FIRST AMENDMENT TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF
SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
1st Internet Group, Inc.
(Name of Small Business Issuer in its charter)
Florida 65-0890599
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification
number)
5883 Lake Worth Road, Lake Worth, Florida 33463
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (561) 642-2811
Securities to be registered under Section 12(b) of the Act:
Title of each class to be so registered: n/a
Name of exchange on which each class is to be registered: n/a
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $.01 per share
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TABLE OF CONTENTS
Page No.
Part I
Item 1. Description of Business 3
Item 2. Management's Discussion and Analysis 11
Item 3. Description of Property 20
Item 4. Security Ownership of Certain
Beneficial Owners and Management 21
Item 5. Directors, Executive Officers,
Promoters and Control Persons 22
Item 6. Executive Compensation 23
Item 7. Certain Relationships and Related
Transactions 24
Item 8. Description of Securities 25
Part II
Item 1. Market for Common Equity and Related
Stockholder Matters 25
Item 2. Legal Proceedings 26
Item 3. Changes In and Disagreements with
Accountants 26
Item 4. Recent Sales of Unregistered
Securities 26
Item 5. Indemnification of Directors and
Officers 26
Part F/S 27
Part III
Item 1. Index to Exhibits 45
Item 2. Description of Exhibits 45
Signatures 45
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
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1st Internet Group, Inc. ("1st Internet" or "Company" or
"Registrant") was formed on November 23, 1998 as a Florida
corporation. On February 25, 1999, the Company became a holding
company by acquiring all of the outstanding stock of three
operating companies: 1st Discount Brokerage, Inc. ("First
Brokerage"), 1st Discount Insurance, Inc. ("First Insurance"),
and Corporate Accounting Group, Inc. ("First Accounting"). All
three subsidiaries are Florida corporations. First Brokerage was
incorporated under the name Discount Institutional Brokerage,
Inc. on July 14, 1995. On July 25, 1995, Discount Institutional
Brokerage, Inc. changed its name to Fidelity Discount
Investments, Inc. On August 4, 1995, Fidelity Discount
Investments, Inc. changed its name to the present name of 1st
Discount Brokerage, Inc. First Insurance was incorporated on
January 3, 1996 and First Accounting was incorporated on January
22, 1991.
First Brokerage is a broker-dealer registered with the
Securities and Exchange Commission ("SEC") and the National
Association of Securities Dealers ("NASD"). First Brokerage is
currently licensed in 48 states and is pending registration in
Minnesota and Hawaii. We will not be able to conduct business
with residents in Minnesota and Hawaii until we become registered
in these states. We project registration in Minnesota within one
month. We have not had any online requests for residents in
Hawaii to open an account and, therefore, have not pursued this
registration with a sense of urgency. First Brokerage provides
retail discount securities brokerage and related
investment/portfolio management counseling services. First
Brokerage makes extensive use of a variety of electronic media,
including the Internet, to service individual investors
throughout the United States and internationally. First Brokerage
has an international office located in Munich, Germany.
First Insurance provides annuity and life insurance products
to complement and augment the needs of brokerage and
non-brokerage clientele.
First Accounting is an accounting and tax preparation
company servicing the needs of brokerage and insurance clientele.
First Brokerage
---------------
Historically, investors could access the financial markets
only through full-commission brokers, who would offer investment
advice and execute trades. The deregulation of brokerage
commissions in 1975 engendered discount brokerage firms, which
charge a lesser commission for a transaction. The recent
emergence of electronic brokerage services further reduces
the costs associated with the human interaction required by
full-commission and discount brokerage firms.
First Brokerage Products and Services
=====================================
First Brokerage makes extensive use of a variety of
electronic media, including the Internet, in order to service
individual investors throughout the United States and
internationally. First Brokerage is able to execute securities
transactions efficiently at a relatively low cost. First
Brokerage provides execution services for stocks, mutual funds,
options and bonds through these means. First Brokerage's services
include fully automated stock, option and mutual fund order
processing via personal computer or touch-tone telephone, as well
as through traditional brokers of the Firm. Customers are able to
track their online investment portfolio and access financial
market news and information. All records are maintained on one
centralized system, so that customers have access to current
account information regardless of which medium they use.
While the market is currently demonstrating rapid account
growth in the near future, it is unlikely to continue
indefinitely. Management expects that this factor will eventually
put pressure on customer acquisition costs, retention efforts,
and pricing. In addition, the expansions of full service
financial firms to the Internet pose a serious market threat to
the smaller independent firms. Firms with a broad base of revenue
will be at a definite competitive advantage on both advertising
and pricing fronts.
Management intends to use the Internet to expand business.
First, it improves client/broker relations by increasing the
efficiency of trading. Second, the Internet provides convenience
for a new base of clientele looking to use the Web as the sole
vehicle for trade. Finally, the web-site offers a strategic
marketing tool for business expansion and name recognition.
Trading, administrative and technical support services for
all levels of online service are among First Brokerage's highest
priorities. First Brokerage believes that providing an effective
customer service team is critical to success. Live customer
support is available 10 hours a day from 8:00am to 6:00pm Eastern
time, Monday through Friday. First Brokerage currently employs 17
registered representatives to execute customer orders, research
past trades, discuss account information and provide detailed
technical support. First Brokerage does not hold any funds or
securities of its clients, nor does it directly
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execute and process either its own or its customers' securities
transactions. Since December 1998, First Brokerage has cleared
all transactions for its customers on a fully-disclosed basis
through U.S. Clearing Corporation.
Online Trading Industry Overview
================================
Online trading is the fastest growing segment of the
brokerage industry and is expected to continue to grow
significantly. In a report dated March 11, 1999, Forrester
Research, Inc., an independent research firm, estimated that
during 1998 the number of North American households investing
online nearly doubled, reaching just under 2.4 million by the
start of 1999. They also estimate that the number of investors
will increase to 4.3 million by the end of 2000. The year-end
estimate was surpassed in April of 1999. In addition, recent
predictions foretell the Internet will account for 60% of
commissioned discount brokerage trading, approximately $2.2
billion, by the year 2001. In 1996, Internet commissions
accounted for only 15% of the market, or $268 million dollars.
Jupiter, a new media research firm that focuses on how the
Internet and other technologies are changing traditional consumer
industries, estimates that online trading households will reach
31 percent of the personal investing market by the year 2002.
First Brokerage's network comprises a series of servers,
routing and Internet networking equipment, workstations, software
support clusters and firewall management systems. Any computer
that can connect to the Internet can connect to First Brokerage's
system.
Key Market Drivers
==================
Management believes that the success of the online trading
industry will be driven by five factors: a reduction in trading
friction (described below), the exponential growth of the World
Wide Web, the increase in consumer comfort with electronic
commerce, a recent shift in discount brokerage channels, and
rising investor participation and autonomy.
o There have traditionally been a number of factors that have
made investing difficult for individual consumers. This
friction has historically been created by high commission
costs, lack of information, and investors' inability to
control their investment decisions. The Internet has helped
to reduce these frictions
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o The continued growth of the World Wide Web has been
overwhelmingly positive. International Data Corp predicts
that by 2001 there will be 227.7 million WEB subscribers.
In addition to the growth in usage, people are spending on
average 245 minutes online a month. This implies that there
is going to be a significant customer base for online
brokerage corporations as more consumers come online and
view the Internet as an increasingly important tool.
o Increasing consumer comfort with electronic commerce has
developed a convenient marketplace for commercial trade and
business transactions. Piper Jaffray Equity Research
estimates that there has been a sharp rise in consumer
purchases from 19% in May of 1997 to 40% in May of 1998.
Moreover, 40% of WEB users seek investment information on
the WEB, while only 15% actually make a purchase. As people
gain a stronger sense of security for their investments,
management believes that the consumer purchasing trend will
transcend into the online investment industry.
o As evidenced by the recent experiences of many traditional
discount brokerages like Schwab and Waterhouse, the Internet
is a very attractive new service to offer existing
customers. The Internet's tremendous convenience, low cost,
and wealth of research information naturally provides an
arena for discount brokerage customers.
o The increase in investment autonomy displayed in the rise of
IRAs, 401Ks, and employee stock ownership plans, combined
with a strong market, have made significant contributions to
the interest and participation of individuals in the market.
In particular, the 401K plans have forced investors to
actively overview their personal retirement funds. In
addition, the strong market makes an influential appeal for
stock-options as employment compensation.
Management believes that these five trends will create an
environment where success begets success, resulting in greater
activity.
Internet Trading Misconceptions
===============================
Management believes that the combination of industry-wide
advertising and the lack of individual-investment knowledge have
created a trend to promote "get rich quick" schemes. Investors
who are uninformed about recent market movements and biases can
be at great financial risk. In addition, the lack of personal
communication between First Brokerage and clientele yield a
missed opportunity to dispel the online trading myths. While
management attempts to correct this industry-wide dilemma by
offering answers to frequently asked questions at our web-site,
it is relatively impossible to personalize service and amply
respond to all customer difficulties.
Moreover, the notion of an instantaneous trade via the
Internet is flawed as well. When any trade is placed over the
Internet, it must be routed to First Brokerage's server, the
broker then places the order and it is subsequently routed to a
clearing firm. During peak trading hours, which are times of
market volatility, it is customary for multiple trades to be
placed and therefore delay the transaction process. Currently,
First Brokerage makes
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every effort to place trades as quickly as possible after receipt
of the order. However, First Brokerage cannot guarantee that
every trade will be placed at the exact moment the client places
the order. First Brokerage's current Internet transaction period
is averaging less than 30 seconds to complete a trade. Management
is continuing to develop and utilize new strategies to make the
process more efficient.
Internet investors who trade on margin and do not have a
comprehensive knowledge of its procedures are an added risk to
First Brokerage. If the asset an investor purchases depreciates
or a margin call is placed, uninformed investors who have lost
capital are a potential liability to the reputation of the firm.
While First Brokerage assumes the investors who trade on margin
understand the process, management is working to revise its
web-site to better explain the regulations and risks involved.
Additionally, the possibility of opening a trading venue to
daytime gamblers has become a plausible concern for First
Brokerage. While management stresses a comprehensive screening
process to attempt to alleviate this situation, the get rich
quick schemes as mentioned above promote this arena. We will
continue to improve our application process, and work with our
clients to ensure they are aware of their fiscal predicaments.
In addition to the above, many firms are facing
misconception issues with clients regarding the availability of
initial public offerings (IPOs). First Brokerage does not offer
IPOs to it clients and therefore is not faced with this
additional risk.
Governmental Regulation
=======================
The securities industry is subject to extensive regulation
under federal and state law. The SEC is the federal agency
responsible for administering the federal securities laws. In
general, broker-dealers are required to register with the SEC
under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). First Brokerage is a broker-dealer registered
with the SEC. Under the Exchange Act, every registered
broker-dealer that does business with the public is required to
be a member of and is subject to the rules of the NASD. The NASD
has established Conduct Rules for all securities transactions
among broker-dealers and private investors, trading rules for the
over-the-counter markets, and operational rules for its member
firms. The NASD conducts examinations of member firms,
investigates possible violations of the federal securities laws
and its own rules, and conducts disciplinary proceedings
involving member firms and associated individuals. The NASD
administers qualification testing for all securities principals
and registered representatives for its own account and on behalf
of the state securities authorities.
First Brokerage is also subject to regulation under state
law. An amendment to the federal securities laws prohibits the
states from imposing substantive requirements on broker-dealers
which exceed those imposed under federal law. However, the recent
amendment does not preclude the states from imposing registration
requirements on broker-dealers that operate within their
jurisdiction or from sanctioning these broker-dealers for
engaging in misconduct.
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Internet Regulation
===================
Due to the increasing popularity of the Internet, various
regulatory authorities are considering laws and/or regulations
with respect to online services covering issues such as user
privacy, pricing, content copyrights, and quality of services. In
addition, the growth and development of the market for online
commerce may prompt more stringent consumer protection laws that
may impose additional burdens on those companies conducting
business online. Furthermore, the applicability of existing laws
to the Internet and other online services in various
jurisdictions is uncertain. Finally, as the Company's services
are available over the Internet in multiple states and foreign
countries, these jurisdictions may claim that the Company is
required to qualify to do business as a foreign corporation in
each such state and foreign country. New legislation or the
application of laws and regulations from jurisdictions to
First Brokerage or online services could harm our business.
Competitive Assessment
======================
First Brokerage competes against full-commission and
discount brokerage firms, as well as against financial
institutions, mutual fund sponsors and other organizations, many
of which are significantly larger than First Brokerage. Among
such competitors are E*Trade Group Inc., Charles Schwab & Co.
Inc., Quick & Reilly Inc., Waterhouse Securities Inc., Fidelity
Brokerage Services Inc., and Datek Securities Corporation.
Management believes that such success will continue to attract
additional competitors such as banks, insurance companies,
providers of online financial and information services, and
others as they expand their product lines.
The market for electronic brokerage services is intensely
competitive, rapidly changing and has few barriers to entry.
First Brokerage can compete on the basis of speed and accuracy of
order execution, processing and confirmation, quality of client
service, ease of use, amount and timeliness of information
provided and price and reliability of trading systems utilizing
its electronic brokerage service.
First Brokerage differentiates itself from its competitors
in three core areas:
Value - First Brokerage's mission is to bring full
financial services, which includes traditional and online
brokerage services, to clients. To accomplish this, First
Brokerage focuses on providing value added, long-term,
professional common sense personal financial planning by
using all of the Company's resources, which include tax
preparation, general accounting and insurance services to
augment the brokerage services. To our knowledge none of
our competitors offer this complete financial service
package through wholly owned subsidiaries of one company at
a common location.
Customer Service - simply put, the customer comes
first. First Brokerage's commitment to fairness is the
cornerstones of its foundation and structure. Furthermore,
First Brokerage's expectations are to exceed customers'
objectives. This policy stands at the forefront of the
Company's daily activities.
Quality Personnel - The Company has developed a
proprietary 1st STEP(trademark) program that provides the
inexperienced investor with an interpersonal tutorial to the
financial marketplace. Each financial consultant goes
through a rigorous training program for one year. Obtaining
securities and insurance licensing is mandated for all
financial consultants. Subsequent training through in-firm
programs and occasional outside consultants in securities
fundamentals, financial planning, selling, marketing and
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administrative activities insures First Brokerage's
professionals are abreast of the current events that could
impact the securities industry.
Aggregation Strategy
====================
Along with internal, external, domestic, and international
expansion, First Brokerage expects to achieve growth through
individual and cooperative alliances. More importantly,
management of the Company expects that accretive acquisitions
will be pursued vigorously to acquire large blocks of incremental
market share. This aggregation strategy, along with new branch
office openings, will permit significant economies of scale to
further enhance net profitability.
First Brokerage's strategy to expand into international
markets stems from the ability to provide international customers
access to U.S. financial market data and to offer electronic
execution services for foreign markets.
Marketing and Sales Plan
========================
The Company intends to employ marketing initiatives
to bring greater brand name recognition to its products and
services. These initiatives may include promotional expenditures
on television, newspaper, and Internet portal entry points. At
this point, no material expenditures are anticipated.
Dependence on Three Major Customers
===================================
First Brokerage has maintained a branch office in Germany
for two years. The branch manager of the German office serves as
a director of 1st Internet Group, Inc. Our branch in Germany has
three major customers, one of which has an eight year brokerage
relationship with the branch manager, and the other two both have
six year brokerage relationships with the branch manager. The
Company relies heavily upon the relationship with its three major
customers. At this time, there are no known trends, events or
uncertainties have a material impact on our business. However,
in the unforeseen event that the Company loses any of these
clients or the branch manager, the Company's short-term
profitability would be materially impacted as the aforementioned
clients have accounted for virtually all of the firm's net
income. First Brokerage receives approximately 80% of its gross
commission from three institutional clients in Germany. These
clients accounted for $3,925,551 of the total gross commission
collected by First Brokerage in the first three quarters.
First Accounting
----------------
Our Business
============
First Accounting primarily provides bookkeeping and tax
preparation services to small businesses and individual clients.
