As filed with the Securities and Exchange Commission on March 20, 2000
Registration Statement No.333-83701
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 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 juris- (Primary Standard (I.R.S. Employer
diction of incorporation Industrial Classifi- Identification No.)
or organization) cation) 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, P.A.
350 East Las Olas Boulevard
Suite 1700
Fort Lauderdale, Florida 33301
(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>
<TABLE>
<CAPTION>
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
- ---------- ---------- --------- --------- ---
<S> <C> <C> <C> <C>
common stock,
$.00005 par value
per share 1,838,760 $10.00 $18,387,600 $4,854.33
</TABLE>
(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 MARCH 20, 2000
PROSPECTUS
CIRCLE GROUP INTERNET, INC.
1,838,760 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 1,838,760 shares of common stock covered by this prospectus are
being sold by selling security holders identified.
There is currently no public market for our common stock. We have
applied for listing of our common stock on the American Stock 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 [ ], 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
<S> <C>
Prospectus Summary.................................................................................................................3
Summary Consolidated 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 Consolidated Financial Statements.......................................................................................F-1
</TABLE>
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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. Our e-finance division focuses its activities on
the Internet sector and, more generally, on issuers seeking to
market their stock offerings to accredited 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.cgicapital.com. The information on our web sites is not a part of this
prospectus.
SUMMARY CONSOLIDATED FINANCIAL DATA
In this section, we present our summary consolidated financial data. You should
read carefully the financial statements included in this prospectus, including
the notes to financial statements. The summary data in this section are not
intended to replace our financials. We derived the statement of operations data
for the years ended December 31, 1999 and 1998 from our audited consolidated
financial statements in this prospectus.
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<TABLE>
<CAPTION>
Statement of operations data:
Fiscal Year Ended December 31,
1999 1998
---- ----
Pro forma
<S> <C> <C>
Sales $6,496,507 $1,212,046
Gross Profit 5,668,664 562,450
Operating Expenses 3,153,471 814,110
Income(loss)
operations 2,515,193 (251,660)
Net Income (loss) 1,753,684 (253,429)
Net Income (loss) per
Common Share:
Basic $0.19 $(0.04)
Fully diluted $0.18 $(0.04)
Weighted average shares
outstanding 9,122,055 7,032,328
</TABLE>
<TABLE>
<CAPTION>
Balance sheet data:
December 31,
1999 1998
---- ----
(Pro forma)
<S> <C> <C>
Current Assets $12,083,385 $1,111,999
Total Assets 23,458,154 1,178,035
Total Liabilities 6,610,150 163,203
Working Capital 5,473,235 948,796
Stockholders Equity 16,848,004 1,014,832
</TABLE>
GENERAL INFORMATION
The terms "Circle Group Internet," "we," "our," and "us" refer to Circle Group
Internet, Inc. and our subsidiaries CGI Capital, Inc., On-line Bedding, Inc.,
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 76% of our revenues for the fiscal year ended December 31, 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
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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.
In addition, at December 31, 1999 we recorded an income tax payable of
$1,171,287. We will be required to use a portion of our working capital to pay
these income taxes which are due on this revenue attributed to non- cash
compensation.
WE HAVE HAD NEGATIVE CASH FLOWS FROM OPERATIONS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING IF WE NEED IT IN THE FUTURE.
To date, we have had negative cash flows from operations and have depended on
sales of our securities to meet our cash requirements. Because a significant
portion of our sales are equal to the value we attribute to restricted
securities we receive as compensation for our B2B services, we may continue to
have negative cash flows from operations during fiscal 2000. There is no public
market for any of the restricted securities we recognize as sales revenue, and
we cannot guarantee that a public market will develop for one or more of these
companies in the future. We cannot guarantee that our e-tailer or e-finance
divisions will generate sufficient cash flow during fiscal 2000 to provide for
our cash needs. We anticipate that we will continue to be dependent upon funds
we received during 1999 from sales of our securities to provide sufficient cash
for our operations. Depending upon the growth rate of our business, we may need
to raise additional cash to:
- - fund our working capital needs until such time as we can convert restricted
securities we accept as payment for the services of our B2B division into cash,
if ever,
- support our planned growth,
- continue development of our e-finance businesses,
- increase our marketing efforts,
- respond to anticipated capital requirements, and
- respond to competitive pressures or unanticipated requirements.
We may not be able to obtain additional financing on acceptable terms when
needed. If we require, but are unable to obtain, additional financing in the
future, we may be unable to fund our operations at their current levels,
implement our business and growth strategies, respond to changing business or
economic conditions, withstand adverse operating results, or compete
effectively.
THE LIMITED OPERATING HISTORY IN OUR B2B DIVISION MAY IMPEDE OUR ABILITY TO
ASSIST IN THE DEVELOPMENT OF OUR CLIENT COMPANIES.
Our ability to consult and build a technological presence for our client
companies is based, in part, on the knowledge we gained from our previous
experiences managing our own growth and the growth of our client companies. We
have only recently expanded into this division, and must still develop a track
record on which our future clients can evaluate us and determine our ability to
assist them in growing their business. While we have been building web sites,
software and our own infrastructure for more than three years, we have limited
consulting experience. If our consulting is inadequate for our client companies,
this may impede their success, and could ultimately affect our ability to
realize a return on our restricted stock compensation.
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OUR MINIMAL PRIOR INVESTMENT BANKING EXPERIENCE MAY LIMIT OUR GROWTH AND
SUCCESS.
While several members of our management team have previous experience in the
securities industry, we have only recently expanded our operations into
investment banking with our e-finance 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 investment banking experiences, it may
adversely affect our ability to increase our revenues and profits.
THE LIMITED 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 develop a further
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 who have the greatest
potential for future success.
WE HAVE ONLY RECENTLY EXPANDED OUR E-TAILER DIVISION TO INCLUDE AN E-COMMERCE
WEB SITE, AND WE MAY BE UNSUCCESSFUL USING THE INTERNET FOR ON-LINE BEDDING'S
TRADITIONAL OPERATION.
Although On-Line Bedding has been in operation since 1981, we recently expanded
its operations to include online sales. We have only a brief history of selling
On-Line Bedding's products over the Internet. The overall growth in our revenues
and profits from On-Line Bedding will depend largely on the continuing
development and marketing of its web site. We will be relying upon Internet
advertising, newsletters, and brochures to draw consumers to On-Line Bedding's
web site. Because we have limited experience running an e-commerce platform, we
cannot guarantee that we will be successful in attracting consumers to On-Line
Bedding's web site or increasing its revenues and profits through online sales.
IN THE EVENT THE SEC DETERMINES THAT WE VIOLATED THE SECURITIES LAWS, WE DO NOT
KNOW WHAT EFFECT, IF ANY, IT WILL HAVE ON US.
On February 17, 2000, the Securities and Exchange Commission issued an order
directing private investigation concerning possible violations of Sections 5,
17(a) and 17(b) of the Securities Act of 1933, as amended (the "Securities Act")
and Sections 10(b) and 10(b)(5) of the Securities Exchange Act of 1934 in
connection with transactions in Circle Group and other securities. We believe
that the allegations contained in the order have no basis in fact, and we have
been cooperating with the Staff of the SEC. However, in the event the Staff
should determine that there have been violations by us, the SEC may institute
public, administrative or injunctive proceedings against us seeking, among other
things, an injunction from future rule violations.
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,
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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 December 31, 1999 and has
been derived from financial information appearing in the financial statements
included in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
-----------------
<S> <C>
Stockholders' equity:
common Stock, $.00005 par value
per share; 50,000,000 shares
authorized; 9,875,680 shares issued
and outstanding at December 31, 1999 494
Additional paid-in capital 16,235,209
Dividend (1,020,166)
Retained earnings 1,597,433
Other comprehensive income 35,714
Minority interest in subsidiary ( 680)
Total stockholders' equity 16,848,004
-------------
Total capitalization $23,458,154
=============
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION ALONG WITH OUR FINANCIAL STATEMENTS AND
RELATED NOTES INCLUDED IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS, UNCERTAINTIES AND
ASSUMPTIONS, INCLUDING THOSE DISCUSSED UNDER "RISK FACTORS." OUR ACTUAL RESULTS,
PERFORMANCE AND ACHIEVEMENTS IN 2000 AND BEYOND MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED IN, OR IMPLIED BY, THESE FORWARD LOOKING STATEMENTS.
Overview
We acquired On-Line Bedding in January 1999. Our CEO was a co-founder, together
with his parents, of On- Line Bedding. At the time of the acquisition, our CEO
was not an officer, director or shareholder of the company. The acquisition,
however, was accounted for as a combination of related party interests treated
in a manner similar to that of a pooling of interests, with the excess of cost
over the net assets acquired being treated as a dividend to the related party.
Our consolidated balance sheet at December 31, 1998 and our condensed
consolidated statements of income, statement of changes in stockholders' equity
and statements of cash flows
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<PAGE>
for the year ended December 31, 1998 give proforma effect to the acquisition of
On-Line Bedding as if it had occurred on January 1, 1998.
We acquired approximately 82% of the issued and outstanding capital stock of PPI
Capital in March 1999 from our CEO. PPI Capital is a shell corporation with no
operations or revenues. The acquisition was accounted for as a dividend to a
related party.
We acquired CGI Capital in November 1999 and its results of operations are
included in our financial statements since the date of acquisition.
RESULTS OF OPERATIONS
CONSOLIDATED
Sales
Our sales increased approximately 436% for the fiscal year ended December 31,
1999 from the fiscal year ended December 31, 1998. The following table provides
a breakdown of the sales for our divisions for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Years Ended December 31,
-------------------------------
1998 1999
---- ----
<S> <C> <C> <C>
B2B division $ 338,333 $ 5,269,819
e-finance division - 198,048
e-tailer division 873,713 1,028,640
----------- -----------
$ 1,212,046 $ 6,496,507
=========== ===========
</TABLE>
Gross profit
Gross profit as a percentage of sales increased significantly to approximately
87.2% for the fiscal year ended December 31, 1999 from approximately 46.4% for
the fiscal year ended December 31, 1998. This increase is primarily the result
of increased revenues from our B2B division.
Operating expenses
Operating expenses consist of payroll and related costs, insurance, occupancy
expenses, professional fees, and general operating expenses. Operating expenses
increased $2,937,462, or approximately 361%, for the fiscal year ended December
31, 1999 from the fiscal year ended December 31, 1998. This increase is
primarily attributable to:
- increases in payroll and related costs of approximately $639,000 for
the fiscal year ended December 31, 1999 as compared to approximately $195,000
for the fiscal year ended December 31, 1998 as a result of the hiring of
additional personnel to support our higher level of sales,
- increases in occupancy costs of approximately $50,000 for the fiscal
year ended December 31, 1999 from those costs in the fiscal year ended December
31, 1998 as a result of our move to our larger facility in August 1999,
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- nonrecurring expenses of approximately $98,000 during fiscal 1999 as
related to our capital raising activities, including costs associated with
printing, transfer agent fees and overnight mail,
- approximately $555,000 in nonrecurring compensation expense in fiscal
1999 which represented the value of common stock issued to new employees as
signing bonuses,
- approximately $598,000 in consulting expense in fiscal 1999 which
represented the value of stock warrants granted for professional services,
- approximately $130,000 in additional depreciation expense for the
fiscal year ended December 31, 1999 as compared to the fiscal year ended
December 31, 1998,
- professional fees, including legal and accounting, and other expenses
related to our capital rasing raising activities in fiscal 1999 of approximately
$460,000, and
- increases in general operating expenses, including computer supplies
and services, insurance, travel, telephone, copying and Internet access of
approximately $860,000 for the fiscal year ended December 31, 1999 as compared
to approximately $190,000 for the fiscal year ended December 31, 1998.
Other income (expenses)
Other income (expenses) for the fiscal year ended December 31, 1999 included
approximately $344,397 in interest income.
Net income
We reported net income of $1,358,845 for the fiscal year ended December 31, 1999
as compared to a net loss of $253,429 for the fiscal year ended December 31,
1998.
