SECOND 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. The lack of registration in
these two states has no direct or indirect effect on clients in
the other 48 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 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.
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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 that
execute unsolicited trades and 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, who are registered with the
Securities Exchange Commission pursuant to Section 15 of the
Securities Exchange Act of 1934 and are affiliated exclusively
with First Brokerage. 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. At this time,
First Brokerage does not offer to its clients the ability to
participate in initial public offerings (IPOs) or repeat public
offerings.
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. The
Internet has helped to reduce these frictions. High
commission costs are reduced with online trading, since
investors have the ability to enter their orders directly
via the Internet, thereby eliminating the participation of a
broker. The Internet also provides access to information
enabling the investor to make more informed investment
decisions.
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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. 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 utilizes its electronic brokerage service and,
therefore, 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.
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 the same "ala carte" financial
services through wholly owned subsidiaries of one company
at a common location. None of the employees of the Company
or any of its subsidiaries is an investment advisor
registered with the Securities and Exchange Commission
pursuant to the Investment Advisors Act of 1940.
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 is designed to keep First
Brokerage's professionals 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, with regard to the three companies, that are
reasonably likely to have a material impact on our short term or
long term liquidity. 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
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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). In order to keep any sensitive data secure
for transmission over the Internet, First Brokerage uses PGP
(Pretty Good Privacy) encryption software. PGP uses the RSA
Public Key Infrastructure to ensure that any data transmitted via
mail, Virtual Private Network or physical disk is encrypted and
secure. This encryption scheme can only be opened by the
intended receiver. The receiver has his own private key that
allows decryption of the data. This method allows data to be
sent over a non-secure medium with reasonable certainty that only
the proper recipient will be able to view it. 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 due to staff's experience
and education, fair pricing and convenience due to its South
Florida 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
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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. 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
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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 $5,431,041, an increase of 747.1% 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 97.4% 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 $4,876,785 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 $318,047 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
13
<PAGE>
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 all the services of a traditional broker,
clients who utilize our online trading system will not receive
the broker interaction or investment advice. These clients may,
however, receive the Company's traditional brokerage services at
a higher fee. 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, an 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.
18
<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. Management
believes the Company is in a firm position to cope with the
transition. 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.
He remained at Merrill Lynch until December, 1994 when he joined
Morgan Stanley Dean Witter as a Senior Vice President. Mr.
Corley remained at Morgan Stanley Dean Witter until July, 1995
when he 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 $60,000
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 transactions other
than the issuance of stock options 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. The Company's replacement auditors, Sweeney,
Gates & Company, were engaged on February 5, 1999.
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 describing the capital
contribution of shares of the subsidiaries for shares of the
Company. 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 are sophisticated investors within the meaning
of Section 4(2) and 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, who were clients, friends and relatives of First
Brokerage and its principals and who were contacted by phone, 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 1,739,341
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 $ 2,614,483
============ ============
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 - 181,650
------------ ------------
Total current
liabilities 266,343 1,079,986
------------ ------------
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) 318,047
------------ ------------
259,568 1,534,497
Subscription receivable (25,000) -
------------ ------------
Total stockholders'
equity 234,568 1,534,497
------------ ------------
$ 504,042 $ 2,614,483
============ ============
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 $ 5,431,041 $ 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 5,578,649 770,020
----------- ------------ ----------- -----------
Selling, general and
administrative expenses:
First Brokerage 1,080,652 545,990 4,876,785 642,018
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 5,131,244 750,342
----------- ------------ ----------- -----------
Income before other income
and (expense) 17,331 92,163 447,405 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 91,213 499,697 21,615
Provision for income taxes - - 181,650 -
----------- ------------ ----------- -----------
Net income $ 21,933 $ 91,213 $ 318,047 $ 21,615
=========== ============ =========== ===========
Pro forma information
(unaudited):
Pro forma net income
(Notes 3 and 8):
Historical net income $ 21,933 $ 91,213 $ 318,047 $ 21,615
Pro forma provision for
income taxes 6,400 34,000 - 6,300
----------- ------------ ----------- -----------
Pro forma net income $ 15,533 $ 57,213 $ 318,047 $ 15,315
=========== ============ =========== ===========
Pro forma per share
data (Note 3):
Net earnings per share
- basic and diluted $ 0.00 $ 0.01 $ 0.06 $ 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) - - - 318,047 - 318,047
---------- --------- ----------- --------- ---------- -----------
Balance, September 30, 1999
(unaudited) 5,777,000 $ 57,770 $ 1,158,680 $ 318,047 $ - $ 1,534,497
========== ========= =========== ========= ========== ===========
</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 $ 318,047 $ 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) (1,489,060) (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 - - 181,650 -
----------- --------- ------------ ----------
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)
Securities Transactions-First Brokerage's proprietary securities
transactions in regular-way trades are recorded on the trade
date, as if they had settled. Profit and loss from all
securities transactions entered into for the account and risk of
the company are recorded on a trade date basis. Customers'
securities transactions are reported on a settlement date basis
with related commission income and expenses reported on a trade
date basis.