Management recognizes that clients desire a certainty about their
financial planning stratagem. Management believes that the
financial relationship between First Brokerage, First Accounting
and First Insurance gives us a competitive edge by offering a
complete financial services experience. The Company provides
clients with an opportunity to invest in brokerage-related
services and insurance policies.
In addition, management believes that bookkeeping is an
under-appreciated sector of the market. The Internet has
revolutionized the communication process by providing an
efficient and secure method for the transfer of documentation. We
believe that this will facilitate the bookkeeping industry as
people search for a convenient method to report transactions.
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Market and Strategic Overview
=============================
The Company believes that most Americans require tax
preparation services. Segmented firms have historically supplied
different financial sectors, but the Company believes that the
current trend toward multi-service firms will enable First
Accounting to attract more clients for its full range of
services.
Management of First Accounting also believes that as people
continue to look for more convenient and efficient ways to
transfer documentation, the Internet provides efficient means
for the movement of this information as compared to traditional
methods (i.e. mail). Moreover, the power of e-mail promotes the
infrastructure of the Web, eliminating the meticulous nature of
copying paperwork. Coupling these factors, we believe people will
begin to seek record keeping services over the Internet. This
industry is very early in its development and we expect it to
grow as convenience becomes even more of a commodity.
Key Market Drivers
==================
The primary market driver for accounting is in the financial
service industry. As more planning becomes eminent in the
development of individual financial futures, the tax preparation
and bookkeeping sectors will continue to grow. The accounting
industry functions around this premise and relies solely upon it.
As people look to the Internet as the future commercial tool,
management believes there will be a growing demand for Internet
bookkeeping and preparation services.
Competitive Assessment
======================
The income tax preparation and financial planning services
industry is highly competitive. First Accounting's competitors
include companies specializing in income tax preparation as well
as companies that provide general financial services. Many of
these competitors, which include H + R Block Inc., HD Vest Inc.,
Jackson Hewitt Tax Service Inc. and Triple Check Income Tax
Service Inc. in the tax preparation field and many well-known
brokerage firms in the financial services field, have
significantly greater financial and other resources than the
Company.
The Company believes that the primary elements of
competition are the quality of service, fair pricing and
convenience due to location and web presence. Based on
management's experience and the Company's success to date, we
believe that we can effectively compete in this market with
respect to these factors.
First Insurance
---------------
Our Business
============
First Insurance was formed to complement the full range of
financial services offered by the Company and its subsidiaries.
The agents, who are licensed insurance brokers and employees of
the firm, sell life, health and annuity policies for insurance
firms and are paid a commission by the policy provider for the
sale. There are no financial liabilities as First Insurance acts
solely as an agent for policy providers underwriting these
policies. First Insurance has a relatively insignificant
role in the daily operations of the Company and its financial
condition. The commissions on insurance sales account for
approximately .5% of the Company's total revenues.
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Market and Strategic Overview
=============================
The insurance sector of the financial services industry has
consistently been a stable fiscal element. While First Insurance
is an agent for alternative policy providers, it prides itself on
ensuring clients the best possible and most reasonable solution
for their personal financial needs. Long term investment plans,
financial security, and financial relief in the case of
emergencies and financial mishaps define the insurance sector.
Almost all American families seek to have a modicum of insurance
to provide a solid backbone for their individual financial goals
and alternative investment opportunities.
First Insurance believes by coupling the services of First
Brokerage and First Accounting with First Insurance, it has a
competitive advantage by offering a full financial service
experience that caters to the needs of the individual. Management
believes that First Insurance will continue to grow as the
Company promotes the idea of a "one-stop" solution for personal
financial services.
Item 2. Management's Discussion and Analysis
This registration statement includes, without limitation,
certain statements containing the words "believes",
"anticipates", "estimates", "could", "plans to", and "predicts"
and words of a similar nature, which constitute "forward-looking
statements" meaning actual results could differ from projected or
expected results. In particular, the statements herein regarding
the Company's expansion plans and methods; the stabilization of
business and its affect on revenues and expenses; the length of
time the proceeds from the Company's stock offering and cash flow
from operations will fund its planned operations; the effect that
any possible change in the Net Capital Rule could have on the
operations of the Company; the complete effect to the Company's
operations if heavy stress is placed on the Company's computer
systems or those of third parties on which it relies, the effect
of name recognition associated with the Internet if Internet
usage and online trading slow down; the complete effect on the
business if the trading market experiences an unforeseen change;
the effects on the operations of the Company if the Company
experiences any sort of trouble with its clearing firm(s); the
effects on the operations of the Company if the Company were to
lose the services of any of its officers or directors or a
conflict among employees arose; the readiness of the Company for
the change to the Year 2000 and the readiness of third party's on
whom the Company relies; the effect a breach in customer security
could have; the effect on the operations of the Company if it is
unable to adapt to changing technology; the accomplishment of
advertising goals for the First Accounting subsidiary; the
consistency of the bookkeeping and accounting industries and its
effect on the revenue and expenses of the First Accounting
subsidiary; the role bookkeeping has in the success of a
financial firm and the growth the industry will face if and when
expanded to the Internet; the percentage of operating revenue to
be generated by personal and corporate accounting services; the
effect on the First Accounting subsidiary's operations if
businesses and individuals rely more and more on do it yourself
software and services; the effect a possible flat tax rate could
have on the First Accounting subsidiary's operations; and the
effect a possible
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misinterpretation of new policies or lack of awareness could have
on operation are forward-looking statements. Forward-looking
statements reflect management's current expectations and are
inherently uncertain. The Company's actual results may differ
significantly from management's expectations.
Introduction
------------
The Company is a holding company with three operating
subsidiaries: 1st Discount Brokerage, Inc., 1st Discount
Insurance, Inc., and Corporate Accounting Group, Inc.
First Brokerage is a broker-dealer registered with the SEC,
the NASD and 48 continental states. First Brokerage has pending
registration in the remaining states. First Brokerage provides
retail discount securities brokerage and related
investment/portfolio management counseling services. First
Brokerage makes extensive use of a variety of electronic media,
including the Internet, to service individual investors
throughout the United States and internationally.
First Insurance provides annuity, life, and health insurance
products to complement and augment the needs of brokerage and
non-brokerage clientele.
First Accounting is an accounting and tax preparation
service company providing these services to individuals and
businesses while complementing the needs of First Brokerage's and
First Insurance's clientele.
In addition to continuing the existing marketing strategy
for the three entities, the Company also plans to expand its
business and operations by transferring current clientele to the
Internet, expanding marketing strategies, and purchasing Internet
market share from existing competitive online brokers and
accounting clients from existing bookkeeping and tax preparation
firms.
First Brokerage - Year-to-Year Comparison
-----------------------------------------
First Three Quarters 1999
=========================
First Brokerage's revenue for the first three fiscal
quarters of 1999 was $4,993,635, an increase of 678.9% over the
first three quarters during the 1998 fiscal year. First
Brokerage's comparative revenue during that period was $641,166.
Approximately 90% of this increase is due to the three
institutional customers in Germany. First Brokerage
as of March 31, 1999 had already surpassed the revenue grossed
during all of the year-end 1998. Significant growth and marketing
strategies have acted as the impetus for First Brokerage's
expansion. First Brokerage's revenue accounted for 97.2% of the
Company's total revenues during the first three fiscal quarters
of 1999.
In addition to the significant growth in revenue, expenses
have also increased as First Brokerage has grown. Expenses during
the first three fiscal quarters of 1999 were $4,472,058 compared
to $642,018 during the first three quarters of fiscal year 1998.
First Brokerage's overall growth has been the primary
impetus for net income to rise to $291,018 during the first three
quarters of 1999 as compared to net income of $21,615 in the same
fiscal period during the year 1998.
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Year-End 1998
=============
First Brokerage's total revenue for the year ending December
31, 1998 was $1,069,021, a 69% increase over the reported
revenues of $634,259 for the year ending December 31, 1997. Total
revenue increased primarily as a result of an additional $626,087
in commission.
The expansion of First Brokerage yielded an increase in
commission revenue. First Brokerage has expanded to take on more
institutional clientele and hire new financial consultants. In
addition, the opening of a branch office in Germany expanded
First Brokerage to include foreign investors in U.S. securities
and services. Finally, the expansion of First Brokerage to
include the Internet as a new source for clientele and financial
services coupled with consistent technological upgrades has
influenced trading revenue and growth.
Although revenues have significantly increased with the
expansion of the business, so have the expenses. Total expenses
rose 98% from $545,990 for the year ending December 31, 1997 to
$1,080,652 year ending December 31, 1998. Clearing and execution
fees rose 96% from $42,464 in year ending December 31, 1997 to
$83,420 in year ending December 31, 1998. In addition, the
commissions, salaries, and benefits expense rose from $337,399 in
year ending December 31, 1997 to $887,972 in year ending December
31, 1998, a change of 163%. Administrative and occupancy fees
have risen to $81,775 in year ending December 31, 1998 from
$29,927 during the previous year, a change of 173%.
In the past year, First Brokerage has expanded its offices
to facilitate the increase in clientele and employment growth.
This has been the primary cause for the increase in
administrative and occupancy expenses. Moreover, the increases
in general purchases (i.e., paperwork, computer software &
hardware and technical instrumentation) have been another facet
of the increase in cost. The trading and execution expenses have
risen due to an expansion of clientele and customer investment.
Finally, the expenses associated with employment have risen as a
result of the hiring of new financial consultants and
administrative employees.
Net income for the year ending December 31, 1998 was
$(7,191), while in the year ending December 31, 1997, it was
$88,269. The change in operating income yielded a net decrease in
cash of $(119,366), finalizing the year-end cash and cash
equivalents at a value of $121,698 for the year ending December
31, 1998. In general, First Brokerage's net income decreased due
to an increase in operating expenses resulting from business
expansion and future planning.
Liquidity
=========
Since inception through April, 1999 the Company has financed
its operations through earnings, capital infusions by the
principal shareholder and sales of common stock. In April of
1999, the Company raised $998,000 through the sale of common
stock. Cash and cash equivalents at December 31, 1998 were
$121,698 as compared to $241,064 at December 31, 1997. The ratio
of
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current assets to current liabilities was almost 1.6 to 1 at
December 31, 1998, compared to 8.4 to 1 at December 31, 1997.
Pursuant to the SEC's net capital rule, First Brokerage is
currently required to maintain net capital of $50,000 and a ratio
of aggregate indebtedness to net capital (the "net capital
ratio") not to exceed 15 to 1. As of December 31, 1998,
First Brokerage's net capital ratio was 1.08 to 1. SEC rules also
prohibit "equity capital" (which, pursuant to the net capital
rule includes the subordinated loans) from being withdrawn or
cash dividends from being paid if First Brokerage's net capital
ratio exceeds 10 to 1 or if it has less than the minimum required
net capital.
Net cash provided by operating activities was $(82,020) at
year-end December 31, 1998 and $124,458 at year-end December 31,
1997. The decrease in cash flow was primarily a result of an
increase in commission receivable from $(10,255) at year-end
December 31, 1997 to $(225,237) at year-end December 31, 1998.
Net cash used in investing activities was $26,701 during
year-end December 31, 1998 and $(58,114) during year-end December
31, 1997. Net cash used in investing activities was primarily a
result of purchasing additional computer systems, office
equipment and leasehold improvements.
Net cash provided by financing activities was $(64,047) in
Year-end December 31, 1998 and $(16,254) in year-end December 31,
1997. The decrease in cash flows from financing activities was a
result of capital contributions and distributions.
Based on currently proposed plans and assumptions relating
to the implementation of the Company's business plan, management
believes that the proceeds from its stock offering, combined with
cash flow from operations, will enable it to fund its planned
operations through the first quarter of 2001.
Net Capital Rule
================
As a registered broker-dealer and member of the NASD,
First Brokerage is subject to the Net Capital Rule. The Net
Capital Rule, which specifies minimum net capital requirements
for registered brokers-dealers, is designed to measure the
general financial integrity and liquidity of a broker-dealer and
requires that at least a minimum part of its assets be kept in
relatively liquid form. In general, net capital is defined as net
worth (assets minus liabilities), plus qualifying subordinated
borrowings and certain discretionary liabilities, and less
certain mandatory deductions that result from excluding assets
that are not readily convertible into cash and from
conservatively valuing certain other assets. Among these
deductions are adjustments, which reflect the possibility of a
decline in the market value of an asset prior to disposition.
Failure to maintain the required net capital may subject a
firm to suspension or revocation of registration by the SEC and
suspension or expulsion by the NASD and other regulatory bodies
and ultimately could require the firm's liquidation. The Net
Capital Rule prohibits payments of dividends, redemption of
stock, the prepayment of subordinated indebtedness and the making
of any unsecured
14
<PAGE>
advance or loan to a shareholder, employee or affiliate, if the
payment would reduce the firm's net capital below a certain
level.
The Net Capital Rule also provides that if the sum of the
net capital withdrawals during a 30-day period exceeds 30% of the
excess net capital, and the SEC concludes that the capital
withdrawal may be detrimental to the financial integrity of the
broker-dealer, the SEC may restrict any withdrawal of equity
capital, or unsecured loans or advances to shareholders. In
addition, the Net Capital Rule provides that the total
outstanding principal amount of a broker-dealer's indebtedness
under certain subordination agreements, the proceeds of which are
included in its net capital, may not exceed 70% of the sum of the
outstanding principal amount of all subordinated indebtedness
included in net capital, par or stated value of capital stock,
paid in capital in excess of par, retained earnings and other
capital accounts for a period in excess of 90 days.
A change in the Net Capital Rule, the imposition of new
rules or any unusually large charge against net capital could
limit First Brokerage's operations that require the intensive use
of capital, such as the financing of client account balances, and
also could restrict its ability to pay dividends, repay debt and
repurchase shares of its outstanding stock. A significant
operating loss or any unusually large charge against net capital
could adversely affect its ability to expand or even maintain its
present levels of business, which could harm business.
Possible Harms to Financial Condition
=====================================
First Brokerage relies heavily on various electronic
mediums, including, but not limited to, the internet, internal
and third party computer systems and communication systems.
First Brokerage receives trade orders using the Internet and
telephone. In addition, all trade orders are processed through
U.S. Clearing Corp. (the "Clearing Firm"). This method of trading
is primarily dependent on the consistency of the electronic
systems supporting them. Heavy stress placed on these systems
during peak trading times could cause First Brokerage's systems
to operate at unacceptably low speeds or malfunction. Any
significant degradation or failure of First Brokerage's computer
and communication systems, those of the Clearing Firm, or any
other systems in the trading process (e.g., online service
providers, record keeping and data processing functions performed
by third parties, and third-party software such as Internet
browsers) could pose a threat to the timeliness of financial
transactions. These delays could cause a moderate loss for First
Brokerage's clientele and could subject First Brokerage to
claims from clients for possible losses, including litigation
claiming fraud or negligence. Management is in the process of
creating operating redundancies in First Brokerage's systems and
regularly conducting backups to protect against system failures.
These systems and/or safeguards may not be sufficient in all
circumstances.
As a majority of First Brokerage's advertising and new
basis for clientele is based on the Internet, the potential loss
of certainty in the Internet for consumers may draw individuals
back to the primary use of a traditional broker. Although First
Brokerage offers a majority of financial services, name
recognition without the use of the Internet could be detrimental
to the expansion of the Company.
In the normal course of business, the Company's activities
involve the execution, settlement, and financing of various
customer securities transactions. These activities may expose the
Company to off balance sheet risk in the event the customer or
other broker is unable to fulfill its contracted obligations and
the Company has to purchase or sell the financial instrument
underlying the contract at a loss.
15
<PAGE>
The market itself can create a possible harm for the firm if
an unforeseen change is drastic. An untimely shift in interest
rates, inflation, unemployment, or any immediate scare or threat
to consumer independence and monetary gain could prove to act as
an impetus for investor withdrawal. A lack of faith in the
market and its ability to grow, or a reduction in consumer
spending could reduce individual investment, therefore reducing
capital within the corporation.