B2B DIVISION
Sales reported by this division increased from $338,333 for the fiscal year
ended December 31, 1998 to $5,269,819 for the fiscal year ended December 31,
1999. These sales included sales of business-to-business consulting services and
our Internet viewing software. Sales for the comparable period in fiscal 1998
were generally attributed to sales of our marketing software. Included in the
sales for the fiscal year ended December 31, 1999 reported by this division is
approximately $4,953,249 in non-cash revenue which represents the value assigned
to restricted securities which we accepted as payment for services rendered by
our B2B division. We anticipate that we will continue to accept restricted
securities as payment for our B2B services in the future.
Operating expenses in this division increased from $435,287 for the fiscal year
ended December 31, 1998 to $3,612,269 for the fiscal year ended December 31,
1999 as a result of our growth and development of this division. These
additional expenses included approximately $1,960,000 in additional payroll and
related costs, insurance, occupancy expenses, professional fees, and general
operating expenses. Included in operating expenses for the fiscal year ended
December 31, 1999 for this division was the $555,000 nonrecurring compensation
expense and $598,000 consulting expense discussed above. As we continue to
expand our operations in this division during fiscal 2000, we anticipate
operating expenses in this division will continue to increase.
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This division reported net income of $985,800 for the fiscal year ended December
31, 1999 versus a net loss of $95,511 for fiscal 1998.
E-TAILER DIVISION
Sales reported by this division increased approximately 18% for the fiscal year
ended December 31, 1999 to $1,028,640 from sales of $873,713 for the fiscal year
ended December 31, 1998. Gross profit as a percentage of sales decreased by
approximately 6.2% to approximately 19.5% for the fiscal year ended December 31,
1999 as compared to approximately 25.7% for the period in fiscal 1998. The gross
profit reported for the fiscal year ended December 31, 1998 was higher than
customarily reported by On-Line Bedding as a result of a non- recurring order
flow in that period. The gross profit margin reported for On-Line Bedding for
the fiscal year ended December 31, 1999 is closer to this division's historic
norms.
Operating expenses in this division, which were $91,965 for the fiscal year
ended December 31, 1999, remained essentially unchanged from the fiscal year
ended December 31, 1998 which were $95,533. We do not presently anticipate any
increases in operating expenses within this division.
This division reported net income of $77,050 for the fiscal year ended December
31, 1999 versus $122,980 for the fiscal year ended December 31, 1998. This
reduction in net income despite the increase in sales is attributable to the
reduced gross profit margins discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 we had working capital of $5,976,637, an increase of
$5,027,841 from December 31, 1998. This increase is primarily 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. We
have drawn $800,000 against this credit line at December 31, 1999. Net cash used
in operating activities was $1,518,657 for the fiscal year ended December 31,
1999 as compared to net cash provided by operating activities of $30,016 for the
fiscal year ended December 31, 1998. This was the result of our policy of
accepting restricted securities as payment for our B2B services, together with
the expenses associated with the rapid expansion of our operations during the
fiscal year ended December 31, 1999 which included the build out of our new
facility and the hiring of an additional 35 employees, including several members
of our senior management team, in our effort to support our sales growth. As
described above, we also incurred a $555,000 expense during fiscal 1999 related
to stock signing bonuses. We anticipate that we will incur similar expenses
during the fiscal year ending December 31, 2000 although the amount may not be
as significant. The net effect of our policy of accepting restricted securities
as payment for our B2B services results in an increase in net cash used by
operating activities until such time, if ever, that the restricted securities
are converted to cash. Net cash used in investing activities increased from
$51,978 for the fiscal year ended December 31, 1998 to $5,037,454 for the fiscal
year ended December 31, 1999, as a result of loans in the aggregate amount of
$2,005,000 made to two non-affiliated entities who are clients of our e-finance
division, the purchase of approximately $20,000 in machinery and equipment for
our new facility, a $500,000 investment in a private placement of an
unaffiliated third party and a $300,000 investment in a certificate of deposit.
Net cash provided by financing activities for the fiscal year ended December 31,
1999 was $14,299,859 compared to $950,672 for the fiscal year ended December 31,
1998. This increase was primarily attributable to proceeds from sales of our
securities and borrowings under our line of credit.
We have primarily funded our operations through the sale of our common stock.
During the fiscal year ended December 31, 1999 we raised $2,500,000 from the
sale of our common stock in a Regulation A offering. The
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following describes what we proposed to use the Regulation A proceeds for and
the actual uses of these proceeds:
<TABLE>
<CAPTION>
Proposed Actual
-------- ------
<S> <C> <C>
Salaries $820,000 $769,668
Marketing 485,000 159,474
Accounts Payable 75,000 75,000
Product Development 175,000 98,850
Working Capital 753,000 472,665
Build out leased premises -0- 484,163
Office & Computer Equipment -0- 270,242
Acquisition of Other Businesses -0- 55,512
</TABLE>
Although the actual use of the Regulation A proceeds deviated slightly from our
proposed use of such proceeds, we believe that the use of the Regulation A
proceeds was substantially in compliance with the disclosure contained in our
Regulation A offering circular. While we may have changed certain specific
focuses as to how we would develop and market our Internet products, we
continued to use the proceeds from the Regulation A offering for developing and
marketing Internet products and general expansion of our operations.
Between March 1, 1999 and March 15, 1999, we sold 151,480 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 in reliance on Section
4(2) and Rule 506, Regulation D. We received $378,700 in gross proceeds from the
sale of these shares. We used these proceeds to launch our e-finance division.
Between April 1, 1999 and July 22, 1999, we sold 1,232,200 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 in reliance on Section 4(2) and Rule
506, Regulation D. We received $12,322,000 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. The balance of these proceeds will be used for
general working capital.
Current assets at December 31, 1999 were $12,083,385 as compared to $1,111,999
at December 31, 1998. In addition to cash on hand at December 31, 1999, the
increase in current assets also includes, $1,076,773 in restricted cash which
represents the encumbered portion of a certificate of deposit set aside to
collateralize our line of credit, $68,231 in employee loans, and $2,005,000 in
notes receivable from two unaffiliated third parties.
In November 1999, CGI Capital lent $2,000,000 to an unaffiliated third party.
This note bears interest at 12% per annum and is collateralized by the
borrower's unencumbered assets and a first mortgage on real property which
serves as the borrower's principal place of business. The note is due on the
earlier of April 30, 2000 or the date on which the borrower receives $5,000,000
in gross proceeds in a private placement to be undertaken on a best efforts
11
<PAGE>
basis by CGI Capital. In December, 1999, CGI Capital lent $5,000 to a second
unaffiliated third party. The note bears interest at 8% per annum, is unsecured,
and is payable from the proceeds of a best efforts private placement for which
CGI Capital is acting as placement agent.
Other assets increased from $40,132 at December 31, 1998 to $10,380,682 at
December 31, 1999. Included in other assets at December 31, 1999 was, $9,405,418
in investments, which represents the fair value assigned to the restricted stock
we accepted for payment of services to third parties by our B2B division, lease
deposits totaling $34,293, and $74,169 in a deferred tax asset.
In September 1999, we invested $500,000 through the purchase of shares of
convertible preferred stock of an unaffiliated third party in a private
placement by that issuer. These shares are convertible into shares of common
stock, at our option, and we have been granted demand and piggy-back
registration rights on the underlying shares of common stock. As of December 31,
1999, the amount of this investment was $535,714 which represents the $500,000
investment, together with an unrealized gain of $35,714.
Current liabilities at December 31, 1999 included $4,452,169 of deferred
revenue. Deferred revenue is the difference between the value we assign to the
stock we receive as compensation for our B2B services and the amount earned
under those contracts at December 31, 1999. Current liabilities at December 31,
1999 also included $1,171,287 of income tax payable. Because we received
non-cash compensation for a significant portion of our sales, we incur an income
tax payable without the benefit of receiving cash for those sales. We will be
required to use cash on hand to satisfy this liability.
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 next 12 months.
SPECIAL CAPITAL CONSIDERATIONS OF OUR E-FINANCE DIVISION
CGI Capital 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, CGI Capital
is required to maintain a minimum net capital of $5,000. As of December 31,
1999, it had net capital in excess of the minimum net capital required of
$21,814. The minimum net capital required is based upon the nature of CGI
Capital' broker dealer business. If CGI Capital remains principally engaged in
the offer and sale of private placement securities, then its net capital
requirements remain at a minimum. In the event CGI Capital 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, CGI will be subject to liabilities based upon the nature of
its business. CGI 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, CGI 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
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time CGI undertakes public offerings for its clients, it will be subject to
similar liabilities related to the contents of the prospectus. CGI 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 CGI's activities, if any, will have on our liquidity and capital
resources.
YEAR 2000 READINESS DISCLOSURE
We were aware of the issues associated with the programming code in existing
computer systems as the year 2000 approached. We reviewed all software and
hardware used internally by us in all support systems to determine whether they
were Year 2000 compliant. Our software had already been upgraded by the
manufacturer, or was recently purchased and was Year 2000 compliant. We also
installed the suppliers' Year 2000 upgrades to our accounting systems. The only
outside vendor upon which we relied, other than utility companies and similar
businesses, was the company which provides us with access to the Internet. This
company had previously informed us that its system was Year 2000 compliant.
Since January 1, 2000 we have experienced no disruptions in our systems or those
of third parties, or other computer related problems as a result of processing
dates beyond 1999. However, we cannot say with any certainty that we will not
experience any Year 2000 problems in the future.
The costs to us 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 were not material to our financial position or
results of operations.
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,
except for research and development. 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.
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Since 1997, we have also acquired three new businesses designed to expand and
broaden the scope of our business and operations.
OUR ACQUISITIONS
- In January 1999, we acquired On-Line Bedding, Inc., 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, Inc., 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 CGI Capital, Inc., 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, Inc. Our e-finance division operates in the corporate structure of CGI
Capital, Inc. Our e-tailer division operates in the corporate structure of
On-Line Bedding, Inc. PPI is a shell corporation which has no operations as of
the date of this prospectus.
INFORMATION ABOUT THE ACQUISITIONS
On-Line Bedding, Inc.
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 allows us to take advantage of various
operating efficiencies including central administrative and accounting
personnel.
PPI Capital, Inc.
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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."
CGI Capital, Inc.
CGI Capital
CIG Securities was formed in 1996 by Internet Broadcasting Company to take
advantage of the developing Internet direct public offering service market. We
officially changed CIG Securities name to CGI Securities on February 2, 2000,
and subsequently changed the name of CGI Securities to CGI Capital on February
24, 2000. CGI Capital 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 CGI Capital, introduced the principal of CGI Capital to us after we
decided to acquire a broker-dealer. After engaging in due diligence on CGI
Capital, we signed an agreement to purchase all of its issued and outstanding
stock from Internet Broadcasting Company, an unaffiliated third party, for
$35,000. CGI Capital's 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. CGI Capital has received
approval to conduct business as a broker-dealer in 43 states, plus the District
of Columbia, and has applications pending in the remaining states. We do not
anticipate that the costs of making and obtaining these additional approvals
will be substantial.
CGI Capital offers accredited investors the opportunity to invest in private
placements made under Rule 506 of Regulation D . CGI Capital has operated as a
$5,000 broker-dealer offering private placements of securities on a best
efforts, application basis pursuant to SEC Rule 15c2-4.
CGI Capital operates as a traditional broker-dealer using the Internet to offer
private placements to accredited investors. By using the Internet as an enabling
tool, we give the opportunity for our members to individually research our
client companies in a password-protected environment to fully evaluate our
private placement offerings. CGI Capital plans to continue to hire registered
representatives and expand the broker-dealer. Additionally, some of the
pre-existing members do not maintain Internet access. Those members are sent
hard copies of private placements that we offer in the traditional manner.
CGI Capital's principal offices are located in a secured, separate area of our
principal offices. Mr. Brad Levine, the previous principal of CGI Capital,
resigned all positions in December 1999. Mr. Erik Brown, our vice president of
corporate development, was appointed president of CGI Capital in May 1999, and
remained in that position following the closing of our purchase of CGI Capital.
