, Inc.
10.15* Industrial lease agreement dated June 18, 1999 between CLO
Enterprises and Circle Group Internet, Inc.
10.16* Amendment No. 1 to the Stock Purchase Agreement between the
shareholders of On-Line Bedding Corporation and Circle Group
Internet, Inc.
10.17* Secured Promissory Note dated August 1, 1999 from Gregory J.
Halpern
10.18* Mortgage dated August 6, 1999 between Gregory J. Halpern and
Karen S. Halpern and Circle Group Internet, Inc.
10.19* Form of Placement Agency Agreement
10.20* Form of Business Consulting Agreement
10.21* Demand Promissory Note dated April 1, 1999
21* Subsidiaries of the Registrant
<PAGE>
23.1** Consent of Harold Y. Sector, Certified Public Accountant
23.2* Consent of Atlas, Pearlman, Trop & Borkson, P.A. is included
in Exhibit 5
27** Financial Data Schedule
99* Letter dated July 14, 1999 to the Securities and Exchange
Commission requesting no-action regarding CIG Securities, Inc.
* Previously filed
** Filed herewith.
CIRCLE GROUP INTERNET, INC.
1999 STOCK OPTION PLAN
----------------------
1. Grant of Options; Generally. In accordance with the provisions
hereinafter set forth in this stock option plan, the name of which is the CIRCLE
GROUP INTERNET, INC. 1999 STOCK OPTION PLAN (the "Plan"), the Board of Directors
(the "Board") or, the Compensation Committee (the "Stock Option Committee") of
Circle Group Internet, Inc., an Illinois corporation, (the "Corporation") is
hereby authorized to issue from time to time on the Corporation's behalf to any
one or more Eligible Persons, as hereinafter defined, options to acquire shares
of the Corporation's Common Stock, $.0001 par value (the "Stock").
2. Type of Options. The Board or the Stock Option Committee is
authorized to issue Incentive Stock Options ("ISOs") which meet the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
which options are hereinafter referred to collectively as ISOs, or singularly as
an ISO. The Board or the Stock Option Committee is also, in its discretion,
authorized to issue options which are not ISOs, which options are hereinafter
referred to collectively as Non Statutory Options ("NSOs"), or singularly as an
NSO. The Board or the Stock Option Committee is also authorized to issue "Reload
Options" in accordance with Paragraph 8 herein, which options are hereinafter
referred to collectively as Reload Options, or singularly as a Reload Option.
Except where the context indicates to the contrary, the term "Option" or
"Options" means ISOs, NSOs and Reload Options.
3. Amount of Stock. The aggregate number of shares of Stock which may
be purchased pursuant to the exercise of Options shall be One Million
(1,000,000) shares. Of this amount, the Board or the Stock Option Committee
shall have the power and authority to designate whether any Options so issued
shall be ISOs or NSOs, subject to the restrictions on ISOs contained elsewhere
herein. If an Option ceases to be exercisable, in whole or in part, the shares
of Stock underlying such Option shall continue to be available under this Plan.
Further, if shares of Stock are delivered to the Corporation as payment for
shares of Stock purchased by the exercise of an Option granted under this Plan,
such shares of Stock shall also be available under this Plan. If there is any
change in the number of shares of Stock due to the declaration of stock
dividends, recapitalization resulting in stock split-ups, or combinations or
exchanges of shares of Stock, or otherwise, the number of shares of Stock
available for purchase upon the exercise of Options, the shares of Stock subject
to any Option and the exercise price of any outstanding Option shall be
appropriately adjusted by the Board or the Stock Option Committee. The Board or
the Stock Option Committee shall give notice of any adjustments to each Eligible
Person granted an Option under this Plan, and such adjustments shall be
effective and binding on all Eligible Persons. If because of one or more
recapitalizations, reorganizations or other corporate events, the holders of
outstanding Stock receive something other than shares of Stock then, upon
exercise of an Option, the Eligible Person will receive what the holder would
have owned if the holder had exercised the Option immediately before the first
such corporate event and not disposed of anything the holder received as a
result of the corporate event.
<PAGE>
4. Eligible Persons.
(a) With respect to ISOs, an Eligible Person means any individual who
has been employed by the Corporation or by any subsidiary of the Corporation,
for a continuous period of at least six month.
(b) With respect to NSOs, an Eligible Person means (i) any individual
who has been employed by the Corporation or by any subsidiary of the
Corporation, for a continuous period of at least six months, (ii) any director
of the Corporation or any subsidiary of the Corporation, or (iii) any consultant
of the Corporation or any subsidiary of the Corporation.