Amounts receivable and payable for securities transactions that
have not reached their contractual settlement date are recorded
net on the statement of financial condition. Marketable
securities are valued at market value.
Insurance Transactions- First Insurance recognizes revenue when
earned. Revenue is considered earned when the Company receives
notification that the insurance company underwriting the policy
has approved the application.
Accounting Transactions- First Accounting charges either a fixed
or hourly fee for services. No standard fee structure exists and
fees are negotiated with each client. First Accounting
recognizes fixed fee revenue when work is complete. Hourly rate
revenues are recognized bi-weekly when billed.
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.
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)
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.
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.
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)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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.
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.
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)
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 $ 1,628,778
Receivables due First
Accounting 5,660 6,364
Other 754 104,199
------------ ------------
$ 250,281 $ 1,739,341
============ ============
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 (655,000 shares at $1 per
share and 7,500 shares at $1.50 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 $ - $ - $ 163,840 $ -
State - - 17,810 -
--------- --------- --------- ---------
Provision for
income taxes $ - $ - $ 181,650 $ -
========= ========= ========= =========
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 $ 163,840 $ 5,400
State 900 3,000 17,810 900
--------- --------- --------- ---------
Provision for
income taxes $ 6,400 $ 34,000 $ 181,650 $ 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
Customer 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
- ------- -----------------------------------------------------
10.0 Revised Employment Agreement for Jason Ling
16.0 Resignation Letter from Auditing Firm
27.0 Financial Data Schedule
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: January 19, 2000 By: /s/ WILLIAM H. CORLEY, JR.
--------------------------------
William H. Corley, Jr.
President, CEO and duly
authorized officer
45
DESCRIPTION: EMPLOYMENT AGREEMENT - LING
EMPLOYMENT AGREEMENT
This Employment Agreement is made on this 1st day of May 1999, between
1st Internet Group, Inc. ("Employer"), whose principal place of business
at 5883 Lake Worth Road, Lake Worth, Florida 33463, and P. Jason Ling
("Employee").
WHEREAS, Employer is actively engaged in the business of a securities
brokerage firm; a insurance firm; and an accounting firm; and,
WHEREAS, Employer wishes to employ Employee and Employee wishes to be
employed pursuant to the terms of this Employment Agreement.
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained in this Employment Agreement, and other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties, intending to be legally bound, agree as
follows:
Article 1
Employment of Employee
Employer agrees to employ Employee, and Employee accepts employment with
Employer, on and subject to the terms and conditions set forth in this
Employment Agreement.
Article 2
Duties of Employee
Section 2.1. POSITION AND DUTIES. Employer agrees to employ Employee
to act as Chief Financial Officer for Employer. Employee shall be
responsible for performing the following duties: executive management,
overseeing business development, and compliance and financial reporting.