Mr. Brown is responsible for its day to day operations. Mr. Arthur Tanner, our
CFO, serves as CGI Capital's CFO and financial operations principal, and
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Mr. Frank Menon, our president, serves as CGI Capital's CEO. These individuals
have already obtained the required licenses from the NASD for the positions they
hold at CGI Capital.
ACQUISITION PROCEDURE
After we identified our acquisition candidates, 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 CGI Capital 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
effective manner, 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 help small to mid-size companies raise equity
capital in private placements through a friendlier funding source than offered
by traditional means. CGI Capital's e-finance activities focus on the Internet
sector and, more generally, on issuers who seek to market their stock offerings
to investors with an interest in technology.
CGI Capital actively solicits client companies that seek to raise private
capital in an efficient and cost effective manner. These potential clients
undergo a screening process during which the company's business plan and
preliminary due diligence materials are reviewed. Management of the companies
which successfully pass the screening process are invited to make a presentation
about their company to CGI Capital, and additional due diligence, including an
industry analysis, are undertaken during this phase. CGI Capital will have
undertaken substantially the same type of due diligence on the issuers as is
generally conducted by other broker-dealer 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. When a decision is made to proceed with an offering, CGI then enters
into agreements with the issuers outlining the terms under which CGI Capital
will act as placement agent.
The placement agreement will generally contain:
- the conditions of the offering,
- the obligations of each party,
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- 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 CGI Capital 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 CGI Capital that
the interim financial statements appear to be prepared in
conformity with GAAP.
CGI Capital offers a reduced commission to issuers, and we believe the
fee structure is competitive, in that:
- CGI Capital 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, CGI Capital's commission is below the 10% to
13% commission charged by other investment banking firms and
broker-dealers, and
- CGI Capital does not charge the issuer a non-accountable
expense allowance, generally 3% of the offering proceeds.
CGI Capital believes its fee structure will enable it to attract a wide
variety of companies that seek assistance in raising capital privately.
We believe this will allow CGI Capital to undertake private placements
which could have a greater than average likelihood of being successful
following the closing of the private offering.
In the placement agency agreement, we generally will require issuers to
grant CGI Capital the right of first refusal for an IPO of the issuer,
upon terms and conditions to be negotiated at the time of the IPO. CGI
Capital 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. This right of first refusal for an IPO
has no bearing on the terms or success of the private offering, but is
an aspect in the placement agreement that offers the opportunity for
possible sources of future revenue.
Sales of securities made through general public solicitations,
like IPOs, are required to be registered under federal and state
securities laws. However, offerings made 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 . 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.
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Each issuer who wants to raise capital through CGI Capital will be
required to agree to issue the securities in a private offering under
strict compliance with Regulation D. The obligation to assure
compliance with Regulation D will rest on the issuer. CGI Capital, in
turn, is responsible to comply with the various federal and state
regulations related to its activities as a broker-dealer in the offer
and sale of the securities.
CGI Capital offers and sells securities in private placements through
traditional investment banking methods using the Internet to offer
additional services to our pre-existing members. CGI Capital's primary
fund raising process currently operates much like a traditional
broker-dealer. CGI Capital follows the basic procedures for offering
and selling shares to its members in private placements described
below.
The private offering memorandum is completed by the
issuer's counsel, reviewed, and approved by CGI
Capital's counsel.
An initial contact call is made by our fully-licensed
representatives to inform our pre-existing members of
the new private placement offering, and provide them
with preliminary information about the client
company's business.
Pre-qualified investors desiring further information
are forwarded a private placement memorandum, client
company materials, and subscription agreements. At
that time, we offer them the option to view our
website at www.cgicapital.com to view the client
company's Funds-In web site. This password-protected
web site allows the pre-qualified investor to
download our client company's private placement
memorandum and see an overview of the company in a
user friendly, easy to follow format.
After the pre-qualified investor has fully reviewed
all documents, a follow-up call is made to respond to
any questions the investor may have. If the investor
decides to proceed, the licensed representative walks
them through the subscription process.
Subscription agreements and funds in the name of the
client company's escrow account are sent to CGI
Capital, and the funds are logged in a locked and
secured area.
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 and the commission portion to CGI Capital. CGI
Capital will not accept subscription proceeds or
otherwise handle subscription funds for the issuer.
CGI Capital anticipates that SEC regulations will change considerably in regards
to the use of the Internet to offer private placements to pre-qualified
investors. CGI Capital has the infrastructure established to operate its
e-finance business patterned after the business described in the no-action
request by IPONet, which previously received favorable treatment by the SEC. We
believe that CGI Capital's proposed method of conducting its e-finance business
does not conflict with the applicable rules and regulations cited in the
no-action request IPONet no-action letter. The proposed procedures include:
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- - Posting a notice of a private offering in a password protected
page on www.cgicapital.com. This page is accessible only to its
members who previously qualified as accredited investors prior to
the offering.
- - Members interested in receiving more information about the private
offering, will contact the issuer directly, or forward an
indication of interest to CGI Capital, either using an on-line
form, or printing out the form and returning the hard copy to CGI
Capital.
- - CGI Capital, or the issuer, will then provide the member with
subscription documents online for the private offering, which will
also contain instructions regarding payment for the subscription.
CGI Capital's basic procedures for offering and selling shares to its members in
private placements may change significantly based on the SEC's ruling in regards
to the use of the Internet for offering private placements. Based on these
rulings, CGI Capital may adjust its operations to use the IPONet Internet-based
model, or conversely, operate the broker-dealer in a strict, traditional manner.
It is also foreseeable that a derivative of the two methods for offering and
selling shares of private placements may result.
As of the date of this prospectus, CGI Capital, in its role as placement agent,
has concluded selling efforts on one best efforts private offering and selling
efforts on four additional best efforts private offerings are ongoing. The
following table provides information on these private offerings:
<TABLE>
<CAPTION>
Date Size Amount Raised Status
Offering of to of
Began Offering Date Offering
----- -------- ---- --------
<S> <C> <C> <C>
June 25, 1999 $ 3,000,000 $930,099 selling efforts concluded
November 18, 1999 $ 3,000,000 $ 6,000 selling efforts ongoing
November 23, 1999 $ 4,000,000 $111,111 selling efforts ongoing
January 15, 2000 $ 3,000,000 0 selling efforts ongoing
January 15, 2000 $10,000,000 $ 18,000 selling efforts ongoing
</TABLE>
CGI Capital has also entered into agreements to act as placement agent
in two additional best efforts private offerings. We anticipate that
CGI Capital will begin selling efforts on these two offerings, which
are structured to raise $3,000,000 each in gross proceeds, during the
first half of 2000.
CGI Capital is also engaged in preliminary due diligence on four
additional companies that have requested that CGI Capital acts as the
placement agent for their private offerings.
As CGI Capital develops, it is important to expand CGI Capital's
membership base through the establishment of a relationship with our
licensed representatives, or more efficiently through web site
registration. CGI Capital will solicit members for its database by
contacting investors that meet the accredited investor standards of the
Securities Act of 1933, and offering them the opportunity to become a
member. This online process has many steps:
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- Prospective members complete an on-line questionnaire
which allows CGI Capital, and any potential issuer of
securities sold in a private offering by CGI Capital, 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 CGI Capital in a
hard copy format.
- CGI Capital 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 CGI Capital, the member will be given a
confidential password which will allow the member to
access a password- protected page in CGI Capital's web
site where private offerings will be posted.
- CGI Capital's web site allows a member to access private
offerings which are posted after the date on which the
individual is qualified as a CGI Capital member, so that
the registration as a member is not a solicitation for a
particular private offering.
- To maintain its members privacy, CGI Capital will contact
its members about new private offerings only if the member
has previously consented to these communications as part
of the registration process.
- CGI Capital will not release the names of its members to
issuers making the private offering unless the member is
interested in the issuers' offering.
Membership in CGI Capital is free and carries no obligation.
In the future, CGI Capital may elect to expand its e-finance activities
to include public offerings. These public offerings could include those
in which CGI Capital 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 CGI Capital acts as the
underwriter. We anticipate that CGI Capital's 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
CGI Capital's members, as well as any other potential
on-line investor. In cases where CGI Capital does not act
as an underwriter, its name will not appear on the
tombstone advertisement or preliminary prospectus.
Information will appear that CGI Capital is not an
underwriter of the securities, but is authorized to accept
customer orders for the purchase of the securities.
- CGI Capital 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 CGI Capital
indicating the visitor's interest in purchasing the
security.
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- in cases where CGI Capital does not act as an underwriter,
the securities will be sold through CGI Capital as a
selected dealer. CGI Capital 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 CGI Capital may act as the underwriter. However, as per Rule
1018 and the Membership Agreement for our firm, CGI Capital will
promptly notify NASD Regulation through the District Office where we
maintain our principal place of business in the event of the firm's
intent to engage in any underwriting or selling group activity of firm
commitment offerings.
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. 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 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 private placement
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, merger,
or acquisition. CGI Capital may act as lead underwriter in the public
offering, or CGI Capital 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. CGI Capital 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 that 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.
OUR B2B DIVISION
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As the result of our own growth experience, we recognize the need for emerging
companies to receive certain types of consulting. Most entrepreneurs tend to be
highly knowledgeable in specific areas of their business. However, we believe
there is a strong need for additional consulting services to benefit these
emerging companies. These include consulting services to assist them in managing
their employees, refining their infrastructure, developing an online identity,
and supporting overall business efficiency. We established our B2B division to
meet this need.
Many of our potential clients do not have the sufficient funds available to pay
the full value for these type of services. After raising capital, we believe it
is fiscally responsible to manage those investor funds in the most conservative
possible way. So, we developed a unique fee structure that is a combination of
restricted stock and a small amount of cash. A portion of the equity
compensation comes in the form of restricted stock, which is logged as revenue.
We expense our business to business consulting services against this revenue.
Additional compensation is paid in cash, where services are billed at cost, or
below cost. We believe this fee structure makes our services affordable to
developmental stage companies and preserves more of their capital for future
needs. 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.
Through formal and informal consulting services our goal is to reproduce and
implement our established method of infrastructure building to strengthen the
operations of our client companies. The scope of the business to business
consulting services provided by our B2B division is limited to operational
consulting services and does not include the raising of capital.
Our duties may extend from assisting a company in writing an employee handbook
to developing a marketing campaign that will target a specific audience. Our
goal is to offer a full range of services, so our client companies will be able
to focus its resources on growing their business. These services include:
- 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 user-friendly web sites 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 clien is properly
represented by attorneys and accountants with experience in
all areas of the client's current and proposed business and
operations;
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- 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;
- 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.
This division also develops distinctive web sites and engineers software
including our Internet viewing software. 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.
Our web design services include developing, maintaining, and promoting
user-friendly web sites. We 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.
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 that 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
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premium promotions, freebies, loss 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, 1998 $ 1,356
Fiscal year ended December 31, 1999 $23,514
We evaluate quarterly the carrying value of each investment currently trading on
an exchange for a possible increase or decrease in value. Securities for which
no trading market exists will be evaluated for a possible decrease in value. Any
increase or decrease in valuation will flow through the stockholders' equity
section of our balance sheet as an unrealized gain or loss on the investment.
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. If we are
unable to liquidate these securities, we will be required to write off the
investments which would adversely affect our financial position.
Because a significant amount of our compensation was generated by non-cash
items, mostly common stock of client companies, we would be required to register
as an investment company under the Investment Company Act of 1940, as amended
(the "1940 Act") unless it meets the statutory exemptions from the 1940 Act,
receives an exemptive order from the SEC, or changed the nature of its business
so that it would not be required to register under the 1940 Act. We are
currently relying on an exemption from the 1940 Act from the requirements to
register under the 1940 act. The exemption that we are relying on will expire on
or about April 24, 2000 and, since we have not taken steps to change the nature
of our business so that it would not be deemed to be an investment company
before that date, nor have we taken steps to apply for exemptive relief from the
SEC, it will be necessary for us to register under the 1940 Act. We will most
probably elect status as a business development company, as that term is defined
in the 1940 Act, and operate as such in the future.