5. Grant of Options. The Board or the Stock Option Committee has the
right to issue the Options established by this Plan to Eligible Persons. The
Board or the Stock Option Committee shall follow the procedures prescribed for
it elsewhere in this Plan. A grant of Options shall be set forth in writing
signed on behalf of the Corporation or by a majority of the members of the Stock
Option Committee. The writing shall identify whether the Option being granted is
an ISO or an NSO and shall set forth the terms which govern the Option. The
terms shall be determined by the Board or the Stock Option Committee, and may
include, among other terms, the number of shares of Stock that may be acquired
pursuant to the exercise of the Options, when the Options may be exercised, the
period for which the Option is granted and including the expiration date, the
effect on the Options if the Eligible Person terminates employment and whether
the Eligible Person may deliver shares of Stock or exchange the Option for a
cashless exercise to pay for the shares of Stock to be purchased by the exercise
of the Option. However, no term shall be set forth in the writing which is
inconsistent with any of the terms of this Plan. The terms of an Option granted
to an Eligible Person may differ from the terms of an Option granted to another
Eligible Person, and may differ from the terms of an earlier Option granted to
the same Eligible Person.
6. Option Price. The option price per share shall be determined by the
Board or the Stock Option Committee at the time any Option is granted, and shall
be not less than (i) in the case of an ISO, the fair market value, (ii) in the
case of an ISO granted to a ten percent or greater stockholder, 110 percent of
the fair market value, or (iii) in the case of an NSO, not less than the fair
market value (but in no event less than the par value) of one share of Stock on
the date the Option is granted, as determined by the Board or the Stock Option
Committee. Fair market value as used herein shall be:
(a) If shares of Stock shall be traded on an exchange or
over-the-counter market, the mean between the high and low sales prices of Stock
on such exchange or over-the-counter market on which such shares shall be traded
on that date, or if such exchange or over-the-counter market is closed or if no
shares shall have traded on such date, on the last preceding date on which such
shares shall have traded.
(b) If shares of Stock shall not be traded on an exchange or
over-the-counter market, the value as determined by a recognized appraiser as
selected by the Board or the Stock Option Committee or pursuant to Section 12
herein.
2
<PAGE>
7. Purchase of Shares. An Option shall be exercised by the tender to
the Corporation of the full purchase price of the Stock with respect to which
the Option is exercised and written notice of the exercise. The purchase price
of the Stock shall be in United States dollars, payable in cash, check,
Promissory Note secured by the Shares issued through exercise of the related
Options, or in property, or Corporation stock or by Option exchange for a
cashless exercise, if so permitted by the Board or the Stock Option Committee in
accordance with the discretion granted in Paragraph 5 hereof, having a value
equal to such purchase price. The Corporation shall not be required to issue or
deliver any certificates for shares of Stock purchased upon the exercise of an
Option prior to (i) if requested by the Corporation, the filing with the
Corporation by the Eligible Person of a representation in writing that it is the
Eligible Person's then present intention to acquire the Stock being purchased
for investment and not for resale, and/or (ii) the completion of any
registration or other qualification of such shares under any government
regulatory body, which the Corporation shall determine to be necessary or
advisable.
8. Grant of Reload Options. In granting an Option under this Plan, the
Board or the Stock Option Committee may include a Reload Option provision
therein, subject to the provisions set forth in Paragraphs 20 herein. A Reload
Option provision provides that if the Eligible Person pays the exercise price of
shares of Stock to be purchased by the exercise of an ISO, NSO or another Reload
Option (the "Original Option") by delivering to the Corporation shares of Stock
already owned by the Eligible Person (the "Tendered Shares"), the Eligible
Person shall receive a Reload Option which shall be a new Option to purchase
shares of Stock equal in number to the tendered shares. The terms of any Reload
Option shall be determined by the Board or the Stock Option Committee consistent
with the provisions of this Plan.
9. Stock Option Committee. The Stock Option Committee may be appointed
from time to time by the Corporation's Board of Directors. The Board may from
time to time remove members from or add members to the Stock Option Committee.
The Stock Option Committee shall be constituted so as to permit the Plan to
comply in all respects with the provisions set forth in Paragraph 20 herein. The
members of the Stock Option Committee may elect one of its members as its
chairman. The Stock Option Committee shall hold its meetings at such times and
places as its chairman shall determine. A majority of the Stock Option
Committee's members present in person shall constitute a quorum for the
transaction of business. All determinations of the Stock Option Committee will
be made by the majority vote of the members constituting the quorum. The members
may participate in a meeting of the Stock Option Committee by conference
telephone or similar communications equipment by means of which all members
participating in the meeting can hear each other. Participation in a meeting in
that manner will constitute presence in person at the meeting. Any decision or
determination reduced to writing and signed by all members of the Stock Option
Committee will be effective as if it had been made by a majority vote of all
members of the Stock Option Committee at a meeting which is duly called and
held.
10. Administration of Plan. In addition to granting Options and to
exercising the authority granted to it elsewhere in this Plan, the Board or the
Stock Option Committee is granted the full right and authority to interpret and
construe the provisions of this Plan, promulgate, amend and rescind rules and
procedures relating to the implementation of the Plan and to make all other
3
<PAGE>
determinations necessary or advisable for the administration of the Plan,
consistent, however, with the intent of the Corporation that Options granted or
awarded pursuant to the Plan comply with the provisions of Paragraph 20 and 21
herein. All determinations made by the Board or the Stock Option Committee shall
be final, binding and conclusive on all persons including the Eligible Person,
the Corporation and its stockholders, employees, officers and directors and
consultants. No member of the Board or the Stock Option Committee will be liable
for any act or omission in connection with the administration of this Plan
unless it is attributable to that member's willful misconduct.