The reliability of the clearing firm is another facet of the
transaction process that could be detrimental to the Company in
the future. The possibility of misplaced trades, incomplete
registration, and inconsistent account transfers due to First
Brokerage's recent change in clearing firms could all prove to
have an effect on the short-term liquidity of the corporation. In
addition, there is no way to determine how current clientele will
react to the delay in trading of their portfolios. This
inconsistency could transcend into a loss of customer/broker
relations that could harm the Company.
The Company's success depends heavily on the work of William
Corley, Chief Executive Officer, P. Jason Ling, Chief Financial
Officer, Michael Graham, Chief Operating Officer, and Thomas Doll
and Michael Fisher, Branch Managers. The loss of services of any
of these employees could have an impact on the financial
condition of the company. The replacement of these individuals
could be a long and meticulous process that would delay daily
services for an extended period of time.
The plausibility of employee misconduct, while difficult to
predict, is a considerable threat to the Company's growth and
expansion. Currently, the corporation employs a small number of
staff members in comparison to a majority of corporations. As a
result, the compliance and work ethic of each individual is
crucial to the day-to-day operations of the Company. A conflict
could compromise the working environment and disrupt the
definitive roles of each individual. The misguided use of
confidential information or the possibility of an intentionally
misplaced trade could compromise the integrity of the Company's
operations.
Because the Company depends to a very substantial degree
upon the proper functioning of its computer systems, a failure of
its systems to be Year 2000 compliant could harm its business.
Failure of this kind could, for example, cause settlement of
trades to fail, lead to incomplete or inaccurate accounting,
recording, or processing of trades in securities and other
assets, result in a generation of erroneous results, or give rise
to uncertainty about our exposure to trading risks and our need
for liquidity. If not remedied, potential risks include business
interruption or shutdown, financial loss, regulatory actions,
harm to our reputation, and legal liability.
In addition, the Company depends upon the proper functioning
of third-party computer and non-information technology systems.
These parties include trading counter parties, financial
intermediaries such as stock exchanges, depositories, clearing
agencies, clearing houses, and commercial banks and vendors such
as providers of telecommunication services and other utilities.
If third parties with whom we interact have Year 2000 problems
that are not remedied, the following problems could result:
o in the case of vendors, a disruption of important
services upon which we depend, such as
telecommunications and electrical power failure;
16
<PAGE>
o in the case of third-party data providers, the receipt
of inaccurate or out-of-date information that could
impair our ability to perform critical data functions;
o in the case of financial intermediaries such as
exchanges and clearing agents, failed trade settlements
could cause an inability to trade in certain markets
and a disruption of funding flows;
o in the case of banks and other lenders, the disruption
of capital flows could potentially result in liquidity
stress.
Disruption or suspension of activity in the world's
financial markets is also possible. Uncertainty about the
success of remediation efforts generally may cause many market
participants to reduce the level of their market activities
temporarily as they assess the effectiveness of these efforts
during a "phase-in" period beginning in late 1999. This in turn
could result in a general reduction in trading and other market
activities (and lost revenues) as well as reduced funding
availability in late 1999 and early 2000. We cannot predict the
impact that any reduction would have on our business.
The market for electronic brokerage services over the
Internet is infantile in its stage and rapid in its development.
The compilation of technological change, client requirements,
frequent services, product enhancements and introductions, and
emerging industry standards give way to evolving marketing and
financial costs. The maturation of this financial arena can
render current technologies and services obsolete and
unmarketable. Our future success depends, in part, on our ability
to develop and use new technologies, adapt and respond to future
changes in technology, and enhance our existing services. As a
result of the financial aspect of the industry there is no
guarantee that we can continue to pursue new opportunities or
compete with the financial firms that have already claimed a
definitive monetary stake within the industry.
Customer security is another essential aspect of Internet
trading. The growing information age of the Internet has opened a
new arena for white-collar crime. Clients rely on the security of
their financial condition as a high priority. A compromise of
this magnitude could jeopardize the relationship of the client
and firm and progress into more complicated issues with retention
of customers and disclaimers. Security compromises could have an
effect on the entire market and its potential to grow, which
could harm our business.
First Accounting - Year-to-Year Comparison
------------------------------------------
First Three Quarters 1999
============================
First Accounting's revenue during the first three fiscal
quarters of 1999 was $135,840, a 11.3% gain in comparison to the
first three quarters of fiscal year 1998, where such revenues
were $122,099. General expansion and growth attributed to the
increase in revenue.
17
<PAGE>
In addition to the growth in revenue, expenses have also
increased as First Accounting has grown. Expenses during the
first three fiscal quarters 1999 were $159,105, compared to
$101,734, during the first three quarters of fiscal year 1998.
Year-End 1998
=============
First Accounting's total revenue year ending December 31,
1998 was $151,565, a 22% decrease from the reported revenues for
the year ending December 31, 1997, a value of $194,170. Total
revenue decreased primarily due to a shift in business focus from
tax preparation to the more stable, but less lucrative
bookkeeping industry.
First Accounting has yielded a constant source of revenue as
First Accounting's clients are introduced to bookkeeping services
and subsequently open brokerage accounts at First Brokerage.
There have been no major changes in clientele or staff members.
Our general revenue line-by-line depends heavily on our
bookkeeping and personal and corporate tax revenue sectors.
Although revenues have decreased over the past two years,
expenses in proportion to revenue have also decreased. Selling,
general and administrative expenses during the year ending
December 31, 1997 were $190,531 or 98.2% of the year's revenues.
However, during the year ending December 31, 1998 expenses were
$130,417 or 86.1% of the year's total revenues. This decrease in
expenses resulted in a profit in the year ending December 31,
1998 of $21,310 compared to a profit of $504 in the year ending
December 31, 1997, a net increase of $20,806 or 4132%.
Advertising has proportionally been one of the largest expenses
the company has endured during the past two years, totaling
approximately $35,000. We believe that we have accomplished our
advertising goals and the expense is expected to decrease. In
addition, the shared expenses between the subsidiaries have
diminished variable individual expenses including, but not
limited to, rent (although the comparison between the line by
line rent expense has increased, proportional to square footage
as a measure of office space, the expense decreased),
administrative fixed costs, and general operating expenses. As a
result, we believe that the consistency of the bookkeeping and
accounting industries will continue to provide a stable source
for corporate revenue while diminishing the general expenses an
independent company would ordinarily bear.
Liquidity
=========
The nature of the accounting industry has yielded a constant
source of revenue over the past year. There have been no major
changes in clientele or staff members. Recently, we have hired
additional employees to assist with bookkeeping responsibilities
and the upcoming fiscal period. Our general revenue depends
heavily on our bookkeeping and personal and corporate tax revenue
sectors.
Bookkeeping during the year-end December 31, 1998 grossed
$59,185 in revenues, approximately 39.1% of the total revenue for
First Accounting. We believe that this is one of the most
essential components of a successful financial firm and we also
believe that there is a tremendous opportunity for company growth
as this industry is expanded to the Internet.
Personal and Corporate accounting services grossed $73,535
during the year-end December 31, 1998, or 48.6% of the total
revenue. This is the primary function of the firm so it is
expected that the operating revenue be generated in the majority
by this sector.
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<PAGE>
Seasonality
===========
First Accounting's tax preparation business is conducted
predominantly in the months of February, March and April, when
most individuals prepare their federal, state and local income
tax returns. The corporation hires no additional seasonal
employees and conducts 65% of its monetary business in these
months.
Possible Harms to Financial Condition
=====================================
We conduct business traditionally in
independent sessions with clients. As technology is changing
rapidly the notion of online tax services is spreading throughout
the industry. This could pose a potential harm to our business as
individuals begin to complete their taxes with self-sustaining
and teaching programs and send them via the Internet.
The current trend towards a flat tax rate has prompted a
scare within the accounting arena. The market depends completely
on tax preparation and the registration processes. The
elimination of the current filing system for a more convenient
and cost effective method could pose serious implications for the
market for accounting services and could harm our business.
The constant changes in the accounting standards and
policies of the filing process give way to a plethora of possible
harms. The misinterpretation of new policies, the absence of
awareness for change of existing policies and policy negligence
could compromise the integrity of the corporation. We depend
heavily on our reputation as our customers provide a solid
clientele base for our other financial services. In addition,
policy malpractice could lead to lawsuits regarding negligence or
jeopardize customer/accountant relations.
First Insurance
---------------
First Three Quarters 1999
=========================
First Insurance's revenues for the first three fiscal
quarters of 1999 were $11,768, an increase of 74.3% over the same
fiscal period for the year-end 1998 when revenue totaled $6,755.
First Insurance's expenses were slightly reduced.
During the first three quarters of fiscal year 1999,
expenses were $6,179 a decrease of $6.3% in comparison to the
same period during 1998, in which expenses were $6,590.
In conjunction with the other financial services offered by
the Company, First Insurance plays an insignificant role in the
financial condition of the daily operations, accounting for
approximately .5% of the first three quarters revenues.
19
<PAGE>
Year-End 1998
=============
First Insurance's revenue for the year ending December 31,
1998 was $24,612, which accounted for 2% of the Company's total
revenue. This was a 27.2% decrease in revenue from the Company's
First Insurance sector compared to the year ending December 31,
1997, in which reported revenue was $33,799 or approximately 4%
of the Company's total revenue. The comparison details that First
Insurance plays an immaterial role in the fiscal operations
conducted by the three subsidiaries. In addition, the decrease in
revenue is a result of the Company's change in business focus
from insurance brokerage to securities brokerage.
Selling, general and administrative expenses decreased from
$33,544 in the year ending December 31, 1997 to $16,798 in the
year ending December 31, 1998. This was a 50% decrease between
the two years. First Insurance accounted for 4.4% of the
Company's total expenses in the year ended December 31, 1997 and
1.4% for the year ended December 31, 1998.
Year 2000 Readiness
-------------------
With the new millennium approaching, many institutions
around the world are reviewing and modifying their computer
systems to ensure that they are Year 2000 compliant. The issue,
in general terms, is that many existing computer systems and
microprocessors with data functions (including those in non-
information technology equipment and systems) use only two digits
to identify a year in the date field with the assumption that the
first two digits of the year are always "19." Consequently, on
January 1, 2000, computers that are not Year 2000 compliant may
read the year as 1900. Systems that calculate, compare, or sort
using the incorrect date may malfunction.
The Company has conducted a multitude of Year 2000
compliance tests to ensure Company readiness and software
compatibility. To date, the Company has spent $5,951 on Year 2000
compliance software and hardware and has budgeted an additional
$25,000 for possible expenses during this period. While
management believes the Company is in a firm position to cope
with the transition, clientele are still skeptical with the
readiness of the market itself. While the SEC has recently
guaranteed a successful industry-wide Year 2000 compliance test
of computer systems and readiness, management continues to
monitor and review the issue. SEC Chairman Arthur Levitt stated
that in a recent test more then 97% of the 260,000 expected
results were successfully completed. Only four Year 2000
compliance errors were noted. In addition, management of the
Company is completing a second test of the systems' Year 2000
compliance performance and will continue to modify or replace
current software that may be vulnerable to the Year 2000 shift.
The Company's Year 2000 Plan, which contains results of
tests performed and the preparedness status, is attached to this
Form 10-SB as Exhibit No. 99.0 and is incorporated herein by
reference to such Year 2000 Plan.
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases office space in good condition in the
Lake Worth/Greenacres area of West Palm Beach, Florida. The
address of the office is 5883 Lake Worth Rd., Lake Worth, Florida
33463. The Company also leases one office in Munich, Germany. The
lease agreement in Lake Worth is for two suites totaling 3,080
sq. feet. The lease agreement was amended in May, 1999 with the
addition of the second suite. There will not be a charge for the
second suite during the first year, and the annual base rent will
be $15,400.
20
<PAGE>
In the second year, the annual rent will increase to $32,340.
There will be an annual rental increase of $1,540 during the
third and fourth years. The lease terminates on October 31,
2002.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of
July 15, 1999, with respect to the beneficial ownership of the
common stock by each officer and director of the Company, each
person (or group of persons whose shares are required to be
aggregated) known to the Company to be the beneficial owner of
more than five percent (5%) of the common stock, and all such
directors and executive officers of the Company as a group.
Unless otherwise noted, the persons named below have sole voting
and investment power with respect to the shares shown as
beneficially owned by them.
Title of Name and Address Amount & Nature Percent of
Class of Beneficial Owner of Beneficial Owner Class
---------------------------------------------------------------
Common William H. & Rosa Corley<F1> 3,004,000<F2> 51.4%
5883 Lake Worth Road
Lake Worth, FL 33463
Common Thomas Doll<F1> 1,140,000<F2> 19.5%
5883 Lake Worth Road
Lake Worth, FL 33463
Common Michael J. Graham<F1> 439,000<F2><F4> 7.5%
6271 Barton Creek Ct.
Lake Worth, FL 33463
Common Philip Jason Ling<F1> 145,000<F2><F5> 2.5%
7385 Nautica Way
Lake Worth, FL 33467
Common Michael Fisher<F1> 41,000<F2><F6> <F3>
2301 S. Congress #322
Boynton Beach, FL 33426
<F1> An officer and/or director of the Company.
<F2> These shares are restricted.
<F3> Less than one percent.
<F4> Additionally, options to purchase 90,000 shares of common
stock at $1.00 per share vesting June 30, 2000 were granted
on July 1, 1999.
<F5> Additionally, options to purchase 150,000 shares of common
stock at $1.00 per share vesting 20%/year were granted on
July 1, 1999. This figure includes the initial thirty
thousand option shares that may be exercised January 1,
2000.
<F6> Additionally, options to purchase 200,000 shares of common
stock at $1.00 per share vesting 20%/year were granted on
July 1, 1999. This figure includes the initial forty
thousand option shares that may be exercised January 1,
2000.
CHANGES IN CONTROL
The Company has no arrangements which might result in a
change in control of the Company.
21
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
The following table sets forth the directors and executive
officers of the Company, their ages, and all positions with the
Company.
Name Age Positions
---------------------------------------------------------------
William H. Corley, Jr. 38 Chief Executive Officer,
President and Director
Philip Jason Ling 31 Chief Financial Officer and
Director
Michael James Graham 34 Chief Operating Officer,
Vice President and Director
Michael Raymond Cornell
Fisher 37 Director
Thomas Doll 36 Director
William H. Corley, Jr. is the founder, Chief Executive
Officer, President and a director of the Company. He started his
career with Bankers Life and Casualty, a Chicago-based life
insurance company, and obtained the Series 218 life and health
license. Later, he obtained the Series 7 license for dealing in
registered securities, and the Series 63 license permitting
transactions in all 50 states. In 1986, Mr. Corley became
president and chief executive officer of Corley Financial
Services, a full service brokerage firm with membership in the
National Association of Securities Dealers. He also obtained the
Series 24 general securities principal license which permits
management of other licensed stockbrokers, the Series 27 license
as a financial and operations principal which permits filing of
financial statements for a brokerage firm, and the Series 53
license as a municipal bonds principal.
In 1989, Mr. Corley relocated to New York City as a vice
president for Global America on Wall Street. Soon afterward, he
was promoted to senior vice president. When the firm ceased
operations, he accepted a position with J.W. Charles Financial
Services in Boca Raton with a mandate to develop a European
equity and bond institutional division. The new activity
ultimately centered on the banking community in Switzerland, plus
other major financial centers of Europe. Four years later, in
January of 1993, Mr. Corley joined Merrill Lynch as a Vice
President. As in prior assignments with other companies, he built
up a significant business and earned the President's Club Award.
Mr. Corley remained at Merrill Lynch until December, 1994 when he
joined Morgan Stanley Dean Witter as a Senior Vice President. In
July, 1995 Mr. Corley founded what is currently known as 1st
Discount Brokerage, Inc.
Mr. Corley earned a bachelor of science degree in Business
Administration from Palm Beach Atlantic College, a Master of Arts
from Louisiana Baptist University, and is listed in the Who's Who
in the South-Southeastern United States.