The provisions of the 1940 Act related to business development companies were
enacted according to changes made to the Investment Company Act in 1980. The
purpose of the amendments were to enable investment companies that seek to
invest in emerging "venture capital type situations" to operate absent some of
the more burdensome restrictions of the 1940 Act. Once an election is filed
according to the 1940 Act electing status as a business development company, it
may not be withdrawn without first seeking a vote of a majority of the voting
shareholders of CGI. The following is a brief description of the business
development company provisions of the 1940 Act, and is qualified in its entirety
by reference to the full text of the 1940 Act and the rules thereunder.
A business development company must be operated for the purpose of investing in
the securities of certain present and former "eligible portfolio companies" and
certain bankrupt, insolvent or
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financially troubled companies and generally must make available "significant
managerial assistance" to such companies. An eligible portfolio company
("Portfolio Company") is a U.S. company that is not an investment company
(except for wholly-owned small business investment companies ("SBICs") licensed
by the Small Business Administration) and that satisfies one of the following
conditions: (1) it does not have a class of securities registered on a national
securities exchange or included in the Federal Reserve Board's list of
over-the-counter securities eligible for margin; (2) it is actively controlled
by the business development company either alone or as part of a group acting
together and an affiliate of the business development company is a member of the
Portfolio Company's board of directors; or (3) it meets such other criteria as
may be established by the SEC. Control of a Portfolio Company, under the
Investment Company Act, is presumed to exist if the business development company
owns more than 25% of the outstanding voting securities of such company.
"Making available significant managerial assistance" is defined under the
Investment Company Act to mean (1) any arrangement whereby a business
development company, through its directors, officers, employees or general
partners, offers to provide and, if accepted, does provide significant guidance
and counsel concerning the management, operations or business objectives or
policies of a Portfolio Company, (2) the exercise of a controlling influence
over the management or policies of a Portfolio Company by the business
development company acting individually or as part of a group of which the
business development company is a member acting together which controls such
company, or (3) the making of loans to a SBIC. A business development company
may satisfy the requirements of clause (1) with respect to a Portfolio Company
by purchasing securities of such a company as part of a group of investors
acting together if one person in such group provides the type of assistance
described in such clause. However, the business development company will not
satisfy the general requirement of making available significant managerial
assistance if it only provides such assistance indirectly through an investor
group. A business development company need extend significant managerial
assistance only with respect to Portfolio Companies that are treated as
Qualifying Assets (as defined below) for the purpose of satisfying the 70% test
discussed below.
The Investment Company Act prohibits or restricts each Fund from investing in
certain types of companies, such as securities brokerage firms, insurance
companies, investment banking firms and investment companies. Moreover, under
the Investment Company Act, a Fund may acquire only Qualifying Assets and
certain assets necessary for its operations (such as office furniture, equipment
and facilities) if, at the time of any proposed acquisition, less than 70% of
the value of such Fund's assets consists of Qualifying Assets. "Qualifying
Assets" include (1) securities of Portfolio Companies, (2) securities of
bankrupt, insolvent or otherwise financially troubled companies that are not
otherwise Portfolio Companies, (3) securities acquired as Follow On Investments
in companies that were eligible at the time of such Fund's initial acquisition
of their securities but are no longer eligible, provided that such Fund has
maintained a substantial investment in those companies, (4) securities received
in exchange for or distributed on or with respect to any of the foregoing, and
(5) cash items, government securities and high-quality short-term debt. The
Investment Company Act also places restrictions on the nature of the
transactions in which, and the persons from whom, securities can be purchased in
order for the securities to be considered Qualifying Assets. As a general
matter, Qualifying Assets may be purchased from the issuer or an
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<PAGE>
affiliate only in a transaction not constituting a public offering. A business
development company may not engage in short sales of securities.
Transactions involving certain closely affiliated persons of a Fund, including
any General Partner of such Fund, will require the prior approval of the SEC. In
general, (a) any person who owns, controls, or holds with power to vote, more
than 5% of the outstanding Interests in a Fund, (b) any director, executive
officer or general partner of that person, and (c) any person who directly or
indirectly controls, is controlled by, or is under common control with, that
person, must obtain the prior approval of a majority of the Independent General
Partners of such Fund and, in some situations, the prior approval of the SEC,
before engaging in certain transactions involving such Fund or any company
controlled by such Fund. In accordance with the Investment Company Act, a
majority of the General Partners of a Fund must be persons who are not
"interested persons" of such Fund as defined in the Act. The Investment Company
Act generally does not restrict transactions between a Fund and its Portfolio
Companies.
In the event that we elect status as a business development company, we will be
required to dispose of CGI Capital because it is a broker-dealer. In this event,
we will seek to sell CGI Capital on the best possible terms.
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.
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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.
Customers enter our online store through our simple, intuitive and easy to use
Web site. Our goal is to make the shopping process as easy as possible for
customers. Users accessing our online store generally fall into one of two
categories: individuals who know what product they want to buy and seek to
purchase it immediately in a highly convenient manner; or individuals who browse
the store, seeking product information to make an informed purchase. We designed
our online store to satisfy both types of users in a simple, intuitive fashion.
Presently, customers who use our online store can:
- - conduct targeted searches through a catalog of over 500 products,
- - browse among featured product lines,
- - participate in promotions,
- - view informational videos, and
- - access our customer support representatives by telephone, fax, and e-mail
during regular business hours
We expect to further improve our online store to include frequently asked
questions, educational materials, additional associated links, and continually
improve e-commerce platform.
Shoppers purchase products by simply clicking on a button to add products to
their virtual shopping cart. Just as in a physical store, customers can add and
subtract products from their shopping cart as they browse prior to making a
final purchase decision. Our store design allows customers to buy several
products at once rather than having to repeat the same purchase process for each
desired product. To execute orders, customers click on buy buttons. A message on
the screen prompts customers to supply shipping and credit card information.
They may also telephone orders in as well. All customer information is stored on
our secure server, and is used solely for internal purposes.
Our customer representatives handle customer service and support, answer general
questions, and provide product information by telephone, fax and e-mail. We
believe that our representatives provide valuable feedback regarding customer
satisfaction, which we use to improve our services.
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 limited inventory, and drop ships its products from manufacturers
or wholesale suppliers in multiple locations throughout the United States to
reduce freight costs for its customers.
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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 expanding 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.
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 all of our trademarks and service marks in the
United States. Although we have not secured registration of all of 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.
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 Safeguard Scientifics, Inc. 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 CGI Capital's 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
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leading securities firms. These developments have increased competition from
firms with capital resources greater than those of CGI Capital. 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 CGI Capital's business and could effect the
opportunities for CGI Capital to expand its operations.
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 better compete, we developed a unique fee
structure that is a combination of restricted common stock and a small amount of
cash. We believe this compensation structure will be attractive to our potential
clients and provide us with a 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.
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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.
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,
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<PAGE>
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.
CGI Capital 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. CGI Capital 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 CGI Capital 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.
CGI Capital 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 CGI Capital 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.
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As of this date, CGI Capital is required to maintain a minimum net capital of
$5,000. As of December 31, 1999, it had total net capital of $26,814, or $21,814
in excess of the minimum net capital required. The minimum net capital required
is based upon the nature of CGI Capital's broker dealer business. If CGI Capital
remains principally engaged in the offer and sale of private placement
securities, then its net capital requirements remain at a minimum. In the event
CGI Capital ever becomes involved in the participation in public underwritings,
then net capital requirements will be increased to a minimum of $100,000.
CGI Capital 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 CGI
Capital 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 CGI Capital 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
CGI Capital's 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.
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
CGI Capital. Significant fines could adversely impact our working capital, and a
suspension or expulsion would severely limit our projected future growth.
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
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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.
EMPLOYEES
As of March 10, 2000, we employ 48 persons, 45 full-time and three part-time.
The following table illustrates the breakdown of our employees by employer:
<TABLE>
<CAPTION>
Name of employer Number of employees
Full-time Part-time
--------- ---------
<S> <C> <C>
Circle Group Internet 34 3
On-Line Bedding 3 0
CGI Capital 8 0
PPI Capital 0 0
</TABLE>
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. However, on February 17,
2000, the Securities and Exchange Commission issued an order directing private
investigation concerning possible violations of Sections 5, 17(a) and 17(b) of
the Securities Act and Sections 10(b) and 10(b)(5) of the Securities Exchange
Act of 1934 in connection with transactions in Circle Group and other
securities. We believe that the allegations contained in the order have no basis
in fact, and we have been cooperating with the Staff of the SEC.
On November 10, 1999, a request for the return of stock received by us for
services provided was received from a client company. We are currently in
favorable negotiations with the client company and believe that the request for
the return of stock will be rescinded. We currently believe that resolving the
matter will not have a material adverse impact on our financial position or our
results of operations.
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
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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 choose to provide, or as we are required by law.
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 35 Chief Financial Officer
Michael J. Theriault 47 Chief Operating Officer
Edward L. Halpern 69 Director
Erik Brown 25 Vice President of Corporate
Development and President of CGI
Securities, Inc.
Steven H. Salgan, M.D. 47 Director
Stanford Jay Levin 48 Director
</TABLE>
GREGORY J. HALPERN is our founder and has been a director and chief executive
officer since our formation in May 1994. Mr. Halpern is also a director of CGI
Capital since November 19, 1999. 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, the
company that distributes a wide variety of bedding and disposable products which
we acquired in January 1999. In 1984, he co-founded Pain Prevention, Inc., an
Illinois company which sold electronic dental anesthesia equipment for which Mr.
Halpern holds
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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
March 1999. Mr. Menon previously served as our vice president of finance from
January 1999 until being elected president. Mr. Menon is also a director and
Chief Executive Officer of CGI Capital since November 19, 1999. Mr. Menon's
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. Mr.
Tanner is also a director, Chief Financial Officer and Financial Operations
Officer of CGI Capital since November 19, 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
35
<PAGE>
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 March 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, CEO and sole director. 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 president of CGI Capital since May 1999 and director of CGI Capital since
November 19, 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.
STEVEN H. SALGAN, M.D. has been a member of our board of directors since March
2000. Since January 1998, Dr. Salgan has been president of Steven H. Salgan,
M.D., Ltd., a practice specializing in primary care internal medicine and
general/family medicine, and since May 1999, he has been president of Steven H.
Salgan, M.D., P.C. Since 1997, he has been a member of the American Association
of Professional Ringside Physicians, and since 1996, he has been a member of the
Internal Medicine Subcommittee for Quality Assurance of Saint Margaret - Meray
Hospital in Hammond, Indiana. Dr. Salgan received a B.S. in Psychology from
DePaul University in 1976, and a M.D. from Abraham Lincoln School of Medicine,
University of Illinois in June 1982.
STANFORD JAY LEVIN has been a member of the board of directors since March 2000.
Since 1988, Mr. Levin has been the proprietor of Levin Enterprises, an auto
brokerage company located in Indiana. From January 1986 until June 1988, Mr.
Levin was a public school teacher. From May 1981 until May 1985, he was employed
by Hohman Professional Corp., a real estate development and management company
where his duties included commercial real estate management and overseeing
renovations, and from June 1975 until May 1981, he was employed by Yale
Corporation of Hammond, a real estate management company, where his
responsibilities included commercial real estate management. Mr. Levin received
a B.S. in Education from Indiana University in 1975.
36
<PAGE>
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, Levin and Salgan.
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,
Levin and Salgan; in matters considered by the compensation committee which
directly relate to Mr. Gregory J. Halpern, the compensation committee consists
of Messrs. Menon, Levin and Salgan.
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
37
<PAGE>
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.
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
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<PAGE>
We began our operations in 1997. The following table summarizes all compensation
accrued and paid by us in each of the last three 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
Chairman and Chief 1998 $76,000 0 0 0 0
Executive Officer 1999 $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.
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.