11. Provisions Applicable to ISOs. The following provisions shall apply
to all ISOs granted by the Board or the Stock Option Committee and are
incorporated by reference into any writing granting an ISO:
(a) An ISO may only be granted within ten (10) years from the
date of this Plan, which is the date that this Plan was originally adopted by
the Corporation's Board of Directors.
(b) An ISO may not be exercised after the expiration of ten
(10) years from the date the ISO is granted.
(c) The option price may not be less than the fair market
value of the Stock at the time the ISO is granted.
(d) An ISO is not transferrable by the Eligible Person to whom
it is granted except by will, or the laws of descent and distribution, and is
exercisable during his or her lifetime only by the Eligible Person.
(e) If the Eligible Person receiving the ISO owns at the time
of the grant stock possessing more than ten (10%) percent of the total combined
voting power of all classes of stock of the employer corporation or of its
parent or subsidiary corporation (as those terms are defined in the Code), then
the option price shall be at least 110% of the fair market value of the Stock,
and the ISO shall not be exercisable after the expiration of five (5) years from
the date the ISO is granted.
(f) The aggregate fair market value (determined at the time
the ISO is granted) of the Stock with respect to which the ISO is first
exercisable by the Eligible Person during any calendar year (under this Plan and
any other incentive stock option plan of the Corporation) shall not exceed
$100,000.
(g) Even if the shares of Stock which are issued upon exercise
of an ISO are sold within one year following the exercise of such ISO so that
the sale constitutes a disqualifying disposition for ISO treatment under the
Code, no provision of this Plan shall be construed as prohibiting such a sale.
(h) This Plan was adopted by the Corporation on __________, by
virtue of its approval by the Corporation's Board of Directors and the sole
shareholder of the Corporation.
4
<PAGE>
12. Determination of Fair Market Value. In granting ISOs under this
Plan, the Board or the Stock Option Committee shall make a good faith
determination as to the fair market value of the Stock at the time of granting
the ISO.
13. Restrictions on Issuance of Stock. The Corporation shall not be
obligated to sell or issue any shares of Stock pursuant to the exercise of an
Option unless the Stock with respect to which the Option is being exercised is
at that time effectively registered or exempt from registration under the
Securities Act of 1933, as amended, and any other applicable laws, rules and
regulations. The Corporation may condition the exercise of an Option granted in
accordance herewith upon receipt from the Eligible Person, or any other
purchaser thereof, of a written representation that at the time of such exercise
it is his or her then present intention to acquire the shares of Stock for
investment and not with a view to, or for sale in connection with, any
distribution thereof; except that, in the case of a legal representative of an
Eligible Person, "distribution" shall be defined to exclude distribution by will
or under the laws of descent and distribution. Prior to issuing any shares of
Stock pursuant to the exercise of an Option, the Corporation shall take such
steps as it deems necessary to satisfy any withholding tax obligations imposed
upon it by any level of government.
14. Exercise in the Event of Death or Termination of Employment.
(a) If an optionee shall die (i) while an employee of the
Corporation or a Subsidiary; or (ii) within three months after termination of
his employment with the Corporation or a Subsidiary because of his disability or
retirement, his Options may be exercised, to the extent that the optionee shall
have been entitled to do so on the date of his death, by the person or persons
to whom the optionee's right under the Option pass by will or applicable law, or
if no such person has such right, by his executors or administrators, at any
time, or from time to time. In the event of termination of employment because of
his death while an employee or because of disability or retirement, his Options
may be exercised not later than the expiration date specified in Paragraph 5 or
one year after the optionee's death, whichever date is earlier.
(b) If an optionee's employment by the Corporation or a
Subsidiary shall terminate because of his disability and such optionee has not
died within the following three months, he may exercise his Options, to the
extent that he shall have been entitled to do so at the date of the termination
of his employment, at any time, or from time to time, but not later than the
expiration date specified in Paragraph 5 hereof or one year after termination of
employment, whichever date is earlier.
(c) If an optionee's employment shall terminate by reason of
his retirement in accordance with the terms of the Corporation's tax-qualified
retirement plans if any, or with the consent of the Board or the Stock Option
Committee or involuntarily other than by termination for cause, and such
optionee has not died within the following three months, he may exercise his
Option to the extent he shall have been entitled to do so at the date of the
termination of his employment, at any time and from to time, but not later than
the expiration date specified in Paragraph 5 hereof or thirty (30) days after
termination of employment, whichever date is earlier. For purposes of this
Paragraph 14, termination for cause shall mean; (i) termination of employment
for cause as defined
5
<PAGE>
in the optionee's Employment Agreement; or (ii) in the absence of an Employment
Agreement for the optionee, termination of employment by reason of the
optionee's commission of a felony, fraud or willful misconduct which has
resulted, or is likely to result, in substantial and material damage to the
Corporation or a Subsidiary, all as the Board or the Stock Option Committee in
its sole discretion may determine.