Philip Jason Ling is a founder of the Company, and is
Chief Financial Officer and a director. Mr. Ling earned his
bachelor of science in accounting from Fisher School of
Accounting at the University of Florida in 1993. He became
licensed as a certified public accountant by the state of Florida
in 1996. From 1993 to 1996, Mr. Ling worked for Securities
Consultants International LLC, a national securities/brokerage
consulting firm. In 1996, he formed zum Tobel & Ling, LLP, a
certified public accounting and consulting firm focusing on the
securities industry. In 1998, he formed P. Jason Ling, CPA, P.A.,
a certified public accounting and consulting firm, once again
focusing on the securities industry.
22
<PAGE>
Michael James Graham, is Chief Operating Officer and a
director of the Company. Mr. Graham started his career as an
accountant 12 years ago. He worked for DeRosa & DeRosa for three
years, from 1987 to 1990, as a public accountant in New York. He
is founder and has been president of Corporate Accounting Group,
Inc., a subsidiary of the Company, since 1991. Mr. Graham also
serves as the financial operations principal and a registered
representative of 1st Discount Brokerage, Inc., a subsidiary of
the Company. He earned a bachelor of arts degree in accounting
from Stockton State College.
Michael Raymond Cornell Fisher is a director of the Company.
Mr. Fisher serves as a registered representative, since 1996, and
became branch manager of 1st Discount Brokerage, Inc. in 1998.
Mr. Fisher is also the founder and executive vice president of
1st Discount Insurance, Inc. He served in the ministry from 1993
until 1996. Mr. Fisher earned his bachelor of science degree in
education from Palm Beach Atlantic College, where he currently
serves on the board of directors, and a master of arts in
education from Southwestern Baptist Theological Seminary.
Thomas Doll is a director of the Company. He serves as a
registered representative and branch manager of the Company's
subsidiary, 1st Discount Brokerage, Inc.'s Munich, Germany
office. He has been the branch manager since 1997. From 1992 to
1997, Mr. Doll was an assistant office manager of Hutzler
Brokerage Agency in Munich. He earned a bachelor of science
degree from University of Passau in economics.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the compensation received by
the Company's President for the last three fiscal years. None of
the other officers' compensation packages exceeded $100,000 per
year.
SUMMARY COMPENSATION TABLE <F1>
Name and Principal Annual Compensation
Position Year Salary
----------------------------------------------------
William H. Corley, Jr. 1998 $50,750
CEO, President and 1997 71,023
Director 1996 8,750
<F1> All columns which are inapplicable have been removed.
OPTIONS/SAR GRANTS
There were no stock options or stock appreciation rights
granted to the chief executive officer during the last fiscal
year.
23
<PAGE>
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR END
OPTION/SAR VALUE TABLE
Not applicable.
LONG TERM INCENTIVE PLANS
There are no long term incentive plans in effect and
therefore no awards have been given to any executive officer in
the past year.
COMPENSATION OF DIRECTORS
The Company pays no fees to members of the Company's Board
of Directors for the performance of their duties as directors.
The Company has not established committees of the Board of
Directors.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN
CONTROL ARRANGEMENTS
The Company has executed employment contracts with its Chief
Executive Officer, its Chief Operating Officer and its Chief
Financial Officer. The contracts, which are attached to this
registration statement as exhibits, are of a general nature for a
one year period of time, which may be extended. Following is a
summary of the base salary entitled to each officer pursuant to
the terms of each agreement.
Officer Position Base Salary
----------------------------------------------------------
William H. Corley, Jr. CEO $75,000
Michael Graham COO $50,000
P. Jason Ling CFO $24,000
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 1, 1999, the Company issued to P. Jason Ling, an
officer and director of the Company, options to purchase 150,000
shares of common stock at $1.00 per share, vesting 20% per year
and expiring ten years from the date of issuance. On July 1,
1999, the Company also issued to Michael Fisher, a director of
the Company, options to purchase 200,000 shares of common stock
at $1.00 per share, vesting 20% per year and expiring ten years
from the date of issuance. The Company has also issued to Michael
Graham, an officer and director of the Company, options to
purchase 90,000 shares of common stock at $1.00 per share vesting
June 30, 2000 and expiring 10 years from the date of issuance.
The Company is in the process of preparing option agreements to
formalize the issuance of such options. Such agreements, when
completed and executed, will be filed as an exhibit to this
registration statement in a follow up amendment.
Other than as described above, there have been no material
transactions in the past two years or proposed transactions to
which the Company has been or proposed to be a party in which any
officer, director, nominee for officer or director, or security
holder of more than 5% of the Company's outstanding securities is
involved.
The Company has no promoters other than its executive
officers and directors. There have been no other transactions
that have benefited or will benefit its executive officers and
directors either directly or indirectly.
24
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES
The Company is presently authorized to issue 100,000,000
shares of common stock, $.01 par value per share each of which is
entitled to one vote per share on matters put to a vote of the
shareholders. The Company presently has 5,777,,000 shares of
common stock outstanding. The shareholders of the Company do not
have a preemptive right to acquire the Company's unissued shares.
There are no provisions, other than the articles and by-laws of
the Company and the Florida Business Corporation Act, that govern
the voting of the Company's shares. The Company has not to date
paid any dividends on its common stock. There are no provisions,
other than as may be set forth in the Florida Business
Corporation Act, that prohibit or limit the payment of dividends.
There are no provisions in the Company's articles or by-laws that
would delay, defer or prevent a change in control of the Company.
PART II
ITEM 1. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company is voluntarily filing this Registration
Statement on Form 10-SB to obtain listing on the OTC Bulletin
Board, which requires all listed companies to be registered with
the SEC under Section 13 or 15(d) of the Securities Exchange Act
of 1934 and to be current in its required filings once so
registered.
The Company has no public trading market for its common
stock. Although the Company intends to seek a quotation for its
common shares on the Over-the-Counter Bulletin Board in the
future, there is no assurance the Company will do so, nor is
there any assurance that should the Company succeed in obtaining
a listing for its securities on the OTC Bulletin Board or on some
other exchange, that a trading market for the Company's stock
will develop. There are no outstanding options, warrants to
purchase, or securities convertible into common equity of the
Company outstanding. The Company has not agreed to register any
shares of its common stock for any shareholder. There are
presently 4,779,000 shares of common stock, which were issued in
the acquisition of 1st Discount Brokerage, Corporate Accounting
Group, and 1st Discount Insurance by the 1st Internet Group on
February 25, 1999, and which may be sold in reliance upon Rule
144 of the Securities Act of 1933.
STOCKHOLDERS
The are approximately 88 shareholders of record for the
Company's common stock.
DIVIDENDS
To date, the Company has not paid any dividends on its
common stock. The payment of dividends, if any, in the future is
within the discretion of the Board of Directors and will depend
upon the Company's earnings, its capital requirements and
financial condition, and other relevant factors. There are no
provisions in the Company's articles of incorporation or by-laws
that prevent or restrict
25
<PAGE>
the payment of dividends. As previously discussed in the
Management's Discussion and Analysis section of this registration
statement, the Net Capital Rule prohibits payments of dividends,
among other things, if the payment will reduce the Company's net
capital below a certain level. Dividend payments, if any, would
be subject to the provisions of the Florida Business Corporation
Act as well.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal
proceedings and, to the best of its knowledge, no such action by
or against the Company has been threatened. None of the
Company's officers, directors, or beneficial owners of 5% or more
of the Company's outstanding securities is a party adverse to the
Company nor do any of the foregoing individuals have a material
interest adverse to the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company previously used the accounting services of zum
Tobel & Ling, LLP, which declined to stand for reelection on
January 5, 1999 because a partner in their firm joined our
Company as Chief Financial Officer. Thus, according to generally
accepted auditing standards, the firm was not independent of our
Company and was prohibited from issuing an opinion on the
financial statements. During the past two years, there were no
disagreements of any sort with the accountants, nor did the
financial statements contain a disclaimer of opinion or an
adverse opinion. The change in accountant was approved by the
Board of Directors.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On February 25, 1999, the Company issued an aggregate of
4,779,000 shares of restricted common stock in exchange for all
of the issued and outstanding stock in its three subsidiaries.
Such shares were issued pursuant to Section 4(2) of the
Securities Act of 1933. These securities were issued as follows:
3,604,000 shares to William H. Corley Jr. & Rosa Corley in
exchange for one share of First Insurance, 1,000 shares of First
Brokerage and 8,708 shares of First Accounting; 640,000 shares to
Thomas Doll in exchange for 250 shares of First Brokerage;451,000
shares to Michael Graham in exchange for 6,425 shares of First
Accounting; 72,000 shares to Steven Donchey in exchange for 1,024
shares of First Accounting; and 12,000 shares to Evelyn Hamilton
in exchange for 25 shares of First Accounting and $10,250 in
compensation. There were no underwriting discounts or
commissions involved in the exchange of these securities.
Further, there was no formal acquisition agreement. Each
shareholder of First Brokerage, First Accounting and First
Insurance executed a subscription letter for the exchange of such
stock. Each of Messrs. Corley, Doll and Graham is accredited by
virtue of his status as a director of the Company. Mr. Donchey
and Ms. Hamilton were granted full access to all the books and
records of the Company in order to make their investment
decisions. Both are long-standing business associates of Mr.
Corley, who determined their suitability as investors based on
his knowledge of their experience in private placements.
From March 7th through April 6th, 1999, the Company sold an
aggregate of 998,000 shares of its common stock to a total of 80
investors at a sales price of $1.00 per share pursuant to an
exemption from registration provided by Regulation D, Rule 504.
At the time of this offering, the Company was neither a reporting
company, investment company nor a blank check company; the
Company did not advertise for or generally solicit investors; and
the Company did not raise more than $1,000,000. These securities
were sold for cash. There were no underwriting discounts or
commissions involved in the sale of these securities.
On July 1, 1999, the Company issued options to purchase
common stock of the Company to nine of its employees, consisting
of options to purchase an aggregate of 415,000 shares at $1.00
per share, vesting 20% per year; options to purchase 150,000
shares at $1.00 per share, vesting immediately; options to
purchase 90,000 shares at $1.00 per share vesting June 30, 2000;
and options to purchase 7,500 shares at $1.50 per share, vesting
immediately. All such options expire ten years from the date of
issuance and were issued pursuant to Section 4(2) of the
Securities Act of 1933.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subchapter 607.0850 of the Florida Business Corporation Act
provides that officers and directors may be indemnified by the
Company for any liability incurred by them while acting within
the scope of their duties as officers and directors of the
Company, except for acts of intentional
26
<PAGE>
misconduct or unlawfulness. The Company's by-laws provide that
the Company shall indemnify all officers and directors to the
fullest extent provided under Florida law. The Company has been
advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy, and is
unenforceable.
The Company's First Accounting subsidiary has a Tax
Preparers Error or Omissions Liability Insurance policy. No other
E&O insurance policies exist for the Company or its subsidiaries.
PART F/S
The unaudited condensed, consolidated financial statements
presented herein do not include all of the information and note
disclosures required by generally accepted accounting principles.
These condensed consolidated financial statements should be read
in conjunction with the audited financial statements and notes
thereto for the years ended December 31, 1998 and 1997. The
accompanying financial statements for the period ended September
30, 1999 have not been examined by independent accountants in
accordance with generally accepted auditing standards, but in the
opinion of management such financial statements include all
adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the Company's financial position and
results of operations. The results of operations for the nine
months ended September 30, 1999 may not be indicative of the
results that may be expected for the year ending December 31,
1999.
27
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
TABLE OF CONTENTS
Page
----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Changes in Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
1st Internet Group, Inc.
We have audited the accompanying consolidated balance sheet of
1st Internet Group, Inc., and Subsidiaries as of December 31,
1998, and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for the years ended
December 31, 1998 and 1997. These consolidated financial
statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain a reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes, examining on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of 1st Internet Group, Inc. and Subsidiaries
as of December 31, 1998, and the results of its operations and
cash flows for the years ended December 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
Sweeney, Gates & Co
March 22, 1999
Fort Lauderdale, Florida
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1998 1999
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 147,679 $ 675,036
Accounts receivable 250,281 1,706,662
Prepaid expenses and other
assets - 3,364
------------ ------------
Total current assets 397,960 2,385,062
------------ ------------
Property and equipment, net of
accumulated depreciation of
$45,600 and $57,589 40,574 89,161
Restricted cash 65,000 100,000
Other assets 508 7,581
------------ ------------
$ 504,042 $ 2,581,804
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Line of credit $ 22,500 $ -
Current portion of long-
term debt 11,869 15,000
Accounts payable and
accrued expenses 21,038 18,853
Commissions payable 210,936 864,483
Income taxes payable - 176,000
------------ ------------
Total current
liabilities 266,343 1,074,336
------------ ------------
Long-term debt, less current
portion 3,131 -
------------ ------------
Stockholders' Equity:
Common stock, $.01 par
value; 100,000,000 shares
authorized; 4,768,750 and
5,777,000 shares issued
and outstanding 47,688 57,770
Additional paid-in capital 263,280 1,158,680
Retained earnings (deficit) (51,400) 291,018
------------ ------------
259,568 1,507,468
Subscription receivable (25,000) -
------------ ------------
Total stockholders'
equity 234,568 1,507,468
------------ ------------
$ 504,042 $ 2,581,804
============ ============
The accompanying notes are an integral part of these financial
statements.