1999 INCENTIVE STOCK OPTION PLAN, AS AMENDED
39
<PAGE>
On January 1, 1999, our board of directors and a majority of our stockholders
initially adopted the Circle Group Internet, Inc. 1999 Stock Option Plan, as
amended. 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 initially reserved an aggregate of 1,000,000 shares of common stock for
issuance under the Plan. Subsequently, on February 17, 2000, we increased the
maximum number of shares issuable upon the exercise of options granted under the
plan to 2,000,000 shares. As of the date of this prospectus, grants for
1,259,000 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.
40
<PAGE>
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 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 grant 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 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
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 and is therefore
unenforceable.
41
<PAGE>
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. 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, 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 March 10,
2000, we owed Mr. and Mrs. Edward Halpern $42,889 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 no interest .
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.
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<PAGE>
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, Nancy Dabney, our receptionist and wife of Dana Dabney, one of
our founders, received 2,000 shares as a bonus.
On August 1, 1999, Mr. Gregory J. Halpern, our Chairman and Chief Executive
Officer, 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, CGI Capital (formerly known as CIG Securities, Inc.) 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 CGI Capital 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 CGI Capital, and he was the original officer and director of CGI
Capital. Because of these actions, he would be considered CGI Capital's
promoter. Mr. Levine, however, did not individually receive anything of value
for his actions in the formation and organization of CGI Capital. Upon its
organization, Internet Broadcasting Company, Inc. became CGI Capital's sole
shareholder, receiving 100 shares of its common stock which represented all the
issued common stock.
43
<PAGE>
On December 16, 2000, we drew down $300,000 from the line of credit to purchase
a certificate of deposit. The certificate of deposit was pledged to secure a
personal line of credit of the Chairman of the Board of Directors. The
certificate of deposit pays interest yearly at 8.25% and matures on December 16,
2002. The certificate of deposit was collateralized by 50,000 shares of our
common stock owned by the Chairman of the Board of Directors. On March 7, 2000,
the certificate of deposit account was closed, and the amount of $300,000 was
transferred back to our line of credit.
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 March 10, 2000, there were 9,875,680 shares of our common stock issued and
outstanding, without giving effect to the exercise of outstanding options or
warrants to acquire an additional 1,473,680 shares of our common stock. The
following table sets forth information as of March 10, 2000 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 6,724,000 68.1%
Dana L. Dabney 541,000 5.5%
Frank K. Menon 270,000 2.7%
Erik Brown 80,000 *
Edward L. Halpern 400,000 4.1%
Michael J. Theriault 190,000 1.9%
Arthur C. Tanner 200,000 2.0%
Steven H. Salgan, M.D. 0 n/a
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<PAGE>
Stanford Jay Levin 0 n/a
All officers and directors
as a group (nine persons) 8,405,000 85.2%
</TABLE>
* represents less than 1%
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, options to purchase 30,000 shares of
our common stock expiring in January 2003 and options to purchase 200,000 shares
of our common stock expiring in February 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, options to purchase 5,000 shares of our common
stock expiring in February 2003, options, owned of record by Nancy Dabney, his
wife, to purchase 10,000 shares, of which 4,000 expire March 2002 and 6,000
expire January 2003, and 2,000 shares owned of record by Nancy Dabney, his wife.
- - Mr. Menon's shares includes options to purchase 40,000 shares of our common
stock expiring in February 2002 and options to purchase 220,000 shares of our
common stock expiring in February 2003.
- - Mr. Brown's shares includes options to purchase 20,000 shares of our common
stock expiring in March 2002 and options to purchase 50,000 shares of our common
stock expiring in February 2003, 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 and options to purchase 160,000 shares of our
common stock expiring in February 2003, but excludes options to purchase 10,000
shares of our common stock which have not yet vested.
- - Mr. Tanner's shares includes options to purchase 20,000 shares of our common
stock expiring in May 2002 and options to purchase 170,000 shares of our common
stock expiring in February 2003, but excludes options to purchase 10,000 shares
of our common stock which have not yet vested.
45
<PAGE>
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 American Stock Exchange. We do not know if
our application for listing will be accepted. Even if our Common Stock is
accepted for listing, 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.
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 March 10, 2000, 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, 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 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.
46
<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 March 10, 2000 By This Prospectus After Offering Offering
- -------------------------------------------------------------------------------------------------------------------
<S> <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 *
Benchmark Capital
Ventures LLC 200,000 200,000 0 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 *
Gary Cooper 5,000 5,000 0 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 *
47
<PAGE>
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 March 10, 2000 By This Prospectus After Offering Offering
- -------------------------------------------------------------------------------------------------------------------
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 *
George D. Guritz, IRA 10,000 10,000 0 *
HF Trust 494,000 247,000 247,000 2.5%
Kevin R. Hitzeman 15,000 15,000 0 *
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 628 628 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 200 200 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 *
48
<PAGE>
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 March 10, 2000 By This Prospectus After Offering Offering
- -------------------------------------------------------------------------------------------------------------------
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. 443,090 443,090 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 Salgan 40,000 40,000 0 *
Susan Schaumberger 10,000 10,000 0 *
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 3,000 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 *
49
<PAGE>
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 March 10, 2000 By This Prospectus After Offering Offering
- -------------------------------------------------------------------------------------------------------------------
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 0 *
Mali H. Wu 2,000 0 *
Eugene Young 2 2,000 0 *
Farhad Zaghi 120,000 120,000 0 *
Total 1,838,760
=========
</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 March 10, 2000 through the conversion or exercise of any security or other
right.
- - 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.
- - 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
- - Mr. James Kokenis is the beneficial owner of Delta Energy Corp.
- - Mr. Stewart Flink is the beneficial owner of Dillion Capital LLC.
50
<PAGE>
- - 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.
- - 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 was terminated on December 1999. 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.
- - 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.
51
<PAGE>
- - 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 American Stock
Exchange. We do not know if the application 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
The American Stock Exchange regarding our listing application. Without an
approval for listing of our common stock on The American Stock Exchange, 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 successful in obtaining a listing of our common stock on
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;
- 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 rather than under this prospectus; and
52
<PAGE>
- 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, 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. Neither we
nor any selling security holder can presently estimate the amount of
compensation. CGI Capital 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 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
53
<PAGE>
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,
$.00005 par value per share, of which 9,875,680 shares are issued and
outstanding as of March 10, 2000. 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 1,246,500 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.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus, an aggregate of 7,045,148 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, assuming a public market exists for the
securities, of which there are no assurances. The 494,000 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 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 American Stock Transfer & Trust Co., 40 Wall Street, New
York, NY 10005.
LEGAL MATTERS
Legal matters in connection with this registration statement will be passed upon
for us by Atlas Pearlman, P.A., 350 East Las Olas Boulevard, Suite 1700, Fort
Lauderdale, Florida 33301.
EXPERTS
Our audited financial statements as of December 31, 1999 and 1998, and for the
fiscal years then ended, and pro forma consolidated financial statements at
December 31, 1998, and for the fiscal year then ended are included in this
prospectus and have been audited by Harold Y. Spector, independent certified
public accountant, as indicated in his reports. These financial statements are
included in this prospectus in reliance upon the authority of Mr. Spector as an
expert in accounting and auditing.
55
<PAGE>
<TABLE>
<CAPTION>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 AND 1998
<S> <C>
Condensed Consolidated Balance Sheets F-
Condensed Consolidated Statements of Income F-
Condensed Consolidated Statements of Cash Flows F-
Notes to Condensed Consolidated Financial Statements F-
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998
Accountant's Report F-
Pro Forma Condensed Consolidated Balance Sheet F-
Pro Forma Condensed Consolidated Statement of Income F-
Notes to Pro Forma Condensed Consolidated Financial Statements F-
AUDITED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997
Independent Auditor's Report F-
Balance Sheets F-
Statements of Income and Retained Earnings F-
Selling Expenses F-
Administrative Expenses F-
Statement of Stockholders' Equity F-
Statement of Cash Flows F-
Notes to Financial Statements F-
HOS-PILLOW CORPORATION
AUDITED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997
Independent Auditor's Report F-
Balance Sheets F-
Statements of Income and Retained Earnings F-
Cost of Sales F-
Operating Expenses F-
Statement of Changes in Stockholders' Equity F-
Statement of Cash Flows F-
Notes to Financial Statements F-
</TABLE>
F-1
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIAIRES
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT..................................................F1
CONSOLIDATED BALANCE SHEETS................................................F2-F3
CONSOLIDATED STATEMENTS OF INCOME.............................................F4
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY.....................F5
CONSOLIDATED STATEMENT OF CASH FLOWS.......................................F6-F7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................F8-F21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors and Stockholders
of Circle Group Internet, Inc and Subsidiaries.
I have audited the accompanying consolidated balance sheets of Circle Group
Internet, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income and cash flows for the years then
ended, and the balance sheet of Circle Group Internet, Inc. as of December 31,
1998 and the related statement of income and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these consolidated
financial statements based on my audits.