(d) If an optionee's employment shall terminate for any
reason, voluntarily or otherwise, other than by death, disability or retirement,
all right to exercise his Option shall terminate at the date of such termination
of employment absent specific provisions in the optionee's Option Agreement.
15. Corporate Events. In the event of the proposed dissolution or
liquidation of the Corporation, a proposed sale of all or substantially all of
the assets of the Corporation, a merger or tender for the Corporation's shares
of Common Stock, the Board of Directors may declare that each Option granted
under this Plan shall terminate as of a date to be fixed by the Board of
Directors; provided that not less than thirty (30) days written notice of the
date so fixed shall be given to each Eligible Person holding an Option, and each
such Eligible Person shall have the right, during the period of thirty (30) days
preceding such termination, to exercise his Option as to all or any part of the
shares of Stock covered thereby, including shares of Stock as to which such
Option would not otherwise be exercisable. Nothing set forth herein shall extend
the term set for purchasing the shares of Stock set forth in the Option.
16. No Guarantee of Employment. Nothing in this Plan or in any writing
granting an Option will confer upon any Eligible Person the right to continue in
the employ of the Eligible Person's employer, or will interfere with or restrict
in any way the right of the Eligible Person's employer to discharge such
Eligible Person at any time for any reason whatsoever, with or without cause.
17. Nontransferability. No Option granted under the Plan shall be
transferable other than by will or by the laws of descent and distribution.
During the lifetime of the optionee, an Option shall be exercisable only by him.
18. No Rights as Stockholder. No optionee shall have any rights as a
stockholder with respect to any shares subject to his Option prior to the date
of issuance to him of a certificate or certificates for such shares.
19. Amendment and Discontinuance of Plan. The Corporation's Board of
Directors may amend, suspend or discontinue this Plan at any time. However, no
such action may prejudice the rights of any Eligible Person who has prior
thereto been granted Options under this Plan. Further, no amendment to this Plan
which has the effect of (a) increasing the aggregate number of shares of Stock
subject to this Plan (except for adjustments pursuant to Paragraph 3 herein), or
(b) changing the definition of Eligible Person under this Plan, may be effective
unless and until approval of the stockholders of the Corporation is obtained in
the same manner as approval of this Plan is required. The Corporation's Board of
Directors is authorized to seek the approval of the Corporation's
6
<PAGE>
stockholders for any other changes it proposes to make to this Plan which
require such approval; however, the Board of Directors may modify the Plan, as
necessary, to effectuate the intent of the Plan as a result of any changes in
the tax, accounting or securities laws treatment of Eligible Persons and the
Plan, subject to the provisions set forth in this Paragraph 19, and Paragraph
20.
20. Compliance with Code. The aspects of this Plan on ISOs is intended
to comply in every respect with Section 422 of the Code and the regulations
promulgated thereunder. In the event any future statute or regulation shall
modify the existing statute, the aspects of this Plan on ISOs shall be deemed to
incorporate by reference such modification. Any stock option agreement relating
to any Option granted pursuant to this Plan outstanding and unexercised at the
time any modifying statute or regulation becomes effective shall also be deemed
to incorporate by reference such modification and no notice of such modification
need be given to optionee.
If any provision of the aspects of this Plan on ISOs is determined to
disqualify the shares purchasable pursuant to the Options granted under this
Plan from the special tax treatment provided by Code Section 422, such provision
shall be deemed null and void and to incorporate by reference the modification
required to qualify the shares for said tax treatment.
21. Compliance With Other Laws and Regulations. The Plan, the grant and
exercise of Options thereunder, and the obligation of the Corporation to sell
and deliver Stock under such Options, shall be subject to all applicable federal
and state laws, rules, and regulations and to such approvals by any government
or regulatory agency as may be required. The Corporation shall not be required
to issue or deliver any certificates for shares of Stock prior to (a) the
listing of such shares on any stock exchange or over-the-counter market on which
the Stock may then be listed, if applicable, and (b) the completion of any
registration or qualification of such shares under any federal or state law, or
any ruling or regulation of any government body which the Corporation shall, in
its sole discretion, determine to be necessary or advisable. Moreover, no Option
may be exercised if its exercise or the receipt of Stock pursuant thereto would
be contrary to applicable laws.
22. Disposition of Shares. In the event any share of Stock acquired by
an exercise of an Option granted under the Plan shall be transferable other than
by will or by the laws of descent and distribution within two years of the date
such Option was granted or within one year after the transfer of such Stock
pursuant to such exercise, the optionee shall give prompt written notice thereof
to the Corporation or the Stock Option Committee.