Employer reserves the right from time to time to change the nature of
Employee's duties and job title; provided, however, Employee's duties
and job title shall always be of an executive nature.
Section 2.2. TIME DEVOTED TO WORK. Employee is employed on a part-time
basis and may be engaged in any other business activities.
Article 3
Place of Employment
Section 3.1. PLACE OF EMPLOYMENT. Employee shall be based at
Employer's principal office at 5883 Lake Worth Road, Lake Worth, FL
33463 and shall not be required to travel away from that office on
business more than thirty (30) days during a calendar year. Employer
agrees that during the term of this Employment Agreement it shall not
assign Employee to work at any location which is more than 100 miles
from said principal office without Employee's consent.
Section 3.2. MOVING EXPENSES. If Employer relocates its principal
office more than 100 miles from its current principal office, or
requests that Employee relocate to one of its offices which is more than
100 miles from its current principal office, and Employee consents to
relocate to that new location, Employer shall promptly pay or reimburse
Employee for all reasonable moving expenses incurred by Employee in
connection with the relocation plus an amount to reimburse Employee for
any federal and state income taxes that it has to pay on amounts
reimbursed. Employer also shall indemnify Employee against any loss
incurred in connection with the sale of Employee's principal residence.
The amount of any loss shall be determined by taking the difference
between the average of two appraisal prices set by two independent
appraisers agreed to by Employer and Employee and the actual sales price
of Employee's principal
residence.
Article 4
Compensation of Employee
Section 4.1. BASE SALARY. For all services rendered by Employee under
this Employment Agreement, Employer agrees to pay Employee an annual
base salary of $60,000, which shall be payable to Employee in such
installments, but not less frequently than bi-monthly, as are consistent
with Employee's practice for its other Employees. Employee's base
salary shall be reviewed at least once a year by Employer and shall be
increased at a minimum by the percentage increase in the Consumer Price
Index for the previous year.
Section 4.2. REIMBURSEMENT FOR BUSINESS EXPENSES. Employer shall
promptly pay or reimburse Employee for all reasonable business expenses
incurred by Employee in performing Employee's duties and obligations
under this Employment Agreement, but only if Employee properly accounts
for expenses in Accordance with Employer's policies.
Article 5
Vacations and Other Paid Absences
Section 5.1. VACATION DAYS. Employee shall be entitled to two (2)
weeks paid vacation days each calendar year during the term of this
Employment Agreement.
Section 5.2. HOLIDAYS. Employee shall be entitled to the same paid
holidays as authorized by Employer for its other Employees.
Section 5.3. SICK DAYS AND PERSONAL ABSENCE DAYS. Employee shall be
entitled to the same number of paid sick days and personal absence days
authorized by Employer for its other Employees.
Article 6
Termination of Employment
Section 6.1. TERM OF EMPLOYMENT. Employee's employment shall commence
on the date of execution by Employer and shall continue for one (1) year
("end-of-employment date"), unless extended or terminated sooner, as
provided by this article of the Employment Agreement.
Section 6.2. EXTENSION OF EMPLOYMENT. On the end-of-employment date
and every year thereafter, Employee's employment with Employer
automatically shall be extended for an additional one (1) year unless,
at least ninety (90) days prior to the end-of-employment date, or
successive three (1) year anniversary thereof, Employer or Employee
delivers to the other a written notice that Employee's employment with
Employer is not to be extended.
Section 6.3. TERMINATION AT EMPLOYEE'S DEATH. Employee's employment
with Employer shall terminate at Employee's death.
Section 6.4. TERMINATION BY EMPLOYEE. Employee may, but is not
obligated to, terminate this employment Agreement at any time under the
following circumstances:
(a) Employee's health becomes so impaired that continued performance of
Employee's duties under this Employment Agreement would be hazardous to
Employee's physical or mental health.
(b) There is a change in control of Employer. There is a change in
control of Employer if someone other than a current owner of Employer
becomes the beneficial owner of 20 percent or more of the voting power
of Employer.