F-2
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine months
Year ended December 31, ended September 30,
--------------------------- --------------------------
1998 1997 1999 1998
----------- ------------ ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
First Brokerage $ 1,069,021 $ 634,259 $ 4,993,635 $ 641,166
First Accounting 151,565 194,170 135,840 122,099
First Insurance 24,612 33,799 11,768 6,755
----------- ------------ ----------- -----------
Total revenue 1,245,198 862,228 5,141,243 770,020
----------- ------------ ----------- -----------
Selling, general and
administrative expenses:
First Brokerage 1,080,652 545,990 4,472,058 642,018
First Accounting 130,417 190,531 159,105 101,734
First Insurance 16,798 33,544 6,179 6,590
Administrative - - 89,175 -
----------- ------------ ----------- -----------
Total expenses 1,227,867 770,065 4,726,517 750,342
----------- ------------ ----------- -----------
Income before other income
and (expense) 17,331 92,163 414,726 19,678
----------- ------------ ----------- -----------
Other income (expense):
Interest and dividend
income 9,073 3,166 51,160 1,687
Realized gain (loss) (4,471) (4,116) 1,132 250
----------- ------------ ----------- -----------
Total other income
(expense) 4,602 (950) 52,292 1,937
----------- ------------ ----------- -----------
Net income before income
taxes 21,933 91,213 467,018 21,615
Provision for income taxes - - 176,000 -
----------- ------------ ----------- -----------
Net income $ 21,933 $ 91,213 $ 291,018 $ 21,615
=========== ============ =========== ===========
Pro forma information
(unaudited):
Pro forma net income
(Notes 3 and 8):
Historical net income $ 21,933 $ 91,213 $ 291,018 $ 21,615
Pro forma provision for
income taxes 6,400 34,000 - 6,300
----------- ------------ ----------- -----------
Pro forma net income $ 15,533 $ 57,213 $ 291,018 $ 15,315
=========== ============ =========== ===========
Pro forma per share
data (Note 3):
Net earnings per share
- basic and diluted $ 0.00 $ 0.01 $ 0.05 $ 0.00
=========== ============ =========== ===========
Weighted average number
of common shares
outstanding - basic
and diluted 4,182,083 4,128,750 5,491,956 4,128,750
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common stock paid-in Retained Subscription
Stock Amount capital (deficit) receivable Total
---------- --------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 4,128,750 $ 41,288 $ 211,662 $ (58,224) $ - $ 194,726
Capital contributions - - 44,390 - - 44,390
Return of capital - - (23,754) - - (23,754)
Net income - - - 91,213 - 91,213
---------- --------- ----------- --------- ---------- -----------
Balance, December 31, 1997 4,128,750 41,288 232,298 32,989 - 306,575
Sale of stock 640,000 6,400 118,600 (25,000) 100,000
Return of capital - - (87,618) - - (87,618)
Dividends - - - (106,322) - (106,322)
Net income - - - 21,933 - 21,933
---------- --------- ----------- --------- ---------- -----------
Balance, December 31, 1998 4,768,750 47,688 263,280 (51,400) (25,000) 234,568
Dividends (51,368) (51,368)
Reclassification of S
corporation accumulated
losses (102,768) 102,768 -
Receipt of subscription - - - - 25,000 25,000
Sale of stock 998,000 9,980 988,020 - - 998,000
Stock compensation 10,250 102 10,148 - - 10,250
Net income (unaudited) - - - 291,018 - 291,018
---------- --------- ----------- --------- ---------- -----------
Balance, September 30, 1999
(unaudited) 5,777,000 $ 57,770 $ 1,158,680 $ 291,018 $ - $ 1,507,468
========== ========= =========== ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-4
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
December 31, September 30,
---------------------- ------------------------
1998 1997 1999 1998
----------- --------- ------------ ----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 21,933 $ 91,213 $ 291,018 $ 21,615
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 10,823 13,389 11,989 6,900
Changes in assets and liabilities:
Increase in receivables (226,284) (15,624) (1,456,381) (198,812)
Increase in employee advances - - - (750)
Increase in deposits - (571) - -
Decrease in securities inventory 4,126 8,486 - 4,126
(Increase) decrease in prepaid expenses 677 (677) (3,364) 677
Increase in restricted cash (50,000) - (35,000) -
(Increase) decrease in other assets 163 - (7,073) 346
Increase (decrease) in accounts payables
and accrued expenses (7,817) 29,387 8,065 (24,473)
Increase (decrease) in commissions
payable 198,546 12,390 653,547 182,610
Increase in income taxes payable - - 176,000 -
----------- --------- ------------ ----------
Net cash provided by (used in)
operations (47,833) 137,993 (361,199) (7,761)
----------- --------- ------------ ----------
Cash flows used for investing activities:
Disposal of property and equipment 30,058 - - 261
Purchase of property and equipment - (59,761) (60,576) (1,625)
----------- --------- ------------ ----------
Net cash provided by (used in)
investing activities 30,058 (59,761) (60,576) (1,364)
----------- --------- ------------ ----------
Cash flows from financing activities:
Proceeds from debt 22,500 22,566 - 7,500
Payment of debt (10,774) (71,386) (22,500) (5,893)
Sale of stock 100,000 - 998,000 -
Receipt of subscription - - 25,000 -
Capital contributions - 44,390 - -
Return of capital (87,618) - - (79,094)
Dividends (106,322) (23,754) (51,368) (61,995)
----------- --------- ------------ ----------
Net cash used by financing activities (82,214) (28,184) 949,132 (139,482)
----------- --------- ------------ ----------
Net increase (decrease) in cash (99,989) 50,048 527,357 (148,607)
Cash and cash equivalents at beginning of year 247,668 197,620 147,679 247,668
----------- --------- ------------ ----------
Cash and cash equivalents at end of year $ 147,679 $ 247,668 $ 675,036 $ 99,061
=========== ========= ============ ==========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 2,527 $ 3,191 $ 5,064 $ 1,709
=========== ========= ============ ==========
Cash paid for income taxes $ - $ - $ - $ -
=========== ========= ============ ==========
Supplemental disclosure of non-cash
investing and financing activities:
=========== ========= ============ ==========
Acquisition of subsidiaries through
issuance of common stock $ - $ - $ 234,568 $ -
=========== ========= ============ ==========
</TABLE>
The accompanying notes are integral part of these financial
statements.
F-5
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - 1st Internet Group, Inc. (the "Company") was
formed on November 23, 1998, as a Florida corporation. The
Company was inactive until February 25, 1999, when it became a
holding company by acquiring all of the outstanding stock of
three operating companies: 1st Discount Brokerage, Inc. ("First
Brokerage"), 1st Discount Insurance, Inc. ("First Insurance") and
Corporate Accounting Group, Inc. ("First Accounting"), on a stock
for stock basis. Since all of the companies were under common
ownership, the acquisitions have been accounted for in a manner
similar to a pooling of interests (see Note 2). All three
subsidiaries are Florida corporations.
First Brokerage is a broker dealer registered with the Securities
and Exchange Commission and the National Association of
Securities Dealers. First Brokerage provides retail discount
securities brokerage and related investment/portfolio management
counseling services. First Brokerage has a branch office in
Munich, Germany. First Insurance provides annuity and life
insurance products to complement the needs of both First
Brokerage and other clients. First Accounting is an accounting
and tax preparation business, servicing the needs of First
Brokerage, First Insurance and other clients.
Unaudited interim financial statements - The accompanying
consolidated financial statements of the Company for the nine
months ended September 30, 1999 and 1998 are unaudited, but, in
the opinion of management, reflect adjustments all of which are
of a normal recurring nature, necessary for the fair presentation
of such financial statements in accordance with generally
accepted accounting principles. The results of operations for an
interim period are not necessarily indicative of results for a
full year.
Basis of presentation and consolidation - The consolidated
financial statements include the accounts of all entities
mentioned above. All material intercompany accounts and
transactions have been eliminated in consolidation.
Cash equivalents - Cash equivalents are short term, liquid
investments with an original maturity of three months or less and
are carried at cost which approximates market value.
Property and equipment - Property and equipment are stated at
cost. Depreciation is computed using the straight-line method
and the declining balance method over the useful lives of the
related assets.
Restricted cash - Restricted cash consists of funds on deposit
with clearing firms, pursuant to the Brokerage's clearing
agreements. The Company's agreement with J. W. Genesis, Inc. was
terminated on November 19, 1999. The Company's agreement with U.
S. Clearing, Inc. includes required deposits ($65,000 and
$100,000 at December 31, 1998 and September 30, 1999,
respectively) placed with the clearing firm, and a minimum net
worth requirement of $250,000. This agreement may be cancelled
by either party with a written ninety-day notice.
F-6
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue recognition - First Brokerage's proprietary securities
transactions in regular-way trades are recorded on the trade
date, as if they had settled. Customers' security transactions
and related commissions and expenses are reported on a settlement
date basis. Related commission income and expenses are reported
on a settlement date basis. First Insurance and First Accounting
record revenue on the accrual basis of accounting, wherein
revenue is recognized when earned.
Advertising costs - Advertising costs are charged to operations
as incurred.
Income taxes - First Brokerage, First Insurance and First
Accounting with the consent of its stockholders, separately
elected to be an "S" corporation under the Internal Revenue Code
during 1998 and 1997. First Brokerage terminated its S
corporation election on December 1, 1998. First Insurance and
First Accounting terminated their S corporation elections on
January 1, 1999. All taxable income or loss flowed through to
the stockholders of each company. Accordingly, no income tax
expense or liability was recorded in the accompanying financial
statements for 1998 and 1997.
During 1999, the Company provides for income taxes under the
provisions of Statement of Financial Accounting Standard, No.
109, "Accounting for Income Taxes" ("SFAS 109"), which requires
the asset and liability method of accounting for income taxes in
which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using the enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Earnings per share -The Company adopted the Financial Accounting
Standards Board ("FASB") No. 128, "Earnings Per Share" ("SFAS No.
128"), for computing and presenting earnings per share. Since
the Group has no potentially dilutive shares outstanding,
earnings per share for both basic and diluted earnings per share
are the same.
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
F-7
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Impairment of long-lived assets - The Company evaluates the
recoverability of its property and equipment, and other assets in
accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed of" ("SFAS 121"). SFAS 121 requires recognition of
impairment of long-lived assets in the event the net book value
of such assets exceeds the estimated future undiscounted cash
flows attributable to such assets or the business to which such
intangible assets relate. No impairments were recognized during
the years ended December 31, 1998 and 1997, and for the nine
months ended September 30, 1999.
Comprehensive income - In June 1997, FASB issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the
reporting and displaying of comprehensive income and its
components in a full set of general-purpose financial statements.
SFAS 130 is effective for financial statements for fiscal years
beginning after December 15, 1997. Its adoption did not impact
the Company's consolidated financial position, consolidated
results of operations, or consolidated cash flows as the Company
had no items of other comprehensive income during the years ended
December 31, 1998 and 1997, or for the nine months ended
September 30, 1999.
Recent accounting pronouncements - In June 1998, FASB issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS 133, amended by
SFAS 137, is effective for all fiscal quarters and all fiscal
years beginning after June 15, 2000, with earlier application
encouraged. The Company does not currently use derivative
instruments and, therefore, does not expect that the adoption of
SFAS 133 will have any impact on its financial position or
results of operation.
In March 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants ("AICPA"),
issued Statement of Position No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use"
("SOP No. 98-1"), which provides guidance regarding when software
developed or obtained for internal use should be capitalized.
SOP 98-1 is effective for fiscal years beginning after December
15, 1998. The adoption of SOP No. 98-1 for the nine months ended
September 30, 1999, did not have a material impact on the
Company's financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee of
the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires
that start-up costs, including organizational costs be expensed
as incurred. The Company accepted early adoption of SOP 98-5 and
expensed all start-up costs.
F-8
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
2. ACQUISITIONS
On February 25, 1999, the Company became a holding company by
acquiring all of the outstanding stock of three operating
companies, First Brokerage, First Accounting and First Insurance,
in a stock for stock exchange, wherein the Company issued
4,768,750 common shares of stock. All companies involved were
under common control, and the majority stockholder of the Company
was the majority stockholder of First Brokerage, First Accounting
and First Insurance. Therefore, the acquisitions have been
treated as purchases, and accounted for in a manner similar to a
pooling of interests, and all periods presented have been
restated to reflect the accounting treatment.
3. PRO FORMA INFORMATION
Pro forma income tax
The objective of the unaudited pro forma income statement
information is to show what the significant effects on the
historical financial information might have been had the Company
not been treated as an S corporation for income tax purposes.
The pro forma adjustments reflect provisions for income taxes
computed based upon statutory tax rates as if the Company had
been subject to federal and state taxation during 1999, 1998 and
1997 (see Note 8).
Pro forma earnings per share
The objective of the unaudited pro forma earnings per share is to
show earnings per share retroactively on the historical income
statements in accordance with SFAS 128.
4. RECEIVABLES FROM CLEARING FIRM AND OTHERS
The following represents receivables due to Brokerage by clearing
firms and the receivable due to First Accounting:
Account December 31, September 30,
------- 1998 1999
------------ ------------
(unaudited)
Commissions due
First Brokerage $ 243,867 $ 1,596,099
Receivables due First
Accounting 5,660 6,364
Other 754 104,199
------------ ------------
$ 250,281 $ 1,706,662
============ ============
F-9
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, September 30, Useful
1998 1999 lives
----------- --------- -------
(unaudited)
Vehicle $ 20,600 $ - 5 years
Computer equipment 29,983 48,854 5 years
Software - 19,587 5 years
Equipment 8,907 24,374 5 years
Furniture and
fixtures 26,684 53,025 7 years
Leasehold
improvements - 910 5 years
----------- ---------
86,174 146,750
Less:
accumulated
depreciation (45,600) (57,589)
----------- ---------
$ 40,574 $ 89,161
=========== =========
Depreciation expense was $10,823 and $13,389 for the years ended
December 31, 1998 and 1997, respectively, and $11,989 and $6,900
for the nine months ended September 30, 1999 and 1998,
respectively.
6. DEBT
At December 31, 1998, First Accounting owed $22,500 on a variable
rate revolving line of credit to a bank. The revolving line of
credit is due on demand, bears interest at 1.75% over the bank's
announced prime rate, and is guaranteed by the Company's Chairman
and CEO and the President of First Accounting, individually.
F-10
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
6. DEBT (continued)
Long-term debt due the President of First Accounting was as
follows:
December 31, September 30
1998 1999
------------ ------------
(unaudited)
Notes payable, interest
at 12%, due March
2000 $ 15,000 $ 15,000
------------ ------------
15,000 15,000
Less: current
portion (11,869) (15,000)
------------ ------------
Long-term debt $ 3,131 $ -
============ ============
This note was paid in full in November of 1999.
Interest expense for the years ended December 31, 1998 and 1997
totaled $2,527 and $3,191,respectively, and $5,064 and $1,709 for
the nine months ended September 30, 1999 and 1998, respectively.
7. STOCKHOLDERS' EQUITY TRANSACTIONS
During 1998, the Company sold 640,000 shares of common stock to a
commissioned salesman for $125,000. Of this amount $25,000 was
not paid as of December 31, 1998, and was reflected as a
subscription receivable. The $25,000 was paid during the first
quarter 1999.
During 1998, two companies distributed capital that was charged
to additional paid-in capital, offsetting capital contributed by
the stockholders in prior years. The amounts were First
Brokerage, $65,000, and First Accounting, $22,618. Additionally,
during 1999 and 1998, $51,368 and $106,322, respectively, were
paid in dividends.
As of June 30, 1999, the Company had completed the sale of
998,000 shares of common stock in a private placement for $1.00
per share.
On July 1, 1999, the Company granted options to purchase 662,500
shares of common stock to employees at $1 per share. Of the
662,500, 157,500 options vested on July 1, 1999 and 90,000
options will vest on June 30, 2000. The remainder of the options
will vest 20% per year commencing January 1, 2000. The
Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related
interpretations in accounting for its plans. Accordingly,
$10,250 of compensation expense has been recognized for its
stock-based compensation plans for options issued to employees.
F-11
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
8. INCOME TAXES
Commencing December 1, 1998, First Brokerage elected to be taxed
as a C corporation. However, the taxes for the one-month period
were immaterial. Simultaneously, with the acquisition of First
Accounting and First Insurance by the Company on February 25,
1999, First Accounting and First Insurance commenced being taxed
as C corporations. Therefore, the tax provision provided for the
nine months ended September 30, 1999, includes the Company and
First Brokerage from January 1, 1999, and First Accounting and
First Insurance from March 1, 1999, on a consolidated basis.
8. INCOME TAXES (continued)
The provision for income taxes consisted of the following:
December 31, September 30,
1998 1997 1999 1998
--------- --------- --------- ---------
Current: (unaudited)
Federal $ - $ - $ 159,000 $ -
State - - 17,000 -
--------- --------- --------- ---------
Provision for
income taxes $ - $ - $ 176,000 $ -
========= ========= ========= =========
A reconciliation of the statutory federal income tax rate of the
Company's effective tax rate is as follows:
December 31, September 30,
1998 1997 1999 1998
--------- --------- --------- ---------
(unaudited)
Statutory federal
income tax rate 0.0% 0.0% 34.0% 0.0%
State income taxes,
net of federal
benefits 0.0% 0.0% 3.6% 0.0%
--------- --------- --------- ---------
Effective tax rate 0.0% 0.0% 37.6% 0.0%
========= ========= ========= =========
Deferred taxes for the above periods were immaterial.
The unaudited pro forma income tax calculation for the two years
ended December 31, 1998 and 1997, and for the nine months ended
September 30, 1998, was prepared as if the Company did not elect
to be taxed as an S corporation and instead consolidated for tax
purposes. The unaudited pro forma income tax calculations
presented for the nine months ended September 30, 1999, includes
Accounting and Insurance as if they elected not to be taxed as an
S corporation commencing January 1, 1999, and instead were taxed
on a consolidated basis with the Company.
F-12
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
8. INCOME TAXES (continued)
The pro forma provisions for income taxes consisted of the
following:
December 31, September 30,
1998 1997 1999 1998
--------- --------- --------- ---------
Current: (unaudited)
Federal $ 5,500 $ 31,000 $ 159,000 $ 5,400
State 900 3,000 17,000 900
--------- --------- --------- ---------
Provision for
income taxes $ 6,400 $ 34,000 $ 176,000 $ 6,300
========= ========= ========= =========
A reconciliation of the pro forma statutory federal income tax
rate to the Company's effective tax rate is as follows:
December 31, September 30,
1998 1997 1999 1998
--------- --------- --------- ---------
(unaudited)
Statutory federal
income tax rate 25.0% 34.0% 34.0% 25.0%
State income taxes,
net of federal
benefits 4.0% 3.6% 3.6% 4.0%
--------- --------- --------- ---------
Effective tax rate 29.0% 37.6% 37.6% 29.0%
========= ========= ========= =========
Deferred taxes for the pro forma periods were immaterial.