23. Name. The Plan shall be known as the "Circle Group Internet, Inc.
1999 Stock Option Plan."
24. Notices. Any notice hereunder shall be in writing and sent by
certified mail, return receipt requested or by facsimile transmission (with
electronic or written confirmation of receipt) and when addressed to the
Corporation or the Committee shall be sent to it at its office, 340 Bingham
Circle, Mundelein, IL 60060, subject to the right of either party to designate
at any time hereafter in writing some other address, facsimile number or person
to whose attention such notice shall be sent.
7
<PAGE>
25. Headings. The headings preceding the text of Sections and
subparagraphs hereof are inserted solely for convenience of reference, and shall
not constitute a part of this Plan nor shall they affect its meaning,
construction or effect.
26. Effective Date. This Plan, the Circle Group Internet, Inc. 1999
Stock Option Plan, was adopted by the Board of Directors of the Corporation on
__________________, 1999. The effective date of the Plan shall be the same date.
Dated as of _________________, 1999.
CIRCLE GROUP INTERNET, INC.
By: ___________________________________
Gregory Halpern, President
8
<PAGE>
[NSO GRANT FORM]
CIRCLE GROUP INTERNET, INC.
340 Bingham Circle
Mundelein, IL 60060
Date: ________________
______________________
______________________
______________________
Dear ______________:
The Board of Directors of Circle Group Internet, Inc. (the
"Corporation") is pleased to award you an Option pursuant to the provisions of
the 1999 Stock Option Plan (the "Plan"). This letter will describe the Option
granted to you. Attached to this letter is a copy of the Plan. The terms of the
Plan also set forth provisions governing the Option granted to you. Therefore,
in addition to reading this letter you should also read the Plan. Your signature
on this letter is an acknowledgement to us that you have read and under-stand
the Plan and that you agree to abide by its terms. All terms not defined in this
letter shall have the same meaning as in the Plan.
1. Type of Option. You are granted an NSO. Please see in particular
Section 11 of the Plan.
2. Rights and Privileges. Subject to the conditions hereinafter set
forth, we grant you the right to purchase __________ shares of Common Stock
("Stock") at $__________ per share, the current fair market value of a share of
Stock. The right to purchase the shares of Stock accrues in __________
installments over the time periods described below:
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
3. Time of Exercise. The Option may be exercised at any time and from
time to time beginning when the right to purchase the shares of Stock accrues
and ending when they terminate as provided in Section 5 of this letter.
4. Method of Exercise. The Options shall be exercised by written
notice to the Chairman of the Board of Directors at the Corporation's principal
place of business. The notice shall set forth the number of shares of Stock to
be acquired and shall contain a check payable to the Corporation in full payment
for the Stock or that number of already owned shares of Stock equal in value to
the total Exercise Price of the Option. We shall make delivery of the shares of
Stock subject to the conditions described in Section 13 of the Plan.
1
<PAGE>
5. Termination of Option. To the extent not exercised, the Option
shall terminate upon the first to occur of the following dates:
(a) __________, 199___, being __________ years from the date
of grant pursuant to the provisions of Section 2 of this Agreement; or
(b) Except as otherwise provided for herein, upon the
termination of your employment with the Corporation and any of its subsidiaries
Plan for any reason.
(c) The expiration of 12 months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan, if such employment termination occurs by reason of your death,
permanent disability (as defined herein) or retirement. As used herein,
"permanent disability" means your inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or which has lasted or can be expected
to last for a continuous period of not less than 12 months
6. Securities Laws. The Option and the shares of Stock underlying the
Option have not been registered under the Securities Act of 1933, as amended
(the "Act"). The Corporation has no obligations to ever register the Option or
the shares of Stock underlying the Option. All shares of Stock acquired upon the
exercise of the Option shall be "restricted securities" as that term is defined
in Rule 144 promulgated under the Act. The certificate representing the shares
shall bear an appropriate legend restricting their transfer. Such shares cannot
be sold, transferred, assigned or otherwise hypothecated without registration
under the Act or unless a valid exemption from registration is then available
under applicable federal and state securities laws and the Corporation has been
furnished with an opinion of counsel satisfactory in form and substance to the
Corporation that such registration is not required.
7. Binding Effect. The rights and obligations described in this letter
shall inure to the benefit of and be binding upon both of us, and our respective
heirs, personal representatives, successors and assigns.
8. Date of Grant. The Option shall be treated as having been granted
to you on the date of this letter even though you may sign it at a later date.
Very truly yours,
By: __________________________
Gregory Halpern, President
AGREED AND ACCEPTED:
_______________________
2
<PAGE>
[ISO GRANT FORM]
CIRCLE GROUP INTERNET, INC.
340 Bingham Circle
Mundelein, IL 60060
Date: ________________
______________________
______________________
______________________
Dear _______________:
The Board of Directors of Circle Group Internet, Inc. (the
"Corporation") is pleased to award you an Option pursuant to the provisions of
the 1999 Stock Option Plan (the "Plan"). This letter will describe the Option
granted to you. Attached to this letter is a copy of the Plan. The terms of the
Plan also set forth provisions governing the Option granted to you. Therefore,
in addition to reading this letter you should also read the Plan. Your signature
on this letter is an acknowledgement to us that you have read and under-stand
the Plan and that you agree to abide by its terms. All terms not defined in this
letter shall have the same meaning as in the Plan.