(c) Employee is assigned duties that are significantly different than
those described in this Employment Agreement, or duties assigned
Employee by this Employment Agreement are eliminated or transferred to
someone else.
(d) Employee is removed from any of the positions described in Section
2.1 of this Employment Agreement (other than by Employer for cause).
(e) Employee's fringe benefits or other compensation are materially
reduced.
(f) Employer requires Employee to travel more frequently than
contemplated by this Employment Agreement.
(g) Employer fails to have a successor assume this Employment Agreement.
(h) Employer becomes insolvent or files a bankruptcy petition.
Section 6.5. TERMINATION BY EMPLOYER.
(a) TERMINATION FOR CAUSE. Employer may terminate Employee's
employment for cause.
(b) "CAUSE" DEFINED. Employer shall have cause to terminate Employee's
employment if Employee fails to substantially perform any duties
required by this Employment Agreement (unless Employee's failure is due
to a physical or mental incapacity), Employee is grossly negligent in
the performance of required duties, Employee engages in conduct that
damages Employer, Employee is convicted of a felonious act of moral
turpitude, or Employee discloses material confidential information in
violation of Article 7 of this Employment Agreement. Employer shall have
cause to terminate Employee's employment should Employee's performance,
attitude, or work habits become unreasonable.
Section 6.6. NOTICE OF TERMINATION. Any termination of Employee's
employment by Employer or Employee must be communicated to the other
party by a written notice of termination. The notice must specify the
provision of this employment Agreement authorizing the termination and
must set forth in reasonable details the facts and circumstances
providing the basis for termination of Employee's employment.
Section 6.7. DATE TERMINATION IS EFFECTIVE. If Employee's employment
terminates because this Employment Agreement expires, then Employee's
employment will be considered to have terminated on that expiration
date. If Employee's employment terminates because of Employee's death,
then Employee's employment will be considered to have terminated on the
date of Employee's death. If Employee's employment is terminated by
Employee, then Employee's employment will be considered to have
terminated on the date that notice of termination is given. If
Employee's employment is terminated by Employer for cause, then
Employee's employment will be considered to have terminated on the date
specified by the notice of termination. If, within thirty (30) days
after a notice of termination is given, the party receiving the notice
notifies the other party that there is a dispute concerning the
termination, then Employee's employment will not be considered to have
terminated, and Employer shall continue to compensate Employee pursuant
to this Employment Agreement, until the dispute is ended by a written
agreement between the parties or a final judgment, order, or decree of a
court of competent jurisdiction. A judgment, order, or decree of a
court of competent jurisdiction will be considered final only if the
time for appealing the decision has expired and no notice of appeal has
been filed.
Article 7
Confidential Information
Section 7.1. CONFIDENTIAL INFORMATION DEFINED. "Confidential
Information" as used in this Employment Agreement shall mean any and all
technical and non-technical information belonging to, or in the
possession of, Employer or its officers, directors, Employees,
affiliates, subsidiaries, clients, vendors, or Employees, including
without limitation, patent, trade secret, and proprietary information;
techniques, sketches, drawings, models, inventions, know-how, processes,
apparatus, equipment, algorithms, source codes, object codes, software
programs, software source documents, and formulae related to Employer's
business or any other current, future and/or proposed business, product
or service contemplated by Employer; and includes, without limitation,
all information concerning research, experimental work, development,
design details and specifications, engineering, financial information,
procurement requirements, purchasing, manufacturing, customer lists,
vendor lists, business forecasts, sales and merchandising, and marketing
plans or similar information.
Section 7.2 DISCLOSURES. Employee agrees that it shall, at no time
during or after termination of this Employment Agreement, directly or
indirectly make use of, disseminate, or in any way disclose Confidential
Information to any person, firm or business, except to the extent
necessary for performance of this employment Agreement. Employee agrees
that it shall disclose Confidential Information only to Employer's other
Employees who need to know such information and who have previously
agreed to be bound by the terms and conditions of a substantially
similar confidentiality provision and shall be liable for damages for
the intentional or negligent disclosure of Confidential Information.