9. BROKER-DEALER REGULATIONS
Pursuant to the net capital provisions of rule 15c3-1 of the
Securities Exchange Act of 1934, First Brokerage is required to
maintain a minimum net capital, as defined under such provisions.
At December 31, 1998 and September 30, 1999, First Brokerage
maintained net capital that complied with the minimum net capital
provisions of the rule.
10. OFF BALANCE SHEET RISK AND CONCENTRATION OF BUSINESS
In the normal course of business, First Brokerage executes
securities transactions. These activities expose First Brokerage
to off-balance sheet risk in the event that customers or other
parties fail to satisfy their obligations.
F-13
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
10. OFF BALANCE SHEET RISK AND CONCENTRATION OF BUSINESS
Securities transactions are recorded on the settlement date,
generally three business days after the trade date. Should a
customer or broker fail to deliver cash or securities as agreed,
First Brokerage may be required to purchase or sell securities at
unfavorable market prices.
During the twelve months ended December 31, 1998 and nine months
ended September 30, 1999, three German institutional customers
accounted for approximately 40% and 80% of First Brokerage's
business, respectively. The German branch office, managed by a
stockholder of the Company, services the customers.
11. SEGMENT REPORTING
The following table presents financial information regarding the
Company's different industry segments as of and for the years
ended December 31:
1998
----
First First First
Brokerage Accounting Insurance Consolidated
----------- --------- ---------- -----------
Revenue $ 1,069,021 $ 151,565 $ 24,612 $ 1,245,198
Operating
income (loss) (11,631) 21,148 7,814 17,331
Depreciation 6,316 4,507 - 10,823
Capital
expenditures - - - -
Identifiable
assets 457,637 41,401 5,004 504,042
1997
----
First First First
Brokerage Accounting Insurance Consolidated
----------- --------- ---------- -----------
Revenue $ 634,259 $ 194,170 $ 33,799 $ 862,228
Operating
income 88,269 3,639 255 92,163
Depreciation 6,015 7,374 - 13,389
Capital
expenditures 58,114 1,647 - 59,761
Identifiable
assets 338,794 30,153 4,647 373,594
F-14
<PAGE>
1st INTERNET GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
12. LEASES
The Company has a lease, which expires October 31, 2002, for
3,080 square feet of office space in West Palm Beach, Florida. A
rent concession of $15,400 for the first year is being allocated
ratably over the remaining lease period. The minimum future
rental payments under the non-cancelable operating lease as of
September 30, 1999 are as follow:
Year ended December 31,
1999 $ 3,850
2000 26,693
2001 33,367
2002 29,004
F-15
<PAGE>
PART III
ITEMS 1 AND 2. INDEX TO EXHIBITS AND DESCRIPTION
Exhibit
Number Description
------- -----------------------------------------------------
2.0 Amended Subscription Letter/Exchange of Stock-Graham
2.1 Amended Subscription Letter/Exchange of Stock-Hamilton
10.0 Incentive Stock Option Agreement - Fisher
10.1 Incentive Stock Option Agreement - Graham
10.2 Incentive Stock Option Agreement - Ling
27.0 Financial Data Schedule
99.0 Year 2000 Plan
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act
of 1934, the registrant has caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly
authorized.
1st Internet Group, Inc.
(Registrant)
Date: November 29, 1999 By: /s/ WILLIAM H. CORLEY, JR.
--------------------------------
William H. Corley, Jr.
President, CEO and duly
authorized officer
45
February 25, 1999
1st Internet Group, Inc.
5883 Lake Worth Rd.
Greenacres, FL 33463
Re: Subscription for Shares
To Whom It May Concern:
The undersigned hereby subscribes for four hundred fifty one thousand
(451,000) shares of the Common Stock (the "Shares") of 1st Internet Group,
Inc., a Florida corporation (the "Corporation"), in consideration of the
transfer to the Corporation from the undersigned of 6425 shares of the
Common Stock of Corporate Accounting Group, Inc.
All of the Shares so received will be taken by the undersigned for its own
account as an investment and not with a view to the distribution thereof.
It is understood that you will issue the Shares without their registration
under the securities Act of 1933. The undersigned will be responsible for
any loss or expense that may be incurred by you by reason of any sale or
disposition of the Shares by the Undersigned which will involve the
Corporation in a violation of the Securities Act of 1933. The undersigned
will give you written notice of any intention to dispose of any or all of
the Shares specifying the terms of such proposed disposition.
Very truly yours,
/s/ MICHAEL J. GRAHAM
----------------------
Michael J. Graham
February 25, 1999
1st Internet Group, Inc.
5883 Lake Worth Rd.
Greenacres, FL 33463
Re: Subscription for Shares
To Whom It May Concern:
The undersigned hereby subscribes for one thousand seven hundred
fifty (1,750) shares of the Common Stock (the "Shares") of 1st
Internet Group, Inc., a Florida corporation (the "Corporation"),
in consideration of the transfer to the Corporation from the
undersigned of 25 shares of the Common Stock of Corporate
Accounting Group, Inc. and ten thousand two hundred fifty
(10,250) shares in consideration for services rendered.
All of the Shares so received will be taken by the undersigned
for its own account as an investment and not with a view to the
distribution thereof.
It is understood that you will issue the Shares without their
registration under the securities Act of 1933. The undersigned
will be responsible for any loss or expense that may be incurred
by you by reason of any sale or disposition of the Shares by the
Undersigned which will involve the Corporation in a violation of
the Securities Act of 1933. The undersigned will give you written
notice of any intention to dispose of any or all of the Shares
specifying the terms of such proposed disposition.
Very truly yours,
/s/ EVELYN HAMILTON
----------------------
Evelyn Hamilton
1ST INTERNET GROUP, INC.
INCENTIVE STOCK OPTION AGREEMENT
INCENTIVE STOCK OPTION AGREEMENT made this 1st day of July, 1999
(the. "Grant Date") by and between 1st INTERNET GROUP, INC., a
Florida corporation located at 5883 Lake Worth Road, Greenacres
Florida 33463 (the "Corporation"), and MICHAEL R. C. FISHER, who
resides at 5709 Strawberry Lakes Circle, Lake Worth, Florida
33463 (the "Optionee").
Recitals:
A. The Corporation has duly adopted with subsequent shareholder
approval an employee benefit plan known as the 1st Internet
Group, Inc. Equity Incentive Plan (the "Plan").
B. The Plan provides for, among other things, the granting of
incentive stock options by a Committee to be appointed by the
Board of Directors of the Corporation (the "Committee") to
executive officers and key employees of the Corporation or of its
subsidiaries to purchase shares of common stock of the
Corporation, par value $0.01 per share (the "Stock"), in
accordance with the terms and provisions thereof.
C. The Committee considers the Optionee to be a person who is
eligible for a grant of incentive stock options under the Plan,
and has determined that it would be in the best interest of the
Corporation to grant the incentive stock option documented
herein.
NOW, THEREFORE, based on the foregoing and for good and valuable
consideration, the Corporation and Optionee hereby agree as
follows:
Section 1. Incorporation of Terms, Provisions, Conditions and
Restrictions of Plan.
(a) All of the terms, provisions, conditions and restrictions
contained in the Plan, including any and all rules and
regulations adopted under the Plan by the Committee (the "Plan
Provisions"), are hereby incorporated in this Agreement and the
Optionee agrees to be bound by all of the Plan Provisions and by
all of the terms and conditions of this Agreement. This Agreement
does not set forth all of the terms and conditions of the Plan;
copies of the Plan may he obtained upon written request without
charge from the Corporation.
(b) Each capitalized terms used in this Agreement without
definition shall have the meaning defined for it in the Plan, if
any.
<PAGE>
Section 2. Grant of Option. Subject to the provisions of this
Agreement and to the Plan Provisions, the Corporation hereby
grants to the Optionee an option (the "Option") to purchase from
the Corporation two hundred thousand (200,000) shares of common
stock (the "Option Shares") at a price of one dollar ($1.00) per
share, the fair market value (the "Exercise Price"). The Option
is intended by the parties hereto to be, and shall be treated as,
an incentive stock option (as such term is defined under Section
422 of the Internal Revenue Code of 1986, as amended).
Section 3. Exercise of Option.
(a) No portion of the Option may be exercised by the Optionee
on or at any time after the tenth anniversary of the Grant Date
or at any time after the termination of the Optionee's employment
with the Corporation for any reason other than the death or
disability of the Optionee.
(b) The option may be exercised in whole or in part at any time
as set forth below in accordance with the Plan Provisions and
this Section by the Optionee's tendering the Exercise Price (or a
proportionate part thereof if the Option is partially exercised)
to the Corporation, together with a written notice, in the form
attached hereto as Exhibit "A", specifying the number of Option
Shares the Optionee wishes to purchase pursuant to the Option.
(c)(i) Forty thousand (40,000) Option Shares may be exercised no
earlier than six (6) months after the Grant Date.
(ii) Forty thousand (40,000) Option Shares (less the Option
Shares exercised pursuant to (c)(i), above) may be exercised no
earlier than eighteen (18) months after the Grant Date.
(iii) Forty thousand (40,000) Option Shares (less the Option
Shares exercised pursuant to (c)(i) and (ii), above) may be
exercised no earlier than thirty (30) months after the Grant
Date.
(iv) Forty thousand (40,000) Option Shares (less the Option
shares exercised pursuant to (c)(i) , (ii), and (iii), above) may
be exercised no earlier than forty two (42) months after the
Grant Date.
(v) Forty thousand (40,000) Option Shares (less the Option
Shares exercised pursuant to (c)(i), (ii), (iii), and (iv) above)
may be exercised no earlier than firty four (54) months after the
Grant Date.
Section 4. Share Certificates. Upon receipt of the Exercise
Price (or the requisite portion thereof), the Corporation shall
cause one or more stock certificates evidencing the Optionee's
ownership of the Option Shares so purchased by the Optionee to be
-2-
<PAGE>
issued to the Optionee subject, however, to the Plan Provisions.
Section 5. Investment Securities. The Optionee represents and
warrants to the Corporation that any Option Shares purchased by
the Optionee upon the exercise hereof will be acquired for
investment and not for distribution within the meaning of the
Securities Act of 1933, as amended, provided, however, that the
foregoing representation and warranty shall he inoperative if
such Option Shares are registered under such Act.
Section 6. Default of Optionee. Should the Optionee at any time
breach any Plan Provision or any provision of this Agreement, the
Option granted hereunder shall be null and void. This provision
shall be in addition to and not in lieu of any other remedies
which the Corporation may have at law and/or in equity.
Section 7. Miscellaneous Provisions.
(a) Unless otherwise specifically provided herein, all notices
to be given hereunder shall be in writing and sent to the parties
by certified mail, return receipt requested, which shall be
addressed to each party's respective address, as set forth in the
first paragraph of this Agreement, or to such other address as
such party shall give to the other party hereby by a notice given
in accordance with this Section and, except as otherwise provided
in this Agreement, shall be effective when deposited in the
United States mail properly addressed and postage prepaid. If
such notice is sent other than by the United States mail, such
notice shall be effective when actually received by the party
being noticed.
(b) This Agreement may not be assigned in whole or in part by
either of the parties hereto.
(c) Both parties hereto shall execute and deliver such other
instruments and do such other acts as may be necessary to carry
out the intent and purposes of this Agreement.
(d) Whenever the context may require, any pronouns used herein
shall include the corresponding masculine, feminine or neuter
forms and the singular form of nouns and pronouns shall include
the plural and vice versa.
(e) The captions contained in this Agreement are inserted only
as a matter of convenience and in no way define, limit or extend
the scope of this Agreement or the intent of any of the
provisions hereof.
(f) This Agreement and the Plan constitute the entire
understanding between the parties hereto concerning the grant of
incentive stock options to the Optionee under the Plan and shall
not be terminated, except in accordance with its terms or the
Plan Provisions, or amended except in accordance with the Plan
-3-
<PAGE>
Provisions or in a writing executed by both of the parties
hereto.
(g) The waiver of a breach of any term or condition of this
Agreement shall not be deemed to constitute the waiver of any
other breach of the same or any other term or condition.
(h) The invalidity or unenforceability, in whole or in part, of
any covenant, promise or undertaking, or any section, subsection,
paragraph, sentence, clause, phrase or word or of any provision
of this Agreement shall not affect the validity or enforceability
of the remaining portions thereof.
(i) This Agreement shall be binding upon and inure to the
benefit of the heirs, successors, estate and personal
representatives of the Optionee and the successors and assigns of
the Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
Witnesses: 1st INTERNET GROUP, INC.
/s/AILEEN GALLAGHER By: /s/WILLIAM S. CORLEY
------------------- ------------------------
President
/s/AILEEN GALLAGHER /S/MICHAEL R. C. FISHER
------------------- -----------------------
-4-
<PAGE>
Exhibit "A" to
Stock Option Agreement dated July 1, 1999
NOTICE OF EXERCISE OF OPTION TO PURCHASE
SHARES OF COMMON STOCK
OF 1st INTERNET GROUP, INC.
The undersigned does by this notice request that 1st Internet
Group Inc., a Florida corporation (the "Company"), issue to the
undersigned that number of shares of Common Stock specified below
(the "Shares") at the price per Share specified below pursuant to
the exercise of the undersigned's option under the Incentive
Stock Option Agreement (the "Agreement") dated July 1, 1999
between the undersigned and the Company.
Simultaneously herewith, the undersigned delivers to the Company
the purchase price for the Shares (i.e., that amount which is
obtained by multiplying the number of Shares for which the Option
is being exercised by the price specified), by good check.
The undersigned hereby represents and warrants that the
undersigned is acquiring the Shares for the undersigned's own
account and not on behalf of any other person and without any
present view to making a public offering or distribution of same
and without any present intention of selling same at any
particular time or at any particular price or upon the occurrence
of any particular event or circumstance.
The undersigned acknowledges and understands that in connection
with the acquisition of the Shares by the undersigned:
1. The Company has informed the undersigned that the Shares are
not registered under the Securities Act of 1933, as amended (the
"Act"), or applicable state securities or Blue Sky law or laws,
and thus the Shares may not be transferred or otherwise disposed
of until the Shares are subsequently registered under the Act and
the applicable state securities or Blue Sky law or laws or an
exemption from such registration requirements is available.
2. The undersigned has been informed that a legend referring to
the restrictions indicated herein on transferability and sale
will be placed upon the certificate(s) evidencing the Shares.
A. Date of Stock Option Agreement: July 1, 1999
B. Number of Shares covered by Agreement: 200,000
C. Number of shares of Common Stock actually to be purchased at
this time: _________
-5-
<PAGE>
D. Exercise price per Share: $1.00
E . Aggregate price to be paid for Shares actually purchased (D
multiplied by C): $_____
Dated: ________________________
Very truly yours,
_______________________________
MICHAEL R. C. FISHER
Residence:
_______________________________
_______________________________
ACCEPTED:
1st INTERNET GROUP, INC.
By: __________________________
Name:______________________
Title: ______________________
Dated: ________________________
1ST INTERNET GROUP, INC.
INCENTIVE STOCK OPTION AGREEMENT
INCENTIVE STOCK OPTION AGREEMENT made this 1st day of July, 1999
(the. "Grant Date") by and between 1st INTERNET GROUP, INC., a
Florida corporation located at 5883 Lake Worth Road, Greenacres
Florida 33463 (the "Corporation"), and MICHAEL J.GRAHAM, who
resides at 6271 Barton Creek Ct., Lake Worth, FL 33463 (the
"Optionee").
Recitals:
A. The Corporation has duly adopted with subsequent shareholder
approval an employee benefit plan known as the 1st Internet
Group, Inc. Equity Incentive Plan (the "Plan").