1. Type of Option. You are granted an ISO. Please see in particular
Section 11 of the Plan.
2. Rights and Privileges. Subject to the conditions hereinafter set
forth, we grant you the right to purchase __________ shares of Stock at
$__________ per share, the current fair market value of a share of Stock. The
right to purchase the shares of Stock accrues in __________ installments over
the time periods described below:
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
1
<PAGE>
3. Time of Exercise. The Option may be exercised at any time and from
time to time beginning when the right to purchase the shares of Stock accrues
and ending when they terminate as provided in Section 5 of this letter.
4. Method of Exercise. The Options shall be exercised by written
notice to the Chairman of the Board of Directors at the Corporation's principal
place of business. The notice shall set forth the number of shares of Stock to
be acquired and shall contain a check payable to the Corporation in full payment
for the Stock or that number of already owned shares of Stock equal in value to
the total Exercise Price of the Option. We shall make delivery of the shares of
Stock subject to the conditions described in Section 13 of the Plan.
5. Termination of Option. To the extent not exercised, the Option
shall terminate upon the first to occur of the following dates:
(a) _____________, 199___, being __________ years from the
date of grant pursuant to the provisions of Section 2 of this Agreement; or
(b) The expiration of thirty (30) days following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan for any reason, other than by reason of death or permanent
disability. As used herein, "permanent disability" means your inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months; or
(c) The expiration of 12 months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan, if such employment termination occurs by reason of your death or by
reason of your permanent disability (as defined above).
6. Securities Laws.
The Option and the shares of Stock underlying the Option have
not been registered under the Securities Act of 1933, as amended (the "Act").
The Corporation has no obligations to ever register the Option or the shares of
Stock underlying the Option. All shares of Stock acquired upon the exercise of
the Option shall be "restricted securities" as that term is defined in Rule 144
promulgated under the Act. The certificate representing the shares shall bear an
appropriate legend restricting their transfer. Such shares cannot be sold,
transferred, assigned or otherwise hypothecated without registration under the
Act or unless a valid exemption from registration is then available under
applicable federal and state securities laws and the Corporation has been
furnished with an opinion of counsel satisfactory in form and substance to the
Corporation that such registration is not required.
7. Binding Effect. The rights and obligations described in this letter
shall inure to the benefit of and be binding upon both of us, and our respective
heirs, personal representatives, successors and assigns.
2
<PAGE>
8. Date of Grant. The Option shall be treated as having been granted
to you on the date of this letter even though you may sign it at a later date.
Very truly yours,
By: __________________________
Gregory Halpern, President
AGREED AND ACCEPTED:
_____________________
3
<PAGE>
[NSO GRANT FORM
WITH RELOAD OPTIONS]
CIRCLE GROUP INTERNET, INC.
340 Bingham Circle
Mundelein, IL 60060
Date: ________________
______________________
______________________
______________________
Dear __________:
The Board of Directors of Circle Group Internet, Inc. (the
"Corporation") is pleased to award you an Option pursuant to the provisions of
the 1999 Stock Option Plan (the "Plan"). This letter will describe the Option
granted to you. Attached to this letter is a copy of the Plan. The terms of the
Plan also set forth provisions governing the Option granted to you. Therefore,
in addition to reading this letter you should also read the Plan. Your signature
on this letter is an acknowledgement to us that you have read and understand the
Plan and that you agree to abide by its terms. All terms not defined in this
letter shall have the same meaning as in the Plan.
1. Type of Option. You are granted an NSO. Please see in particular
Section 11 of the Plan.
2. Rights and Privileges.
(a) Subject to the conditions hereinafter set forth, we grant
you the right to purchase __________ shares of Stock at $__________ per share,
the current fair market value of a share of Stock. The right to purchase the
shares of Stock accrues in __________ installments over the time periods
described below:
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
(b) In addition to the Option granted hereby (the "Underlying
Option"), the Corporation will grant you a reload option (the "Reload Option")
as hereinafter provided. A Reload Option is hereby granted to you if you acquire
shares of Stock pursuant to the exercise of the Underlying Option and pay for
such shares of Stock with shares of Common Stock already owned by you (the
"Tendered Shares"). The Reload Option grants you the right to purchase shares of
Stock equal in number to the number of Tendered Shares. The date on which the
Tendered Shares are tendered to the Corporation in full or partial payment of
the purchase price for the shares of Stock acquired pursuant to the exercise of
the Underlying Option is the Reload Grant Date. The exercise
1
<PAGE>
price of the Reload Option is the fair market value of the Tendered Shares on
the Reload Grant Date. The fair market value of the Tendered Shares shall be the
low bid price per share of the Corporation's Common Stock on the Reload Grant
Date. The Reload Option shall vest equally over a period of __________ (___)
years, commencing on the first anniversary of the Reload Grant Date, and on each
anniversary of the Reload Grant Date thereafter; however, no Reload Option shall
vest in any calendar year if it would allow you to purchase for the first time
in that calendar year shares of Stock with a fair market value in excess of
$100,000, taking into account ISOs previously granted to you. The Reload Option
shall expire on the earlier of (i) __________ (___) years from the Reload Grant
Date, or (ii) in accordance with Paragraph 5(b), or (iii) in accordance with
Paragraph 5(c) as set forth herein. If vesting of the Reload Option is deferred,
then the Reload Option shall vest in the next calendar year, subject, however,
to the deferral of vesting previously provided. Except as provided herein the
Reload Option is subject to all of the other terms and provisions of this
Agreement governing Options.