Employee's obligations with respect to any portion of Confidential
Information shall terminate only when Employee has documented to
Employer that (a) such information was lawfully in the public domain at
the time it was communicated to Employee by Employer; or (b) the
communication was in response to a valid order by a court of competent
jurisdiction or was necessary to establish the rights of Employer under
this Employment Agreement.
Article 8
Noncompetition Agreement
Section 8.1. AGREEMENT NOT TO COMPETE. For one (1) year after
Employee's employment with Employer terminates, Employee agrees not to
directly or indirectly own, manage, control, or operate; serve as an
officer, director, partner, or Employee of; have any direct or indirect
financial interest in; or assist in any way; any person or entity that
competes with any business conducted by Employer or any of Employer's
affiliates or subsidiaries in any geographic region in which Employer
conducts business.
Section 8.2. COMPETITIVE BUSINESSES. For purposes of this Article 11,
a competitive business shall be any person or entity which operates as a
securities broker dealer whose primarily business is to provide its
clients with the ability buy, sell, or trade securities via the internet
or world wide web, or via some similar system, network, method, or
service.
Section 8.3. OWNERSHIP OF PUBLIC CORPORATION NO VIOLATION. Employee
will not be considered to have violated this provision merely because
Employee owns no more than twenty percent (20%) of the stock of any
publicly held corporation.
Article 9
Notices
Any notice given under this Employment Agreement to either party shall
be made in writing. Notices shall be deemed given when delivered by
hand or when mailed by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the party at the address
set forth below.
Employee's address: 7385 Nautica Way
Lake Worth, FL 33467
Employer's address: 5883 Lake Worth Road
Lake Worth, FL 33463
Each party may designate a different address for receiving notices by
giving written notice of the different address to the other party. The
written notice of the different address will be deemed given when it is
received by the other party.
Article 10
Binding Agreement
Section 10.1. EMPLOYER'S SUCCESSORS.
(a) The rights and obligations of Employer under this Employment
Agreement shall inure to the benefit of and shall be binding in all
respects upon the successors and assigns of Employer.
(b) Employer shall require any direct or indirect successor (by
purchase, merger, consolidation, or (otherwise) of all or substantially
all of Employer's stock, business and/or assets to expressly agree to
assume Employer's obligations under this Employment Agreement and
perform them in the same manner and to the same extent as Employer would
have been required to do if no succession had occurred. The agreement
must be in a form and substance satisfactory to Employee.
(c) If Employer fails to obtain such an agreement before the effective
date of the succession, Employer's failure will be considered a breach
of this Employment Agreement, and Employee shall be entitled to the
greater of (i) one year's base salary in effect on the effective date of
such succession. However, Employer's failure to obtain such agreement
shall not affect-said successor's obligations pursuant to paragraph
10.1(a) above.
Section 10.2. EMPLOYEE'S SUCCESSORS. This Employment Agreement shall
inure to the benefit and be enforceable by and upon Employee's personal
representatives, legatees, and heirs. If Employee dies while amounts
are still owed, such amounts shall be paid to Employee's legatees or, if
no such person or persons have been designated, to Employee's estate.
Article 11
Waivers
The waiver by either party of a breach of any provision of this
Employment Agreement shall not operate or be construed as a waiver of
any subsequent breach.
Article 12
Entire Agreement
Section 12.1. NO OTHER AGREEMENTS. This instrument contains the entire
agreement of the parties. The parties have not made any agreements or
representations, oral or otherwise, express or implied, pertaining to
the subject matter of this Employment Agreement other than those
specifically included in this employment Agreement.
Section 12.2. PRIOR AGREEMENTS. This Employment Agreement supersedes
any prior agreements pertaining to or connected with or arising in any
manner out of the employment of Employee by Employer. All such prior
agreements are terminated and are of no force or effect whatsoever.