I conducted these audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provided a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial positions of Circle Group
Internet, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Harold Y Spector, CPA
Pasadena, CA
March 7, 2000
F-1
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998 1998
------------ ------------ ------------
(Pro forma) (Circle)
<S> <C> <C> <C>
Current Assets
Cash $ 8,820,024 $ 1,019,511 $ 1,031,532
Restricted Cash - Certificate of Deposit 1,076,773 0 0
Accounts Receivable 87,942 40,051 0
Employee Loan and Advances 68,231 0 0
Notes Receivable 2,005,000 0 0
Prepaid Expenses 10,997 6,109 0
Inventory 14,418 46,328 0
------------ ------------ ------------
Total Current Assets 12,083,385 1,111,999 1,031,532
------------ ------------ ------------
Property and Equipment 1,194,682 85,401 61,192
Less Accumulated Depreciation (200,595) (59,497) (35,288)
------------ ------------ ------------
Total Fixed Assets 994,087 25,904 25,904
------------ ------------ ------------
Other Assets
Investments - Stock for Services 9,405,418 0 0
Investments - Others 535,714 0 0
Certificate of Deposit 300,000 0 0
Deposits and Others 34,293 6,405 0
Deferred Tax Asset 74,169 12,037 10,181
Goodwill, net of accumulated amortization
of $1,072 in 1999 and $0 in 1998 31,088 21,690 0
------------ ------------ ------------
Total Other Assets 10,380,682 40,132 10,181
------------ ------------ ------------
TOTAL ASSETS $ 23,458,154 $ 1,178,035 $ 1,067,617
============ ============ ============
</TABLE>
See auditor's report and accompanying notes
F-2
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 and 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998 1998
------------ ------------ ------------
(Pro forma) (Circle)
<S> <C> <C> <C>
Current Liabilities
Accounts Payable & Accrued Expenses $ 129,265 $ 157,252 $ 31,500
Deferred Revenue 4,452,169 0 0
Income Taxes Payable 967,885 5,951 4,095
Line of Credit 800,000 0 0
Note Payable - Shareholder 57,429 0 0
------------ ------------ ------------
Total Current Liabilities 6,406,748 163,203 35,595
------------ ------------ ------------
Long-Term Liabilities 0 0 0
------------ ------------ ------------
Total Liabilities 6,406,748 163,203 35,595
------------ ------------ ------------
Stockholders' Equity
Controlling Interest
Common Stock, $.00005 par value;
50,000,000 shares authorized; 9,870,680
shares issued and outstanding at
December 31, 1999, 7,351,340 shares at
December 31, 1998 493 367 367
Paid-in Capital - Stock 16,235,210 2,187,906 1,187,906
Paid-in Capital - Warrants 598,241 0 0
Dividend Paid (1,020,166) (1,019,046) 0
Retained Earnings 1,202,594 (154,115) (156,251)
Other Comprehensive Income 35,714 0 0
------------ ------------ ------------
17,052,086 1,015,112 1,032,022
Minority Interest in subsidiary (680) (280) 0
------------ ------------ ------------
Total Stockholders' Equity 17,051,406 1,014,832 1,032,022
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 23,458,154 $ 1,178,035 $ 1,067,617
============ ============ ============
</TABLE>
See auditor's report and accompanying notes
F-3
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR YEARS ENDED DECEMBER 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998 1998
----------- ----------- -----------
(Pro forma) (Circle)
<S> <C> <C> <C>
Sales $ 6,496,507 $ 1,212,046 $ 338,333
Cost of Goods Sold 827,843 649,596 0
----------- ----------- -----------
Gross Profit 5,668,664 562,450 338,333
Operating Expenses 3,751,572 814,110 435,287
----------- ----------- -----------
Income(Loss) from Operations 1,917,092 (251,660) (96,954)
Other Income (Expenses) 348,612 (2,049) 1,443
----------- ----------- -----------
Income(Loss) before Minority Interest and Taxes 2,265,704 (253,709) (95,511)
Minority Interest in net loss of subsidiary 400 280 0
----------- ----------- -----------
Income(Loss) before Taxes 2,266,104 (253,429) (95,511)
Provision for Income Taxes 907,119 0 0
----------- ----------- -----------
Net Income (Loss) $ 1,358,985 $ (253,429) $ (95,511)
=========== =========== ===========
Earnings per share - Basic $ 0.149 $ (0.036) $ (0.014)
=========== =========== ===========
Earnings per share - Fully Diluted $ 0.144 $ (0.036) $ (0.014)
=========== =========== ===========
Weighted average shares outstanding - Basic 9,122,055 7,032,328 7,032,328
=========== =========== ===========
Weighted average shares outstanding - Fully
Diluted 9,413,184 7,032,328 7,032,328
=========== =========== ===========
</TABLE>
See auditor's report and accompanying notes
F-4
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Other
Compre-
Common Stock Paid-in Retained hensive Minority
Shares Amount Capital Earnings Income Interest Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 12/31/98 3,675,670 $367 $ 1,187,906 $ (156,251) $ 0 $ 0 $1,032,022
Stock Split 2-for-1 3,675,670 0
----------------------------------------------------------------------------------------------
Retroactive Balance as of 12/31/98 7,351,340 $367 $ 1,187,906 $ (156,251) $ 0 $ 0 $1,032,022
Issuance of Stocks for Cash 2,032,340 102 13,462,328 13,462,430
Acquisition of On-Line Bedding 400,000 20 999,980 1,000,000
Dividend related to acquire Subsidiaries (1,020,166) (1,020,166)
Minority Interest in net deficit of
Subsidiary at acquisition (280) (280)
Issuance of stocks for Signing Bonus 84,000 4 554,996 555,000
Issuance of stocks for Professional
Services 3,000 30,000 30,000
Issuance of warrants for consulting fees 598,241 598,241
Minority Interest in net loss of subsidiary (400) (400)
Comprehensive Income
Net Income 1,358,985 1,358,985
Unrealized holding gain on securities
available for sales 35,714 35,714
----------------------------------------------------------------------------------------------
Balance at 12/31/99 9,870,680 $493 $16,833,451 $ 182,568 $35,714 $(680) $17,051,546
==============================================================================================
</TABLE>
See auditor's report and accompanying notes
F-5
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998 1998
----------- ----------- -----------
(Pro forma) (Circle)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 1,358,985 $ (253,429) $ (95,511)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and Amortization 142,949 16,909 11,744
Loss on Disposal of Assets 0 6,464 0
Draw for Disposal of Assets 0 67,312 0
Stock for Signing Bonus 555,000 0 0
Paid-in Capital for Officers' Compensation 0 104,980 104,980
Stock Warrants for consulting services 598,241 0 0
Minority Interest in net loss of subsidiary (400) (280) 0
Stock for Professional Service 30,000 0 0
(Increase) Decrease in:
Accounts Receivable (47,891) 30,724 0
Employee Loans and Advances (68,231) 0 0
Prepaid Expenses (10,997) 40 0
Inventories 31,910 (4,891) 0
Deposits and Others (29,445) 40 0
Investments-Stocks for Services (9,405,418) 0 0
Deferred Tax Assets (63,988) (6,150) (4,294)
Increase (Decrease) in:
Accounts Payable (5,737) 46,267 5,000
Accrued Expenses and Other (17,598) 24,063 (24,000)
Deferred Revenue 4,452,169 0 0
Income Taxes Payable 961,934 (2,033) (2,357)
----------- ----------- -----------
Net cash provided (used) by operating activities (1,518,517) 30,016 43,562
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (1,109,281) (16,978) (13,970)
Purchase of Investment Securities (500,000) 0 0
Purchase of Subsidiaries (46,400) (35,000) 0
Notes Receivable (2,005,000) 0 0
Purchase of Certificate of Deposit (300,000) 0 0
Restricted Cash - Certificate of Deposit (1,076,773) 0 0
----------- ----------- -----------
Net cash (used) by investing activities (5,037,454) (51,978) (13,970)
----------- ----------- -----------
</TABLE>
See auditor's report and accompanying notes
F-6
<PAGE>
CIRCLE GROUP INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR YEARS ENDED DECEMBER 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998 1998
------------ ------------ ------------
(Pro forma) (Circle)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payment to Officer's Loans 57,429 (16,578) (16,403)
Dividend Paid (20,000) (20,000) 0
Proceeds from Line of Credit 800,000 0 0
Cash Contributions 0 5,900 0
Proceeds from Sales of Common Stock 13,462,430 981,350 981,350
------------ ------------ ------------
Net cash provided by financing activities 14,299,859 950,672 964,947
------------ ------------ ------------
NET INCREASE IN CASH 7,743,748 928,710 994,539
CASH BALANCE AT BEGINNING OF YEAR 1,076,276 90,801 36,993
------------ ------------ ------------
CASH BALANCE AT END OF YEAR $ 8,820,024 $ 1,019,511 $ 1,031,532
============ ============ ============
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest $ 9,552 $ 0 $ 0
============ ============ ============
Cash paid for income taxes $ 9,173 $ 7,907 $ 6,375
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In 1998:
Paid In Capital for Officers' Compensation $ 104,980
==========
A shareholder's draw of $67,312 is accrued in 1998 for the disposal
Of an automobile:
Net book value of automobile $ 73,776
Loss on Disposal of Assets (6,464)
----------
$ 67,312
In 1999:
Issuance of stocks for signing bonus $ 555,000
==========
Issuance of 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 $1,000,166
==========
</TABLE>
See auditor's report and accompanying notes
F-7
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Circle Group Internet, Inc. and subsidiaries (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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Company uses the accrual basis of accounting for financial reporting, in
accordance with generally accepted accounting principles.
Principle of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of
Circle Group Internet, Inc. and its subsidiaries, On-Line Bedding Corporation,
PPI Capital Corp., and CIG Securities, Inc., after elimination of all
inter-company accounts and transactions. The acquisition of On-Line Bedding
Corporation was accounted for as a combination of related party interests
treated in a manner similar to that of a pooling of interests with the excess
cost over the net assets acquired treated as a dividend to the related party.
The acquisition of PPI Capital Corp. was accounted for as a dividend to the
related party. The historical costs of both companies' assets and liabilities
were combined and became the recorded amounts of the Company's assets and
liabilities. The consolidated company has reported its operations for 1999 as if
the combinations occurred at the beginning of the year. The acquisition of CIG
Securities, Inc. was accounted for as a purchase. Under the purchase method, the
accompanying consolidated income statement and cash flows include only the
subsidiaries' earnings since the date of acquisition.
The accompanying pro forma consolidated financial statements as of December 31,
1998 are presented for comparison. The consolidated balance sheet as of December
31, 1998 is based on the historical balance sheets of the Company and
subsidiaries as of that date and assumes the acquisitions took place on that
date. The consolidated statements of income and cash flows for year ended
December 31, 1998 are based on the historical statements of income of the
Company and subsidiaries for that period, except for CIG Securities, Inc. of
which the period included is from July 1, 1998 to December 31, 1998. The
consolidated statements of income and cash flows assume the acquisitions took
place on January 1, 1998 and On-Line Bedding Corporation is a "C" corporation.
F-8
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimate
In preparing consolidated 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.
Concentrations of Cash
The Company places its cash and cash equivalents with high quality financial
institutions. At times, cash balances may be in excess of the FDIC insurance
limit. Management considers the risk to be minimal.
Revenue Recognition
Revenue from sales is recognized when the products are shipped. Monies received
for services to be provided over a period of time are recognized as revenue as
the services are provided.
Accounts Receivable
The Company has not established an allowance for doubtful accounts and does not
use the 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 recorded in 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. Maintenance and repair costs are expensed as
incurred. Depreciation is calculated on the accelerated method over the
estimated useful lives of the assets. Total depreciation expense for years ended
December 31, 1999 and 1998 was $141,098 and $16,130, respectively.
F-9
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 lack of liquidity of the
shares is 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 at
the estimated fair market value.
The Company evaluates quarterly the carrying value of each investment currently
trading on an exchange for a possible increase or decrease in value. Securities
for which no trading market exists will be evaluated for a possible decrease in
value. Factors considered by the Company in evaluating the carrying value of
investments includes lack of achievement of business plan objectives and
milestones, the deterioration of financial condition and prospects for the
client company, lack of performance by the management team, and other valuation
factors. Any increase/decrease in valuation will flow through the stockholders'
equity section of the balance sheet as an unrealized gain or loss in compliance
with SFAS 115 and 130.
Marketable Securities
The Company determines the appropriate classifications of marketable securities
at the time of acquisition and reevaluates such designation at each balance
sheet date. Marketable securities which meet the criteria for classification as
available-for-sale are carried at fair value, based on quoted market prices, net
of market value discount to reflect any restrictions on transferability, with
unrealized gains and losses reported as a separate component of stockholders'
equity.
F-10
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill
The cost in excess of net assets acquired of a subsidiary is capitalized as
goodwill and is being amortized on a straight-line basis over a 180-month
period.
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. "Accounting For Income
Taxes" (SFAS No. 109). SFAS No. 109 requires a company to recognize deferred tax
liabilities and assets for the expected future income tax consequences of events
that have been recognized in the Company's financial statements. Under this
method, deferred tax assets and liabilities are determined based on temporary
differences between the financial carrying amounts and the tax bases of assets
and liabilities using the enacted tax rates in effect in the years in which the
temporary differences are expected to reverse.
NOTE 3 - ACQUISITIONS 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 parties treated in a manner similar to
that of a pooling of interests, not a purchase combination. The results of
operations of On-Line Bedding are included in the historical financial
statements from the beginning of the year.
F-11
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS OF BUSINESS (Continued)
Aggregate purchase price, 400,000 shares of common stock
@ $2.50 per share $1,000,000
----------
Less: Net assets acquired
Working Capital 184
Property and equipment 0
Other 770
----------
Total 954
----------
Excess of purchase price over net assets acquired $ 999,046
==========
The excess cost over the book value, of $999,046, was treated as a dividend to
the related party.
On February 1, 1999, the Company acquired 80% or 3,200,000 of the 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 accounted for as a dividend, with the assets acquired and
liabilities assumed recorded at book value.
On July 1, 1999, the Company acquired from a non-affiliated third party, 100% of
the issued and outstanding common stock of CIG Securities, Inc. (a broker-dealer
domiciled in Florida) for $35,000. On November 12, 1999, the National
Association of Securities Dealers, Inc. (NASD) granted the application of CIG
Securities, Inc. with regard to its change of ownership, control, and
operations. This transaction has been accounted for under the purchase method of
accounting and the results of operations of CIG Securities are included in the
historical financial statements from the date of acquisition.
The purchase price was allocated to the net assets acquired based on their fair
market values. As a result of this allocation, $32,160 of the purchase price was
allocated to excess of purchase price over net assets acquired and will be
capitalized as goodwill.
Cash Price $35,000
-------
Less: Net assets acquired
Working Capital (Deficit) (2,017)
Other 4,857
-------
Total 2,840
-------
Excess of purchase price over net assets acquired $32,160
=======
F-12
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVESTMENTS - STOCKS FOR SERVICES
As of December 31, 1999, Investments in stock received for services totalled
$9,405,418, of which $4,452,169 was deferred as of that date. Management
evaluated each investment as of December 31, 1999 and they believed that there
was no decrease in value of each investment. Accordingly, no unrealized gain or
loss on these investments was recognized for the year.