3. Time of Exercise. The Option may be exercised at any time and from
time to time beginning when the right to purchase the shares of Stock accrues
and ending when they terminate as provided in Section 5 of this letter.
4. Method of Exercise. The Options shall be exercised by written
notice to the Chairman of the Board of Directors at the Corporation's principal
place of business. The notice shall set forth the number of shares of Stock to
be acquired and shall contain a check payable to the Corporation in full payment
for the Stock or that number of already owned shares of Stock equal in value to
the total Exercise Price of the Option. We shall make delivery of the shares of
Stock subject to the conditions described in Section 13 of the Plan.
5. Termination of Option. To the extent not exercised, the Option
shall terminate upon the first to occur of the following dates:
(a) __________, 199_, being __________ years from the date of
grant pursuant to the provisions of Section 2 of this Agreement; or
(b) The expiration of three months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan for any reason, other than by reason of death or permanent
disability. As used herein, "permanent disability" means your inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months; or
(c) The expiration of 12 months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan, if such employment termination occurs by reason of your death or by
reason of your permanent disability (as defined above).
6. Securities Laws.
The Option and the shares of Stock underlying the Option have
not been registered under the Securities Act of 1933, as amended (the "Act").
The Corporation has no obligations to ever register the Option or the shares of
Stock underlying the Option. All shares of Stock acquired
2
<PAGE>
upon the exercise of the Option shall be "restricted securities" as that term is
defined in Rule 144 promulgated under the Act. The certificate representing the
shares shall bear an appropriate legend restricting their transfer. Such shares
cannot be sold, transferred, assigned or otherwise hypothecated without
registration under the Act or unless a valid exemption from registration is then
available under applicable federal and state securities laws and the Corporation
has been furnished with an opinion of counsel satisfactory in form and substance
to the Corporation that such registration is not required.
7. Binding Effect. The rights and obligations described in this letter
shall inure to the benefit of and be binding upon both of us, and our respective
heirs, personal representatives, successors and assigns.
8. Date of Grant. The Option shall be treated as having been granted
to you on the date of this letter even though you may sign it at a later date.
Very truly yours,
By: __________________________
Gregory Halpern, President
AGREED AND ACCEPTED:
___________________
3
<PAGE>
[ISO GRANT FORM
WITH RELOAD OPTIONS]
CIRCLE GROUP INTERNET, INC.
340 Bingham Circle
Mundelein, IL 60060
Date: ________________
______________________
______________________
______________________
Dear __________:
The Board of Directors of Circle Group Internet, Inc. (the
"Corporation") is pleased to award you an Option pursuant to the provisions of
the 1999 Stock Option Plan (the "Plan"). This letter will describe the Option
granted to you. Attached to this letter is a copy of the Plan. The terms of the
Plan also set forth provisions governing the Option granted to you. Therefore,
in addition to reading this letter you should also read the Plan. Your signature
on this letter is an acknowledgement to us that you have read and understand the
Plan and that you agree to abide by its terms. All terms not defined in this
letter shall have the same meaning as in the Plan.
1. Type of Option. You are granted an ISO. Please see in particular
Section 11 of the Plan.
2. Rights and Privileges.
(a) Subject to the conditions hereinafter set forth, we grant
you the right to purchase __________ shares of Stock at $__________ per share,
the current fair market value of a share of Stock. The right to purchase the
shares of Stock accrues in __________ installments over the time periods
described below:
The right to acquire __________ shares accrues on __________.
The right to acquire __________ shares accrues on __________.