Article 13
Amendment of Agreement
No change or modification of this Employment Agreement shall be valid
unless it is in writing and signed by the party against whom the change
or modification is sought to be enforced. No change or modification by
Employer shall be effective unless it is approved by Employer's Board of
Directors and signed by an officer specifically authorized to sign such
documents.
Article 14
Severability of Provisions
If any provision of this Employment Agreement is invalidated or held
unenforceable, the invalidity or unenforceability of that provision or
provisions shall be deemed modified or severed only to the minimum
extent necessary to make said provision(s) valid and enforceable while
maintaining the intent of said provision(s). No such modification shall
affect the validity or enforceability of any other provision of this
Employment Agreement.
Article 15
Assignment of Agreement
Employer shall not assign this Employment Agreement without Employee's
prior written consent, but failure to obtain such consent shall not
affect-said assignee's obligations pursuant to paragraph 10.1(a) above,
which consent shall not be unreasonably withheld.
Article 16
Governing Law, Venue & Attorneys Fees
All questions regarding the validity and interpretation of this
Employment Agreement shall be governed by and construed and enforced in
all respects in accordance with the laws of the State of Florida. Venue
for any action arising in any manner out of the Employee's employment,
this Employment Agreement, or any of the terms contained herein shall be
the Federal and or State courts located in Palm Beach County, Florida,
regardless of where this Employment Agreement is to be performed. In
the event either party engages legal counsel to enforce any provision
contained in this Employment Agreement, the prevailing party shall be
entitled to all reasonable attorneys fees, investigative expenses,
costs, and court costs, whether or not a suit is actually filed, but
including all levels of appeal.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
in duplicate on the date and year first above written.
EMPLOYEE:
/s/ P. JASON LING
----------------------------------
P. Jason Ling
EMPLOYER:
1st Internet Group, Inc.
By:
/s/ WILLIAM CORLEY
-------------------------------
Name:
William Corley
-----------------------------
Title:
CEO
----------------------------
zum Tobel & Ling, LLP
7385 Nautica Way
Lake Worth, FL 33467
561.963.9727
Date: January 4, 2000
To: Securities and Exchange Commission
Re: The change in accountants of 1st Discount Brokerage, Inc. (
subsidiary of 1st Internet Group, Inc.).
The change in accountants resulted from zum Tobel & Ling, LLP resigning. The
resignation was the result of P. Jason Ling, CPA being employed by 1st Internet
Group, Inc. as the CFO and the resulting loss of independence required by
Generally Accepted Auditing Standards to perform a financial statement audit.
During the period that zum Tobel & Ling, LLP was engaged by the firm there were
no problems with the firm's accounting principles or practices, financial
statement disclosures, auditing scope or procedure, or compliance with
applicable rules of the Securities & Exchange Commission. The last audit
report of the financial statements dated 12/31/98 did not contain an adverse
opinion, a disclaimer of opinion, nor was it qualified as to uncertainties,
audit scope, or accounting principles.
Sincerely,
/s/ P. JASON LING
P. Jason Ling, CPA
For the firm
<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>
<RESTATED>
<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 1,739,341
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 397,960 2,417,741
<PP&E> 86,174 146,750
<DEPRECIATION> 45,600 57,589
<TOTAL-ASSETS> 504,042 2,614,483
<CURRENT-LIABILITIES> 266,343 1,079,986
<BONDS> 0 0
0 0
0 0
<COMMON> 47,688 57,770
<OTHER-SE> 186,880 1,476,727
<TOTAL-LIABILITY-AND-EQUITY> 504,042 2,614,483
<SALES> 0 0
<TOTAL-REVENUES> 1,245,198 5,578,649
<CGS> 0 0
<TOTAL-COSTS> 1,227,867 5,131,244
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 21,933 499,697
<INCOME-TAX> 0 181,650
<INCOME-CONTINUING> 21,933 318,047
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 21,933 318,047
<EPS-BASIC> .000 .06
<EPS-DILUTED> .000 .06
</TABLE>