<TABLE>
<CAPTION>
No. of
Date of shares Fair Value Valuation Revenue Deferred
Issuance Entity Received at 12/31/99 Method Earned Revenue
- -------- ---------- -------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
4/23/99 Company I 272,000 $ 816,000 b $ 816,000 $ 0
7/7/99 Company II 200,000 1,000,000 b 750,000 250,000
9/22/99 Company III 180,000 720,000 c 540,000 180,000
10/29/99 Company IV 352,000 1,408,000 c 704,000 704,000
11/8/99 Company V 340,000 1,360,000 b 680,000 680,000
11/15/99 Company VI 400,000 1,200,000 c 600,000 600,000
12/14/99 Company VII 210,526 631,578 c 315,789 315,789
12/31/99 Company VIII 357,460 1,429,840 b 337,460 1,092,380
12/31/99 Company IX 280,000 840,000 c 210,000 630,000
------- ----------- ------------ ------------
Total $ 9,405,418 $ 4,953,249 $ 4,452,169
=========== ============ ============
</TABLE>
NOTE 5 - OTHER INVESTMENTS
In September 1999, the Company invested in an unregistered Series A 8%
Cumulative Convertible Preferred Stock (Convertible Preferred Stock) at a price
of $10.00 per share. Dividends on the Convertible Preferred Stock accrue
cumulatively at the rate of 8% of the stated value of $10.00 per share per annum
through the Redemption Date unless converted and are payable quarterly in
additional shares of Convertible Preferred Stock. After four months from the
date of issuance and prior to redemption each share of Convertible Preferred
Stock is convertible into that number of shares of Common Stock of the investee
determined by dividing the purchase price per share ($10.00) by 80% of the
market price per share of common stock as of the first closing date, subject to
a minimum conversion price of $4.00 per share and a maximum conversion price of
$6.00 per share. Commencing twelve months from the date of issuance, the
Convertible Preferred Stock shall be redeemable by the investee, in whole but
not in part, at $12.00 per share plus all accumulated and unpaid dividends on 30
day's prior written notice, provided that the closing bid price of the common
stock for the 20 consecutive trading days prior to the date of redemption notice
has equalled or exceeded $13.00 per share. In the event of a liquidation, the
holders of the Convertible Preferred Stock shall be entitled to a liquidation
preference per share equal to the
F-13
<PAGE>
redemption price on the date of such liquidation. There is no public market for
the Convertible Preferred Stock. The Common Stock is traded on the OTC Bulletin
Board.
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - OTHER INVESTMENTS (Continued)
The securities are reported at fair value, with the unrealized gain and loss
included in comprehensive income. As of December 31, 1999, these securities had
a fair value of $535,714 and an unrealized gain of $35,714. 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 to secure a line of credit (See Note 9).
NOTE 7 - NOTES RECEIVABLE
As of December 31, 1999, CIG Securities, Inc. (CIG) had two notes receivable
from its client companies. The first note, in the amount of $5,000, is due upon
the client company receiving at least $5,000 in proceeds through CIG in a best
efforts private placement on behalf of the client. The note is convertible at
the sole option of the Company into equity of the client company at $4 per
share. The note bears interest at 8% per annum. There is no public market for
the borrowers securities.
The second note, in the amount of $2,000,000, and any accrued but unpaid
interest are due upon the earlier of the client receiving $5 million in gross
proceeds in a private placement conducted by CIG or April 30, 2000. The loan
will bear interest at 12% per annum, payable in cash or in shares of the
client's common stock. The note is convertible at the sole option of the Company
into equity of the client at $4 per share. The note is secured by the client's
unencumbered assets and a first mortgage on two real properties located in
Michigan. In addition, CIG recognized $160,000 (8% of the note) as a loan
origination fee. There is no public market for the borrowers securities.
NOTE 8 - NOTE PAYABLE - SHAREHOLDER
As of December 31, 1999, On-Line Bedding had a note payable to the President of
On-Line Bedding in the amount of $57,429. No interest is being charged on the
loan, and it is due on demand.
F-14
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 1999), matures
on June 15, 2000 and requires monthly interest payments. As of December 31,
1999, the Company owes $800,000 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
The components of income tax expense (benefit) as of December 31, 1999 and 1998
were as follows:
1999 1998 1998
---- ---- ----
(Pro forma) (Circle)
Current $ 971,107 $ 6,150 $ 4,294
Deferred (63,988) (6,150) (4,294)
--------- ---------- ----------
Total $ 907,119 $ 0 $ 0
========= ========== ==========
Deferred income tax asset and liabilities have been classified on the
accompanying consolidated balance sheets in accordance with the nature of the
item giving rise to the temporary differences. The components of deferred tax
assets and liabilities are as follows:
1999 1998 1998
---- ---- ----
(Pro forma) (Circle)
Deferred Tax Assets:
Officers' Compensation Recognition $ 74,604 $ 13,406 $ 13,406
Amortization of capitalized accumulated
Deficit 9,108 0 0
Income Tax Benefit on Consolidated
Income Tax Return 0 1,856 0
-------- -------- --------
Total Deferred Tax Asset 83,712 15,262 13,406
-------- -------- --------
Deferred Tax Liability:
Difference in tax depreciation (9,543) (3,225) (3,225)
-------- -------- --------
Total Deferred Tax Liability (9,543) (3,225) 10,181
-------- -------- --------
Net Deferred Tax Asset $ 74,169 $ 12,037 $ 10,181
======== ======== ========
F-15
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 151,480
shares of its common stock at $2.50 per share or an aggregate of $378,700
pursuant to Rule 506 of Regulation D of the Securities Act of 1933 as amended.
NOTE 13 - REGULATION D OFFERING - SECOND
In July 1999, the Company completed a private placement offering of 1,232,200
shares of its common stock at $10 per share or an aggregate of $12,322,000
pursuant to Rule 506 of Regulation D of the Securities Act of 1933 as amended.
Total expenses related to the offerings were $132,488.
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 9,870,680, 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.
F-16
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 312,000 options under the Plan as of December 31,
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 options granted by the Company as of December 31, 1999 was
$4.85. None of these options have been exercised to date.
A summary of the status of stock options issued by the Company as of December
31, 1999 is presented in the following table. There were no options issued or
outstanding at December 31, 1998.
Weighted Average
Number of Exercise Price Per
Shares Share
------ -----
Outstanding at beginning of period -- --
Granted 312,000 $6.13
Exercised -- --
Cancelled -- --
------- -----
Outstanding at end of period 312,000 $6.13
======= =====
Exercisable at end of period 312,000 $6.13
======= =====
The following table sets forth additional information about stock options
outstanding at December 31, 1999:
Range of Number Weighted Weighted Number
Exercise Outstanding Average Average Exercisable
Prices as of Remaining Exercise as of
- ------ Dec. 31, 1999 Contractual Price Dec 31, 1999
------------- Life ----- ------------
----
$ 2.50 161,000 2.07 years $ 2.50 161,000
$10.00 151,000 2.46 years $10.00 151,000
------- ---- ------ -------
312,000 2.26 years $6.13 312,000
======= ==== ===== =======
F-17
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - STOCK OPTIONS AND WARRANTS (Continued)
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
employee stock options. Accordingly, the Company has elected to account for its
stock-based compensation plan under APB Opinion No. 25 an accounting standard
under which no related compensation was recognized in 1998, the year of the
grant; however the Company has computed for pro forma disclosure purposes, the
value of all options granted during the year ended December 31, 1999 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123 and the
weighted average assumptions as follows.
Fiscal year ended
December 31, 1999
-----------------
Weighted average fair value per option granted $4.85
Risk-free interest rate 6.00%
Expected dividend yield 0.00%
Expected Lives 3.00
Expected volatility 0.00
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the options' vesting period. The Company's pro forma
information follows:
Net Income as reported $1,358,985
==========
Net Income (pro forma) $854,445
========
Basic Earnings per share as reported $0.149
======
Basic Earnings per share (pro forma) $0.094
======
Fully Diluted Earnings per share as reported $0.144
======
Fully Diluted Earnings per share (pro forma) $0.091
======
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.
F-18
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - STOCK OPTIONS AND WARRANTS (Continued)
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 financial and operational
consulting services. These services were valued at $1,794,722, and recorded as a
general and administrative expense of $598,241 over a three year period in the
accompanying statements of operations. These warrants will expire by March 2002.
NOTE 16 - EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of shares of
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 December 31, 1999, earnings per share as of that date would have
been $0.144, fully diluted.
NOTE 17 - LEASE COMMITMENTS
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 December 31, 1999, the minimum commitments under these leases are as
follows:
December 31, Amount
------------ --------
2000 $117,545
2001 143,410
2002 142,560
2003 142,560
2004 92,440
--------
Total $638,515
========
Rent expense for years ended December 31, 1999 and 1998 was $36,778 and $38,635,
respectively.
F-19
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 parties treated in a manner similar to that of a
pooling of interests. The excess cost over the net assets acquired is 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.
During 1999, the Company loaned the Chairman of the Board the sum of $935,000.
The loan is evidenced by a secured promissory note and a first mortgage on a
residence. The loan was paid in full in December, 1999. Interest received on the
loan was $18,700.
The Company drew down $300,000 from the line of credit to purchase a certificate
of deposit. The certificate of deposit was pledged to secure a personal line of
credit of the Chairman of the Board of Directors. The certificate of deposit
pays interest yearly at 8.25% and matures on December 16, 2002. The certificate
of deposit is collateralized by 50,000 shares of the common stock of Circle
Group Internet, Inc. owned by the Chairman of the Board of Directors.
As of December 31, 1999, On-Line Bedding had a note payable to the President of
On-Line Bedding in the amount of $57,429. No interest is being charged on the
loan, and it is due on demand.
As of December 31, 1999, the Company issued 84,000 shares of its common stock to
employees as a signing bonus of $555,000. The compensation was expensed.
All officers' salaries have been expensed as officers' salaries or compensation.
Officers' compensation expense was $322,667 and $136,000 for years ended
December 31, 1999 and 1998, respectively. In 1999, the total amount was paid in
full. In 1998, the Company paid and accrued $31,020; the balance of $104,980 was
additional paid-in capital.
F-20
<PAGE>
CIRCLE GROUP INTERNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 EVENT
On February 14, 2000, the Board of Directors and sole shareholder of CIG
Securities, Inc. elected to change the name of the Company to CGI Capital, Inc.
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 is currently in favorable negotiations with the client company and
believes that the request for the return of stock will be rescinded. 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 March 7, 2000, the certificate of deposit account, which was pledged as
collateral against a personal line of credit of the Chairman of the Board of
Directors was closed and an amount of $300,000 was transferred back to the
Company's line of credit.
F-21
<PAGE>
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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.
1,838,760 SHARES
COMMON STOCK
---------------------
PROSPECTUS
---------------------
CIRCLE GROUP INTERNET, INC.
, 2000
------------------------------------------------------------------------------
-------
------------------------------------------------------------------------------
-------
<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 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 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 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
========
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On October 9, 1996 CGI Capital 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. 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 CGI Capital.
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. 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 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 in reliance
on the exemption set forth in Section 4(2) of the Securities Act. 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
II-2
<PAGE>
are accredited investors. The transaction was exempt from registration under the
Securities Act in reliance on the exemption provided by Section 4(2) of the
Securities Act. 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. We paid no underwriting fees, discounts or
commissions in connection therewith.
Between March 1 and March 15, 1999, we sold 151,480 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, 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.
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.
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.
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 in reliance on Section 4(2) and Rule 506, Regulation D,
of the Securities Act. 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. The balance of the funds will be used for general
working capital.
II-3
<PAGE>
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.
On September 16, 1999, we issued options to purchase an aggregate of 927,500
shares of our common stock, at an exercise price of $10.00 per share, under our
1999 Stock Option Plan, as amended to 34 of our executive officers, directors
and employees. 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 the securities was exempt from the
registration requirements of the Securities Act in reliance upon the exemption
set forth in Section 4(2) of the Securities Act. All of the optionees, who are
employees, are accredited investors.