(b) In addition to the Option granted hereby (the "Underlying
Option"), the Corporation will grant you a reload option (the "Reload Option")
as hereinafter provided. A Reload Option is hereby granted to you if you acquire
shares of Stock pursuant to the exercise of the Underlying Option and pay for
such shares of Stock with shares of Common Stock already owned by you (the
"Tendered Shares"). The Reload Option grants you the right to purchase shares of
Stock equal in number to the number of Tendered Shares. The date on which the
Tendered Shares are tendered to the Corporation in full or partial payment of
the purchase price for the shares of Stock acquired pursuant to the exercise of
the Underlying Option is the Reload Grant Date. The exercise
1
<PAGE>
price of the Reload Option is the fair market value of the Tendered Shares on
the Reload Grant Date. The fair market value of the Tendered Shares shall be the
low bid price per share of the Corporation's Common Stock on the Reload Grant
Date. The Reload Option shall vest equally over a period of __________ (___)
years, commencing on the first anniversary of the Reload Grant Date, and on each
anniversary of the Reload Grant Date thereafter; however, no Reload Option shall
vest in any calendar year if it would allow you to purchase for the first time
in that calendar year shares of Stock with a fair market value in excess of
$100,000, taking into account ISOs previously granted to you. The Reload Option
shall expire on the earlier of (i) __________ (___) years from the Reload Grant
Date, or (ii) in accordance with Paragraph 5(b), or (iii) in accordance with
Paragraph 5(c) as set forth herein. If vesting of the Reload Option is deferred,
then the Reload Option shall vest in the next calendar year, subject, however,
to the deferral of vesting previously provided. Except as provided herein the
Reload Option is subject to all of the other terms and provisions of this
Agreement governing Options.
3. Time of Exercise. The Option may be exercised at any time and from
time to time beginning when the right to purchase the shares of Stock accrues
and ending when they terminate as provided in Section 5 of this letter.
4. Method of Exercise. The Options shall be exercised by written
notice to the Chairman of the Board of Directors at the Corporation's principal
place of business. The notice shall set forth the number of shares of Stock to
be acquired and shall contain a check payable to the Corporation in full payment
for the Stock or that number of already owned shares of Stock equal in value to
the total Exercise Price of the Option. We shall make delivery of the shares of
Stock subject to the conditions described in Section 13 of the Plan.
5. Termination of Option. To the extent not exercised, the Option
shall terminate upon the first to occur of the following dates:
(a) __________, 199_, being __________ years from the date of
grant pursuant to the provisions of Section 2 of this Agreement; or
(b) The expiration of three months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan for any reason, other than by reason of death or permanent
disability. As used herein, "permanent disability" means your inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months; or
(c) The expiration of 12 months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan, if such employment termination occurs by reason of your death or by
reason of your permanent disability (as defined above).
6. Securities Laws.
The Option and the shares of Stock underlying the Option have
not been registered under the Securities Act of 1933, as amended (the "Act").
The Corporation has no obligations to ever register the Option or the shares of
Stock underlying the Option. All shares of Stock acquired
2
<PAGE>
upon the exercise of the Option shall be "restricted securities" as that term is
defined in Rule 144 promulgated under the Act. The certificate representing the
shares shall bear an appropriate legend restricting their transfer. Such shares
cannot be sold, transferred, assigned or otherwise hypothecated without
registration under the Act or unless a valid exemption from registration is then
available under applicable federal and state securities laws and the Corporation
has been furnished with an opinion of counsel satisfactory in form and substance
to the Corporation that such registration is not required.
7. Binding Effect. The rights and obligations described in this letter
shall inure to the benefit of and be binding upon both of us, and our respective
heirs, personal representatives, successors and assigns.
8. Date of Grant. The Option shall be treated as having been granted
to you on the date of this letter even though you may sign it at a later date.
Very truly yours,
By: __________________________
Gregory Halpern, President
AGREED AND ACCEPTED:
____________________
3
CONSENT OF HAROLD Y. SPECTOR
INDEPENDENT AUDITOR
I consent to the use of my reports dated as follows, included herein and to the
reference made to me.:
1. Financial statements of Circle Group Internet, Inc. as of December 31,
1998 and 1997, dated June 30, 1999 (except for Notes 1 and 3, the date
is October 6, 1999, and Notes 2, 4, 6 and 8, the date is November 24,
1999)
2. Financial Statements of Hos-Pillow Corporation, as of December 31, 1998
and 1997, dated June 4, 1999.
I consent to the incorporation by reference in the Registration Statement of the
aforementioned reports and to the use of my name as it appears under the caption
"Experts."
/s/ Harold Y. Spector, CPA
Pasadena, California
December 7, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Consolidated with subsidaries from date of acquisition
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 10,920,121
<SECURITIES> 0
<RECEIVABLES> 142,952
<ALLOWANCES> 0
<INVENTORY> 129,761
<CURRENT-ASSETS> 13,307,707
<PP&E> 706,156
<DEPRECIATION> 92,041
<TOTAL-ASSETS> 18,281,602
<CURRENT-LIABILITIES> 1,796,183
<BONDS> 0
0
0
<COMMON> 431
<OTHER-SE> 16,485,419
<TOTAL-LIABILITY-AND-EQUITY> 18,281,602
<SALES> 3,765,618
<TOTAL-REVENUES> 5,068,425
<CGS> 522,946
<TOTAL-COSTS> 2,610,529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,068
<INCOME-PRETAX> 2,455,828
<INCOME-TAX> 955,645
<INCOME-CONTINUING> 1,500,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,500,183
<EPS-BASIC> 0.175
<EPS-DILUTED> 0.165
</TABLE>