B. The Plan provides for, among other things, the granting of
incentive stock options by a Committee to be appointed by the
Board of Directors of the Corporation (the "Committee") to
executive officers and key employees of the Corporation or of its
subsidiaries to purchase shares of common stock of the
Corporation par value $0.01 per share (the "Stock"), in
accordance with the terms and provisions thereof.
C. The Committee considers the Optionee to be a person who is
eligible for a grant of incentive stock options under the Plan,
and has determined that it would be in the best interest of the
Corporation to grant the incentive stock option documented
herein.
NOW, THEREFORE, based on the foregoing and for good and valuable
consideration, the Corporation and optionee hereby agree as
follows:
Section 1. Incorporation of Terms, Provisions, Conditions and
Restrictions of Plan.
(a) All of the terms, provisions, conditions and restrictions
contained in the Plan, including any and all rules and
regulations adopted under the Plan by the Committee (the "Plan
Provisions"), are hereby incorporated in this Agreement and the
Optionee agrees to be bound by all of the Plan provisions and by
all of the terms and conditions of this Agreement. This Agreement
does not set forth all of the terms and conditions of the Plan;
copies of the Plan may he obtained upon written request without
charge from the Corporation.
(b) Each capitalized terms used in this Agreement without
definition shall have the meaning defined for it in the Plan, if
any.
Section 2. Grant of Option. Subject to the provisions of this
Agreement and to the Plan Provisions, the Corporation hereby
grants to the Optionee an option (the "Option") to purchase from
the Corporation ninety thousand (90,000) shares of common stock
(the "Option Shares") at a price of one dollar ($1.00) per share,
the fair market value (the "Exercise Price"). The Option is
intended by the parties hereto to be, and shall be treated as, an
incentive stock option (as such term is defined under Section 422
of the Internal Revenue Code of 1986, as amended).
<PAGE>
Section 3. Exercise of Option.
(a) No portion of the Option may be exercised by the Optionee
on or at any time after the tenth anniversary of the Grant Date
or at any time after the termination of the Optionee's employment
with the Corporation for any reason other than the death or
disability of the Optionee.
(b) The option may be exercised in whole or in part on June 30,
2000 and any time thereafter in accordance with the Plan
Provisions by the Optionee's tendering the Exercise Price (or a
proportionate part thereof if the Option is partially exercised)
to the Corporation, together with a written notice, in the form
attached hereto as Exhibit "A", specifying the number of Option
Shares the Optionee wishes to purchase pursuant to the Option.
Section 4. Share Certificates. Upon receipt of the Exercise
Price (or the requisite portion thereof), the Corporation shall
cause one or more stock certificates evidencing the Optionee's
ownership of the Option Shares so purchased by the Optionee to be
issued to the Optionee subject, however, to the Plan Provisions.
Section 5. Investment Securities. The Optionee represents and
warrants to the Corporation that any Option Shares purchased by
the Optionee upon the exercise hereof will be acquired for
investment and not for distribution within the meaning of the
Securities Act of 1933, as amended, provided, however, that the
foregoing representation and warranty shall he inoperative if
such Option Shares are registered under such Act.
Section 6. Default of Optionee. Should the Optionee at any time
breach any Plan Provision or any provision of this Agreement, the
option granted hereunder shall be null and void. This provision
shall be in addition to and not in lieu of any other remedies
which the Corporation may have at law and/or in equity.
Section 7. Miscellaneous Provisions.
(a) Unless otherwise specifically provided herein, all notices
to be given hereunder shall be in writing and sent to the parties
by certified mail, return receipt requested, which shall be
addressed to each party's respective address, as set forth in the
first paragraph of this Agreement, or to such other address as
such party shall give to the other party hereby by a notice given
in accordance with this Section and, except as otherwise provided
in this Agreement, shall be effective when deposited in the
United States mail properly addressed and postage prepaid. If
such notice is sent other than by the United States mail, such
notice shall be effective when actually received by the party
being noticed.
(b) This Agreement may not be assigned in whole or in part by
either of the parties hereto.
(c) Both parties hereto shall execute and deliver such other
instruments and do such other acts as may be necessary to carry
out the intent and purposes of this Agreement.
(d) Whenever the context may require, any pronouns used herein
shall include the corresponding masculine, feminine or neuter
forms and the singular form of nouns and pronouns shall include
the plural and vice versa.
<PAGE>
(e) The captions contained in this Agreement are inserted only
as a matter of convenience and in no way define, limit or extend
the scope of this Agreement or the intent of any of the
provisions hereof.
(f) This Agreement and the Plan constitute the entire
understanding between the parties hereto concerning the grant of
incentive stock options to the Optionee under the Plan and shall
not be terminated, except in accordance with its terms or the
Plan Provisions, or amended except in accordance with the Plan
Provisions or in a writing executed by both of the parties
hereto.
(g) The waiver of a breach of any term or condition of this
Agreement shall not be deemed to constitute the waiver of any
other breach of the same or any other term or condition.
(h) The invalidity or unenforceability, in whole or in part, of
any covenant, promise or undertaking, or any section, subsection,
paragraph, sentence, clause, phrase or word or of any provision
of this Agreement shall not affect the validity or enforceability
of the remaining portions thereof.
(i) This Agreement shall be binding upon and inure to the
benefit of the heirs, successors, estate and personal
representatives of the Optionee and the successors and assigns of
the Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
Witnesses: 1st INTERNET GROUP, INC.
/s/AILEEN GALLAGHER By: /s/WILLIAM S. CORLEY
------------------- ------------------------
President
/s/AILEEN GALLAGHER /s/MICHAEL J. GRAHAM
------------------- --------------------
<PAGE>
Exhibit "A" to
Stock Option Agreement dated July 1, 1999
NOTICE OF EXERCISE OF OPTION TO PURCHASE
SHARES OF COMMON STOCK
OF 1st INTERNET GROUP, INC.
The undersigned does by this notice request that 1st Internet
Group Inc., a Florida corporation (the "Company"), issue to the
undersigned that number of shares of Common Stock specified below
(the "Shares") at the price per Share specified below pursuant to
the exercise of the undersigned's option under the Incentive
Stock Option Agreement (the "Agreement") dated July 1, 1999
between the undersigned and the Company.
Simultaneously herewith, the undersigned delivers to the Company
the purchase price for the Shares (i.e., that amount which is
obtained by multiplying the number of Shares for which the Option
is being exercised by the price specified), by good check.
The undersigned hereby represents and warrants that the
undersigned is acquiring the Shares for the undersigned's own
account and not on behalf of any other person and without any
present view to making a public offering or distribution of same
and without any present intention of selling same at any
particular time or at any particular price or upon the occurrence
of any particular event or circumstance.
The undersigned acknowledges and understands that in connection
with the acquisition of the Shares by the undersigned:
1. The Company has informed the undersigned that the Shares are
not registered under the Securities Act of 1933, as amended (the
"Act"), or applicable state securities or Blue Sky law or laws,
and thus the Shares may not be transferred or otherwise disposed
of until the Shares are subsequently registered under the Act and
the applicable state securities or Blue Sky law or laws or an
exemption from such registration requirements is available.
2. The undersigned has been informed that a legend referring to
the restrictions indicated herein on transferability and sale
will be placed upon the certificate(s) evidencing the Shares.
A. Date of Stock Option Agreement: July 1, 1999
B. Number of Shares covered by Agreement: 90,000
C. Number of shares of Common Stock actually to be purchased at
this time: _________
D. Exercise price per Share: $1.00
E . Aggregate price to be paid for Shares actually purchased (D
multiplied by C): $_____
<PAGE>
Dated: ________________________
Very truly yours,
_______________________________
MICHAEL J. GRAHAM
Residence:
_______________________________
_______________________________
ACCEPTED:
1st INTERNET GROUP, INC.
By: __________________________
Name:______________________
Title: ______________________
Dated: ________________________
1ST INTERNET GROUP, INC.
INCENTIVE STOCK OPTION AGREEMENT
INCENTIVE STOCK OPTION AGREEMENT made this 1st day of July, 1999
(the. "Grant Date") by and between 1st INTERNET GROUP, INC., a
Florida corporation located at 5883 Lake Worth Road, Greenacres
Florida 33463 (the "Corporation"), and P. JASON LING, who resides
at 7385 Nautica Way, Lake Worth, FL 33467 (the "Optionee").
Recitals:
A. The Corporation has duly adopted with subsequent shareholder
approval an employee benefit plan known as the 1st Internet
Group, Inc. Equity Incentive Plan (the "Plan").
B. The Plan provides for, among other things, the granting of
incentive stock options by a Committee to be appointed by the
Board of Directors of the Corporation (the "Committee") to
executive officers and key employees of the Corporation or of its
subsidiaries to purchase shares of common stock of the
Corporation, par value $0.01 per share (the "Stock"), in
accordance with the terms and provisions thereof.
C. The Committee considers the Optionee to be a person who is
eligible for a grant of incentive stock options under the Plan,
and has determined that it would be in the best interest of the
Corporation to grant the incentive stock option documented
herein.
NOW, THEREFORE, based on the foregoing and for good and valuable
consideration, the Corporation and Optionee hereby agree as
follows:
Section 1. Incorporation of Terms, Provisions, Conditions and
Restrictions of Plan.
(a) All of the terms, provisions, conditions and restrictions
contained in the Plan, including any and all rules and
regulations adopted under the Plan by the Committee (the "Plan
Provisions"), are hereby incorporated in this Agreement and the
Optionee agrees to be bound by all of the Plan Provisions and by
all of the terms and conditions of this Agreement. This Agreement
does not set forth all of the terms and conditions of the Plan;
copies of the Plan may he obtained upon written request without
charge from the Corporation.
(b) Each capitalized terms used in this Agreement without
definition shall have the meaning defined for it in the Plan, if
any.
<PAGE>
Section 2. Grant of Option. Subject to the provisions of this
Agreement and to the Plan Provisions, the Corporation hereby
grants to the Optionee an option (the "Option") to purchase from
the Corporation one hundred fifty thousand (150,000) shares of
common stock (the "Option Shares") at a price of one dollar
($1.00) per share, the fair market value (the "Exercise Price").
The Option is intended by the parties hereto to be, and shall be
treated as, an incentive stock option (as such term is defined
under Section 422 of the Internal Revenue Code of 1986, as
amended).
Section 3. Exercise of Option.
(a) No portion of the Option may be exercised by the Optionee
on or at any time after the tenth anniversary of the Grant Date
or at any time after the termination of the Optionee's employment
with the Corporation for any reason other than the death or
disability of the Optionee.
(b) The option may be exercised in whole or in part at any time
as set forth below in accordance with the Plan Provisions and
this Section by the Optionee's tendering the Exercise Price (or a
proportionate part thereof if the Option is partially exercised)
to the Corporation, together with a written notice, in the form
attached hereto as Exhibit "A", specifying the number of Option
Shares the Optionee wishes to purchase pursuant to the Option.
(c)(i) Thirty thousand (30,000) Option Shares may be exercised no
earlier than six (6) months after the Grant Date.
(ii) Thirty thousand (30,000) Option Shares (less the Option
Shares exercised pursuant to (c)(i), above) may be exercised no
earlier than eighteen (18) months after the Grant Date.
(iii) Thirty thousand (30,000) Option Shares (less the Option
Shares exercised pursuant to (c)(i) and (ii), above) may be
exercised no earlier than thirty (30) months after the Grant
Date.
(iv) Thirty thousand (30,000) Option Shares (less the Option
shares exercised pursuant to (c)(i) , (ii), and (iii), above) may
be exercised no earlier than forty two (42) months after the
Grant Date.
(v) Thirty thousand (30,000) Option Shares (less the Option
Shares exercised pursuant to (c)(i), (ii), (iii), and (iv) above)
may be exercised no earlier than firty four (54) months after the
Grant Date.
Section 4. Share Certificates. Upon receipt of the Exercise
Price (or the requisite portion thereof), the Corporation shall
cause one or more stock certificates evidencing the Optionee's
<PAGE>
ownership of the Option Shares so purchased by the Optionee to be
issued to the Optionee subject, however, to the Plan Provisions.
Section 5. Investment Securities. The Optionee represents and
warrants to the Corporation that any Option Shares purchased by
the Optionee upon the exercise hereof will be acquired for
investment and not for distribution within the meaning of the
Securities Act of 1933, as amended, provided, however, that the
foregoing representation and warranty shall he inoperative if
such Option Shares are registered under such Act.
Section 6. Default of Optionee. Should the Optionee at any time
breach any Plan Provision or any provision of this Agreement, the
Option granted hereunder shall be null and void. This provision
shall be in addition to and not in lieu of any other remedies
which the Corporation may have at law and/or in equity.
Section 7. Miscellaneous Provisions.
(a) Unless otherwise specifically provided herein, all notices
to be given hereunder shall be in writing and sent to the parties
by certified mail, return receipt requested, which shall be
addressed to each party's respective address, as set forth in the
first paragraph of this Agreement, or to such other address as
such party shall give to the other party hereby by a notice given
in accordance with this Section and, except as otherwise provided
in this Agreement, shall be effective when deposited in the
United States mail properly addressed and postage prepaid. If
such notice is sent other than by the United States mail, such
notice shall be effective when actually received by the party
being noticed.
(b) This Agreement may not be assigned in whole or in part by
either of the parties hereto.
(c) Both parties hereto shall execute and deliver such other
instruments and do such other acts as may be necessary to carry
out the intent and purposes of this Agreement.
(d) Whenever the context may require, any pronouns used herein
shall include the corresponding masculine, feminine or neuter
forms and the singular form of nouns and pronouns shall include
the plural and vice versa.
(e) The captions contained in this Agreement are inserted only
as a matter of convenience and in no way define, limit or extend
the scope of this Agreement or the intent of any of the
provisions hereof.
(f) This Agreement and the Plan constitute the entire
understanding between the parties hereto concerning the grant of
incentive stock options to the Optionee under the Plan and shall
not be terminated, except in accordance with its terms or the
<PAGE>
Plan Provisions, or amended except in accordance with the Plan
Provisions or in a writing executed by both of the parties
hereto.
(g) The waiver of a breach of any term or condition of this
Agreement shall not be deemed to constitute the waiver of any
other breach of the same or any other term or condition.
(h) The invalidity or unenforceability, in whole or in part, of
any covenant, promise or undertaking, or any section, subsection,
paragraph, sentence, clause, phrase or word or of any provision
of this Agreement shall not affect the validity or enforceability
of the remaining portions thereof.
(i) This Agreement shall be binding upon and inure to the
benefit of the heirs, successors, estate and personal
representatives of the Optionee and the successors and assigns of
the Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
Witnesses: 1st INTERNET GROUP, INC.
/s/AILEEN GALLAGHER By: /s/WILLIAM S. CORLEY
------------------- ------------------------
President
/s/AILEEN GALLAGHER /s/ P. JASON LING
------------------- ------------------
<PAGE>
Exhibit "A" to
Stock Option Agreement dated July 1, 1999
NOTICE OF EXERCISE OF OPTION TO PURCHASE
SHARES OF COMMON STOCK
OF 1st INTERNET GROUP, INC.
The undersigned does by this notice request that 1st Internet
Group Inc., a Florida corporation (the "Company"), issue to the
undersigned that number of shares of Common Stock specified below
(the "Shares") at the price per Share specified below pursuant to
the exercise of the undersigned's option under the Incentive
Stock Option Agreement (the "Agreement") dated July 1, 1999
between the undersigned and the Company.
Simultaneously herewith, the undersigned delivers to the Company
the purchase price for the Shares (i.e., that amount which is
obtained by multiplying the number of Shares for which the Option
is being exercised by the price specified), by good check.
The undersigned hereby represents and warrants that the
undersigned is acquiring the Shares for the undersigned's own
account and not on behalf of any other person and without any
present view to making a public offering or distribution of same
and without any present intention of selling same at any
particular time or at any particular price or upon the occurrence
of any particular event or circumstance.