On March 8, 2000, we sold 5,000 shares of our common stock to Gary Cooper, a
former director of the Company. Mr. Cooper is a sophisticated investor and had
full access to, or was otherwise provided with, all relevant information
reasonably necessary to evaluate Circle Group Internet, Inc. Accordingly, the
issuance of the shares of common stock were exempt from registration under
Section 4(2) of the Securities Act.
II-4
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
<S> <C>
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.
3.5** Articles of Amendment dated March 1, 2000 to the Articles of Incorporation 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 CGI Capital, Inc.
10.10* Extension Agreement dated May 25, 1999 between Circle Group Internet, Inc., Internet
Broadcasting Company and CGI Capital, 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 CGI Capital, 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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
<S> <C>
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
10.22** 1999 Stock Option Plan, as amended, of Circle Group Internet, Inc.
21** Subsidiaries of the Registrant
23.1** Consent of Harold Y. Spector, 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 CGI Capital, Inc.
</TABLE>
* Previously filed
** Filed herewith.
II-6
<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;
(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, 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 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
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 and will be
governed by the final adjudication of the issue.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, 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 March 13, 2000.
CIRCLE GROUP INTERNET, INC.
By: /s/ Gregory J. Halpern
----------------------
Gregory J. Halpern, Chief
Executive Officer
In accordance with the requirements of the Securities Act, this Amendment No. 3
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 March 16, 2000
- -----------------------
Gregory J. Halpern
/s/Frank K. Menon Director and President March 16, 2000
- ---------------------------
Frank K. Menon
/s/Dana L. Dabney Director, Vice President of Human Resources March 16, 2000
- -------------------------
Dana L. Dabney
/s/ Arthur C. Tanner Chief Financial Officer March 16, 2000
- -----------------------
Arthur C. Tanner
/s/ Michael J. Theriault Chief Operating Officer March 16, 2000
- ------------------------------
Michael J. Theriault
/s/ Edward J. Halpern Director March 16, 2000
- -------------------------------
Edward L. Halpern
/s/ Steven H. Salgan Director March 16, 2000
- ------------------------------------
Steven H. Salgan, M.D.
/s/ Stanford Jay Levin Director March 16, 2000
- ------------------------------------
Stanford Jay Levin
</TABLE>
The foregoing represents a majority of the Board of Directors
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
<C> <S>
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.
3.5** Articles of Amendment dated March 1, 2000 to the Articles of Incorporation 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 CGI Capital, Inc.
10.10* Extension Agreement dated May 25, 1999 between Circle Group Internet, Inc., Internet
Broadcasting Company and CGI Capital, 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 CGI Capital, 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
<C> <S>
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 Placement Agency Agreement
10.20* Form of Business Consulting Agreement
10.21* Demand Promissory Note dated April 1, 1999
10.22** 1999 Stock Option Plan, as amended, of Circle Group Internet, Inc.
21** Subsidiaries of the Registrant
23.1** Consent of Harold Y. Spector, 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 CGI Capital, Inc.
</TABLE>
* Previously filed
** Filed herewith.
STATE OF ILLINOIS
OFFICE OF
THE SECRETARY OF STATE
WHEREAS, Articles of Amendment to the Articles of Incorporation of
CIRCLE GROUP INTERNET, INC.
incorporated under the laws of the State of Illinois have been filed in the
office of the Secretary of State as provided by the Business Corporation Act of
Illinois, in force July 1, A.D. 1984.
NOW THEREFORE, I, Jesse White, Secretary of State of the State of
Illinois, by virtue of the powers vested in me by law, do hereby issue this
certificate and attach hereto a copy of the Application of the aforesaid
corporation.
IN TESTIMONY WHEREOF, I hereto set by hand and cause to be affixed the
Great Seal of the State of Illinois, at the City of Springfield, this 1st day of
March, A.D. 2000 and of the Independence of the United States the two hundred
and 24th.
/s/ Jesse White
---------------
Jesse White
Secretary of State
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Form BCA-10.30 ARTICLES OF AMENDMENT File # 5780-124-7
Jesse White SUBMIT IN DUPLICATE
Secretary of State This space for use by
Department of Business Services Secretary of State
Springfield, IL 62756
Telephone (217) 782-1832
___________________________ Date 3/1/00
Remit payment in check or money Franchise Tax
order, payable to "Secretary of Filing Fee* $25.00
State". Penalty $
The filing fee for restated articles Approved
of amendment - $100.00
Http://www.sos.state.il.us
1. CORPORATE NAME: CIRCLE GROUP INTERNET, INC.
2. MANNER OF ADOPTION OF AMENDMENT:
The following amendment of the Articles of Incorporation was adopted on
February 21, 2000 in the manner indicated below. ("X" one box only)
|_| By a majority of the incorporators, provided no directors were named in the articles
of Incorporation and no directors have been elected;
(Note 2)
|_| By a majority of the board of directors, in accordance with Section
10.10, the corporation having issued no shares as of the time of
adoption of this amendment;
(Note 2)
|_| By a majority of the board of directors, in accordance with Section
10.15, shares having been issued but shareholder action not being
required for the adoption of the amendment;
(Note 3)
|X| By the shareholders, in accordance with Section 10.20, a resolution of
the board of directors having been duly adopted and submitted to the
shareholders. At a meeting of shareholders, not less than the minimum
number of votes required by statue and by the articles of incorporation
were voted in favor of the amendment.
(Note 4)
|_| By the shareholders, in accordance with Sections 10.20 and 7.10, a
resolution of the board of directors having been duly adopted and
submitted to the shareholders. A consent in writing has been signed by
shareholders having not less than the minimum number of votes required
by statute and by the articles of incorporation. Shareholders who have
not consented in writing have been given notices in accordance with
Section 7.10;
<PAGE>
(Notes 4 & 5)
|_| By the shareholders, in accordance with Sections 10.20 and 7.10, a
resolution of the board of directors having been duly adopted and
submitted to the shareholders. A consent in writing has been signed by
all the shareholders entitled to vote on this amendment.
(Note 5)
3. TEXT OF AMENDMENT
a. When amendment effects a name change, insert the new corporate name
below. Use page 2 for all other amendments.
Article I: The name of the corporation is:
_____________________________________________________________________________________
(NEW NAME)
All changes other than name, include on page 2
b. (If amendment affects the corporate purpose, the amended
purpose is required to be set forth in its entirety. If there
is not sufficient space to do so, add one or more sheets of
this size.
Paragraph 4. Paragraph I thereof of the Articles of Incorporation is
amended to read as follows:
The total number of shares of stock which the Corporation shall have
the authority to issue is Fifty Million (50,000,000). The par value of
each of the shares is $.00005. All such shares are one class and the
shares are Common Stock.
4. The manner, if not set forth in Article 3b, in which any exchange,
reclassification or cancellation of issued shares, of a reduction of
the number of authorized shares of any class below the number of issued
shares of that class, provided for or effected by this amendment, is as
follows: (if not applicable, insert "No change").
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 8,141,480 and decreasing
the par value of each share to $0.00005.
5. (a) The manner, if not set forth in Article 3b, in which said amendment
effects a change in the amount of paid-in capital (Paid-in capital
replaces the terms Stated Capital and Paid-In Surplus and is equal to
the total of these accounts) is as follows: (If not applicable, insert
"No Change").
No change.
<PAGE>
(b) The amount of paid-in capital (Paid-in Capital replaces the terms
Stated Capital and Paid-In Surplus and is equal to the total of these
accounts) as changed by this amendment is as follows: (If not
applicable, insert "No Change").
No change.
Before Amendment After Amendment
Paid-In Capital: $______________ $______________
(Complete either Item 6 or 7 below. All signatures must be
in BLACK INK.)
6. The undersigned corporation has caused this statement to be signed by
its duly authorized officers, each of whom affirms under penalties of
perjury, that the facts stated herein are true.
Dated: 02/21/2000 Circle Group Internet, Inc.
Attested by:/s/ Dana L. Dabney By:/s/ Gregory J. Halpern
------------------ ----------------------
Dana L. Dabney, Secretary Gregory J. Halpern, CEO
7. If amendment is authorized by the directors pursuant to Section 10.10
and there are no officers, then a majority o the directors or such
directors as may be designated by the board, must sign below, and type
or print name and title.
The undersigned affirms, under the penalties of perjury, that the facts stated
herein are true.
Dated: ___________________________
__________________________________ _______________________________
__________________________________ _______________________________
__________________________________ _______________________________
</TABLE>
CIRCLE GROUP INTERNET, INC.
1999 STOCK OPTION PLAN, AS AMENDED
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, AS AMENDED (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, $.0005 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 Two Million
(2,000,000) 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.
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<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.
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<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.
4
<PAGE>
(h) This Plan was adopted by the Corporation on __________,
and amended on ________________, by virtue of its approval by the Corporation's
Board of Directors and the majority shareholders of the Corporation.
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
5
<PAGE>
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 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
6
<PAGE>
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 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, as amended."
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)
7
<PAGE>
and when addressed to the Corporation or the Committee shall be sent to it at
its office, 1011 Campus Drive, 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.
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, as amended, was adopted by the Board of Directors of the
Corporation on __________________, 1999, and amended ______________. The
effective date of the Plan shall be _____________, 1999.
Dated as of _________________, 1999.
And amended ________________, 2000.
CIRCLE GROUP INTERNET, INC.
By: ________________________________________
Gregory Halpern, Chief Executive Officer
8
<PAGE>
[NSO GRANT FORM]
CIRCLE GROUP INTERNET, INC.
1011 Campus Drive
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, as amended (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 acknowledgment 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.
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<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, Chief Executive Officer
AGREED AND ACCEPTED:
- -------------------------
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[ISO GRANT FORM]
CIRCLE GROUP INTERNET, INC.
1011 Campus Drive
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, as amended (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 acknowledgment 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, Chief Executive Officer
AGREED AND ACCEPTED:
- -------------------------
3
<PAGE>
[NSO GRANT FORM
WITH RELOAD OPTIONS]
CIRCLE GROUP INTERNET, INC.
1011 Campus Drive
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, as amended (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 acknowledgment 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, Chief Executive Officer
AGREED AND ACCEPTED:
- -------------------------
3
<PAGE>
[ISO GRANT FORM
WITH RELOAD OPTIONS]
CIRCLE GROUP INTERNET, INC.
1011 Campus Drive
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, as amended (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 acknowledgment 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
SUBSIDIARIES OF THE REGISTRANT
On-Line Bedding Corporation, an Illinois corporation
PPI Capital Corporation, a Utah corporation
CGI Capital, Inc., a Florida corporation
CONSENT OF HAROLD Y. SPECTOR
INDEPENDENT AUDITOR
I consent to the use of my report dated March 7, 2000, on the condensed
consolidated financial statements of Circle Group Internet, Inc. and
subsidiaries, as of December 31, 1999 and 1998, included herein and to the
reference made to me:
I consent to the incorporation by reference in the Registration Statement of the
aforementioned report and to the use of my name as it appears under the option
"Experts."
/s/ Harold Y. Spector, CPA
- --------------------------
Harold Y. Spector, CPA
Pasadena, California
March 20, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Consolidated with subsidaries
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,820,024
<SECURITIES> 0
<RECEIVABLES> 87,942
<ALLOWANCES> 0
<INVENTORY> 14,418
<CURRENT-ASSETS> 12,083,385
<PP&E> 1,194,682
<DEPRECIATION> 200,595
<TOTAL-ASSETS> 23,458,154
<CURRENT-LIABILITIES> 6,406,748
<BONDS> 0
0
0
<COMMON> 493
<OTHER-SE> 17,050,913
<TOTAL-LIABILITY-AND-EQUITY> 23,458,154
<SALES> 6,496,507
<TOTAL-REVENUES> 6,857,157
<CGS> 827,843
<TOTAL-COSTS> 4,579,555
<OTHER-EXPENSES> (376)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,014
<INCOME-PRETAX> 2,265,964
<INCOME-TAX> 907,119
<INCOME-CONTINUING> 1,358,985
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,358,985
<EPS-BASIC> 0.149
<EPS-DILUTED> 0.144
</TABLE>