The undersigned acknowledges and understands that in connection
with the acquisition of the Shares by the undersigned:
1. The Company has informed the undersigned that the Shares are
not registered under the Securities Act of 1933, as amended (the
"Act"), or applicable state securities or Blue Sky law or laws,
and thus the Shares may not be transferred or otherwise disposed
of until the Shares are subsequently registered under the Act and
the applicable state securities or Blue Sky law or laws or an
exemption from such registration requirements is available.
2. The undersigned has been informed that a legend referring to
the restrictions indicated herein on transferability and sale
will be placed upon the certificate(s) evidencing the Shares.
A. Date of Stock Option Agreement: July 1, 1999
B. Number of Shares covered by Agreement: 150,000
C. Number of shares of Common Stock actually to be purchased at
this time: _________
<PAGE>
D. Exercise price per Share: $1.00
E . Aggregate price to be paid for Shares actually purchased (D
multiplied by C): $_____
Dated: ________________________
Very truly yours,
_______________________________
P. JASON LING
Residence:
_______________________________
_______________________________
ACCEPTED:
1st INTERNET GROUP, INC.
By: __________________________
Name:______________________
Title: ______________________
Dated: ________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 (AUDITED)
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001086232
<NAME> 1ST INTERNET GROUP INC
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 212,679 775,036
<SECURITIES> 0 0
<RECEIVABLES> 250,281 1,706,662
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 397,960 2,835,062
<PP&E> 86,174 146,750
<DEPRECIATION> 45,600 57,589
<TOTAL-ASSETS> 504,042 2,581,804
<CURRENT-LIABILITIES> 266,343 1,074,336
<BONDS> 0 0
0 0
0 0
<COMMON> 47,688 57,770
<OTHER-SE> 186,880 1,449,698
<TOTAL-LIABILITY-AND-EQUITY> 504,042 2,581,804
<SALES> 0 0
<TOTAL-REVENUES> 1,245,198 5,141,243
<CGS> 0 0
<TOTAL-COSTS> 1,227,867 4,726,517
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 21,933 467,018
<INCOME-TAX> 0 176,000
<INCOME-CONTINUING> 21,933 291,018
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 21,933 291,018
<EPS-BASIC> .000 .05
<EPS-DILUTED> .000 .05
</TABLE>
1st Internet Group 1
Year 2000 Plan
TABLE OF CONTENTS
I. Introduction
II. Assessment
a. Electronic Systems
b. External Vendors
III. Testing
IV. Action Plan
V. Documentation
VI. Contingency Plan
VII. Conclusion
<PAGE>
1st Internet Group 2
Year 2000 Plan
I. Introduction
1st Internet Group is aware of the computer problem facing
businesses worldwide. Recognizing how reliant we are on
technology to provide services and data, we want to be best
prepared to handle this critical issue. In our analysis of the
Y2K issue, we are implementing tests on all of our mission
critical hardware and software as well as requiring Y2K
disclosure statements from any vendor we do business with.
1st Internet Group employs 5 registered representatives and
does business exclusively through our clearing firm, US Clearing.
Joe Hofeditz is the MIS Director for 1st Internet Group. He
is responsible for Year 2000 assessment and compliance. Aimee
Shank also has performed extensive research to ensure our
business systems and vendors are compliant as well.
II. Assessment
Internal and external testing has been performed to ensure
that are systems will function in the 21st century. Because most
of our computer systems have been upgraded or replaced in the
last 4 years, the effect of non-compliant hardware and software
has found to be minimal.
Assessment and testing/repair was performed on August 23,
1999. All non-compliant systems are scheduled to be repaired or
replaced before October 30, 1999. Page 3-4 is an inventory of
internal systems and their compliance status.
<PAGE>
1st Internet Group 3
Year 2000 Plan
Year 2000 Compliance Inventory
Testing completed August 23, 19999
Item/Service Manufacturer Method Compliant? Mission Critical?
---------------- ------------- --------- -------- ------------------
Connectivity
============
Web site hosting Verio (Flinet) statement YES Mission Critical
WebRamp ISDN Ramp Networks statement YES Mission Critical
ADP market system ADP statement YES Mission Critical
Clearing Firm US Clearing statement YES Mission Critical
BackOffice Data Bridge Systems statement YES Mission Critical
Merlin Legend
Phone System Lucent statement YES Mission Critical
Local Telephone
Service BellSouth statement YES Mission Critical
PC Software
===========
Maximizer97
contact software Maximizer statement YES
Office 2000
Small Business Microsoft statement YES
Office 2000
Professional Microsoft statement YES
NT Small Business
Server Microsoft statement YES Mission Critical
/ testing
Windows 98 SP-1 Microsoft statement YES Mission Critical
/ testing
Windows 95 OSR1 Microsoft statement YES Mission Critical
/ testing
Windows 95 OSR2.5 Microsoft statement YES Mission Critical
/ testing
Peachtree
Accounting Peachtree statement YES
PC Hardware
===========
User PC's Various testing YES Mission Critical
BackUPS APC statement YES Mission Critical
Hubs 3com statement YES Mission Critical
<PAGE>
1st Internet Group 4
Year 2000 Plan
Year 2000 Compliance Inventory
Testing completed August 23, 19999
Item/Service Manufacturer Method Compliant? Mission Critical?
---------------- ------------- --------- -------- ------------------
External Vendors
================
First Union Bank First Union statement YES
Union Planters Union Planters statement YES
Electric Service FPL statement YES
Equitable Life USG Annuity statement YES
Zurich Kemper Zurich Kemper statement YES
Insurance Provider Lincoln Benefit statement YES
Pioneer Group The Pioneer
Group statement YES
Illinois Mutual
Life Insurance Illinois Mutual statement YES
Fortis Life
Insurance Fortis Inc statement YES
Jackson Life
Insurance Jackson National statement YES
Keyport Life
Insurance Keyport statement YES
Office Electronic Equipment
===========================
Fax machine HP Fax 700 &
920 statement NO but works
Copy machine HP OfficeJet
1150C statement YES
HP printers HP LJ 5P,
LJ4, LJ3 statement YES
Time clocks Widmer, Latham Statement YES
All of the above listed non-IT systems have been verified in statements by
their respective manufacturer's to be either Year 2000 Ready or functionary
regardless of date.
For both IT and non-IT systems, we have completed our testing for Year 2000
compliance which entails that there are no remaining phases or testing
procedures.
<PAGE>
1st Internet Group 5
Year 2000 Plan
III. Testing
Our internal systems have been tested and all mission
critical systems are Y2K compliant. For the hardware testing,
Parsons Technology's Year 2000 Detect and Correct testing
software was used. This software package tests the BIOS, RTC, and
OS clocks for date issues. The software passed all of our desktop
computers with a few minor software corrections to correct the
BIOS rollover clock. To ensure accurate testing, each desktop
machine was also verified with the Accute Y2K Super Test. For
software, patches were installed for Windows 95, 98, and NT
Server to ensure compliance. An Excel spreadsheet patch was
installed to protect data from corruption and all other critical
software has been confirmed Y2K ready from the respective
vendors.
Externally, we have received a letter of compliance from
each of our 3rd party vendors, our insurance carriers, market
data providers, and suppliers.
The companies who provide electronic data for trades and
market orders (US Clearing, ADP, Bridge) have performed
conclusive testing to ensure that the systems used to connect to
the market are Y2K ready.
Page 6 is the result of 1st Discount's computer systems
hardware testing.
<PAGE>
1st Internet Group 6
Year 2000 Plan
1st Internet Group Y2K PC Evaluation
August 16-23, 1999
Users Windows Parsons AccuTest
----------- ----------- ---------- ----------
Chip Win95, patched BIOS patch passed
John Win98, patched passed passed
Liz Win98, patched passed passed
Sandra Win95, patched BIOS patch passed
Autumn Win95, patched BIOS patch passed
Fish Win95, patched passed passed
Pete Win98, patched passed passed
Evelyn Win95, patched BIOS patch passed
Dayli Win95, patched BIOS patch passed
Graham Win95, patched BIOS patch passed
Aimee Win95, patched BIOS patch passed
Jason Win95, patched BIOS patch passed
Aileen Win95, patched BIOS patch passed
Rusty Win98, patched BIOS patch passed
Joe Win98, patched passed passed
web_server Win98, patched passed passed
Olga Win98, patched passed passed
ADP Server:
Compliance certified by ADP, Bridge, & US Clearing
NT BackOffice Small Business Server 4.5
Compliance statement from Microsoft, SBS patched to SP5
ETS Predictive Dialer
Being tested and made compliant by external service agent
ETS Dialing System compliance scheduled to be completed by
September 30, 1999
<PAGE>
1st Internet Group 7
Year 2000 Plan
IV. Action Plan
* 1st Internet Group will identify and inventory all electronic
equipment
* 1st Internet Group will assess all identified items for Y2K
flaws
* Mission Critical systems including hardware and software will
be tested and evaluated
* A strategy will be implemented to test, repair or replace all
affected systems
* Y2K compliance documentation will be created as mandated by the
NASD
* Management will review notices from the NASD to keep updated on
Y2K regulations
* Contingency plans will be put into place to protect the
business and its clients
* The firm will set aside $10,000 to handle any unforeseen
circumstances that could be caused by Y2K glitches.
V. Documentation
Documentation of the Y2K status of mission critical and
non-mission critical systems has been obtained and cataloged. Y2K
compliance statements from 3rd party vendors have also been
collected and cataloged.
VI. Contingency Plan
1. Objective of the plan
To allow staff of, The Company, to continue to serve clients
without interruption and to do there jobs and schedule their time
with minimal disruption in the event of a loss of access to any
system.
2. Criteria for invoking the plan
The technical coordinator (TC) for the firm will make a
determination that:
a. there are serious problems threatening the integrity of
the system
b. the problems are unlikely to be resolved within two days
c. the problems currently affect or likely will affect a
majority of users
d. data is or likely will be corrupted
3. Expected life of the plan
From three days to several weeks, depending upon the nature and
availability of remedies.
4. Roles, responsibilities, and authority
The TC is responsible for backing up the system on the last day
used in 1999, monitoring the system closely in January and
February of 2000, and quickly communicating any problems and
recommendations to the Designated Principal (DP) or his/her
designee. The DP is responsible for making any system
availability or monetary decisions, communicating with staff, and
monitoring the efforts to repair
<PAGE>
1st Internet Group 8
Year 2000 Plan
the system. Users will be responsible for printing paper copies
of their calendars before leaving in December.
5. Procedures for invoking contingency mode
The TC on-site will recommend to the DP that the contingency plan
be implemented. The DP may designate a communications person who
will be responsible for informing staff of the action plan, and
providing the technical staff to respond to user questions
related to the problem. While attempting to rectify any
problems, the TC will keep the DP and communications person
informed relative to the status. Decisions with cost or service
implications will be referred to the DP.
6. Procedures for operating in contingency mode
Each user will be responsible for printing their calendar on
their last workday in 1999 for contingency use. In the event
that the contingency plan is invoked, each user is responsible
for maintaining their meeting schedule manually. Should the
contingency last over one week, a temporary worker may be hired
to answer phone calls related to scheduling, if needed.
7. Resource plan for operating in contingency mode
The technical staff will reduce work on projects with fewer
priorities to free-up resources. Administrative and budget
personnel will review alternatives if funding is needed for
additional staff, hardware, or software.
8. Criteria for returning to normal operating mode
The technical staff will test the system and make a determination
that the system is ready for use and recommend to the
administrative person that an announcement be made.
9. Procedures for returning to normal operating mode
A specific time will be designated for the system to return.
Technical personnel will attempt to recover data and work with
the communications person about what information users need.
Communications person will inform users and field questions.
10. Procedures for recovering lost or damaged data
Systems personnel will attempt to recover the data from the last
backup. After they are informed that the system is stable, users
will be responsible for making any needed changes to their data
by adding new meetings or transaction information.
11. Estimated cost of the plan
Assuming that the problem is vendor-supported software related
and that temporary personnel are not needed to either fix the
system or assist in the manual scheduling of meetings, the
incremental cost beyond current staff time will be immaterial.
<PAGE>
1st Internet Group 9
Year 2000 Plan
12. Post contingency plan The communications person will update
staff on any problems incurred in returning to normal operating
mode and ask staff to return to the normal procedures for
assistance with system problems.
As details regarding preparedness become available for both
Internal and External systems, The Company will determine where
potential problems might exist. A list of potential alternatives
will be complied that provide similar services.
In case there is an interruption to service due to a Year 2000
problem, The Company will execute the following contingency plan.
Management's strategy is to either go to a manual system in the
short-term, or to outsource the tasks to a Year 2000 compliant
alternative. Current systems will be backed-up to maintain the
integrity of automated files.
Account Documentation
Backups of all electronic systems will be made and kept at a
secure location. In the event that electronic systems fail due
to the Year 2000 Problem, account documentation will be recorded
manually and the records kept on site.
Blotters
In the event that electronic systems fail due to the Year 2000
Problem, the firm will complete Purchases and Sales Blotters,
Receipt and Delivery of Securities Blotters and Checks Received
and Delivered Blotters manually or using spreadsheet programs.
Clearing Firm Systems
In the event that electronic systems fail due to the Year 2000
Problem, the firm will complete all Clearing documentation
manually and send to the clearing firm by fax, or overnight
service or standard mail.
Accounting and Financial Reporting
In the event that electronic filing systems fail due to the Year
2000 Problem, the general ledger, check register, trial balance
and other transactions related to the firms assets and
liabilities and its income and expense and capital accounts will
be kept manually in order to prepare financial statements showing
the firms financial condition. An alternative method of filing
will be used, such as manual calculation of Net Capital
Requirements and Focus, and then faxed to district examiner, or
an alternative third party vendor will be contacted to prepare
financial reports.
<PAGE>
1st Internet Group 10
Year 2000 Plan
Electronic Complaint System
In the event that electronic filing systems fail due to the Year
2000 Problem, the Customer Complaints will be transmitted via a
third party vendor. If a third party vendor is unavailable the
complaints will be completed manually, and transmitted by fax,
overnight, or standard mail.
ALL MISSION CRITICAL SYSTEMS AND VENDORS HAVE BEEN TESTED AND ARE
TO THE BEST OF OUR KNOWLEDGE Y2K COMPLIANT. HOWEVER, IN THE
EVENT THAT A MISSION CRITICAL SYSTEM AND/OR VENDOR SUFFERS A Y2K
PROBLEM THE FOLLOWING PROCEDURES WILL BE FOLLOWED UNTIL A
SUPERIOR ALTERNATIVE ARISES OR THE PROBLEM IS CORRECTED.
Clearing Firm:
All information has indicated that Fleet Securities is and will
be Y2K compliant. In the event Fleet Securities has Y2K
difficulties at its main location they have set up backup
facilities in alternate locations that should enable the Company
to operate with minimal interruption. However, in the event
Fleet Securities and is back up system are both inoperable is
unable to operate the Company will notify the NASD and SEC and
proceed as advised. If Fleet Securities is unable to get
operational, the Company will use another clearing firm.
Electric Companies:
The Company will re-direct operations to another branch office
which is not suffering from electric problems. Additional
personnel will be allocated to the operational location if
necessary.
Telephone Companies:
The Company will re-direct operations to another branch office
which has operational telephones. Additionally, cellular
telephones will be made available for use. Additional personnel
will be allocated to the operational location if necessary.
Internal Telephone Systems:
The Company will forward calls to cellular telephones in
conjunction with bypassing the telephone system by using standard
dedicated telephone lines.
Office-Physical Infrastructure:
The employees will use the stairs in case of elevator failure.
If a branch or the main office is uninhabitable the Company will
re-direct operations to and additional personel (if required) to
another office which is operational.
<PAGE>
1st Internet Group 11
Year 2000 Plan
VII. Conclusion
Based on the information found in this plan, 1st Internet
Group is confident that it is adequately prepared to handle the
Y2K problem on January 1, 2000 and following. In case of any
failures, the firm will notify the NASD. The firm expects to
remain in full NASD compliance and meet all NASD filing
regulations.
