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As filed with the Securities and Exchange Commission on May 23, 2000
Registration Statement No. 000-29417
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
AMENDMENT NO. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
I CRYSTAL, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 62-1581902
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3237 KING GEORGE HWY., SUITE 101-B
SURREY, BC V4P 1B7, CANADA
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (604) 542-5021
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which each
to be so registered: class to be registered:
None Not Applicable.
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
===============================================================================
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
FORWARD LOOKING STATEMENTS
This Registration Statement contains forward-looking statements by the
registrant based on its current expectations about its business and its
industry. You can identify these forward-looking statements when you see
words such as "expect," "anticipate," "estimate" and other similar
expressions. These forward-looking statements involve risks and uncertainties
and actual results could differ materially from those anticipated in these
forward-looking statements as a result of such risk factors as discussed in
Business Description, Risk Factors and elsewhere in this Registration
Statement. The registrant undertakes no obligation to publicly update any
forward-looking statements for any reason, even in the event new information
becomes available or other events occur in the future.
Unless otherwise indicated, all references to "dollars", "$" or "US$" refer to
U.S. dollars and all references to "Cdn$" refer to Canadian dollars.
THE COMPANY
I crystal, Inc. (together with its subsidiary, the "Company") is a Delaware
corporation, incorporated on October 5, 1994, as Cable Group South, Inc.
Effective October 19, 1998 the Company undertook an 8:1 reverse stock split
and changed its name to SoftNet Industries, Inc. To avoid a conflict with a
similarly named company, the Company again changed its name to I crystal, Inc.
on July 29, 1999. The Company intends to ask its stockholders for approval to
change its name to "iCrystal, Inc." at a Special Meeting to stockholders
currently scheduled to be held on June 5, 2000. The Company believes this
change in its name will better reflect the Internet aspects of its software
development business.
From 1994 until late 1998, the Company had minimal operations and devoted its
efforts to corporate structuring, financial and business planning,
recruitment of directors and advisors, and raising additional financing. In
1998 the business of the Company became focused on the development and
licensing of Internet based software for computer based card and table games
for gaming and casino applications. In December 1998 the Company entered into
a licensing and put option agreement (the "Diversified License") with
Diversified Cosmetics International, Inc. ("Diversified") to license that
company's game and casino software. Diversified subsequently exercised the
put option (the "Put Option") granted in the Diversified License and required
the Company to acquire Diversified's casino software for Company Common Stock
and a promissory note. As of April 3, 2000, Diversified held 16.8% of the
Company's Common Stock and officers and directors of the Company held 26.5%
of Diversified's common stock. The Company's first revenues from the newly
focused business operations were realized in July 1999 and, therefore, the
Company has presented development stage financial statements for the periods
through June 1999. Since its founding, the Company has recorded significant
losses. At December 31, 1999, the Company has an accumulated deficit of
$5,775,600 and has a shareholders deficiency of $216,700. As of the three
months ended March 31, 2000, the Company had an accumulated deficit of
$5,948,400 and a shareholders deficiency of $158,300.
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BUSINESS
The Company is in the business of developing, acquiring, upgrading and
supporting Internet based games and casino and gaming software and developing
and maintaining websites for business to business enterprises that are
engaged in the Internet based casino and gaming business and associated
electronic commerce operations. The Company generally licenses the use of its
software on a non-exclusive basis to licensees for the payment of an initial
up-front fee and a percentage of the revenues generated by such licensees
whether at their websites or through sublicensees. While the current games
are focused on table and casino style games, the Company has the capacity and
intends to produce games that work on a variety of game platforms and span a
wide range of genres including action, adventure, strategy and simulation
models to attract game enthusiasts, value buyers and foreign casino players.
In addition, the Company offers website development and transaction support
services, cash transaction processing and software upgrading to its
licensees. Merchant banking and e-cash services for licensees of the
Company's software have been contracted through agreements with Digital
Commerce Bank, Ltd. ("Digital Commerce") and CTC, Inc.("CTC"). Licensees of
the Company are provided direct access to the merchant accounts for the
processing of gaming transactions on Company designed websites. The
licensees are responsible for providing credit card processing information
and either paying the processing fees directly (under the CTC agreement) or
as an offset against gross (under the Digital Commerce agreement). Currently
such merchant banking accounts and e-cash services are conducted in the name
of the Master Licensee. In either event, the processing costs are deducted
from gross revenues under the Master License and therefore are a cost of
business incurred by the Master Licensee. The Company may enter into
additional agreements for such services in the ordinary course of business.
The Company elected to assure its licensees with access to the Company's
pre-established merchant accounts with Digital Commerce and CTC without the
need to pay up-front fees for establishing merchant accounts. As compensation
for the Digital Commerce arrangement, the Company issued 1,000,000 shares of
Common Stock of the Company as payment for the up-front fees to acquire the
merchant banking number. Similarly, the Company issued 1,000,000 shares of
Common Stock in lieu of payment of a one time service fee to CTC to acquire
that merchant account number. Licensees of the Company's casino websites and
gaming software thereby have the benefit of the access to such accounts
without the upfront fees. Although the Company charges additional fees for
such ongoing services, such fees vary with each licensing arrangement.
Company management expects that its principal revenues will be derived from
licensing revenues. The Company's disclosure of the terms of its agreements
with Digital Commerce and CTC may impact the Company's ongoing relationship
with Digital Commerce or future contractors who now have full access to the
information in such agreements. Disclosure of such terms may also negatively
affect the Company's ability to negotiate more favorable agreements with
other merchant banks since they will be able to refer to the terms of the
agreements with Digital Commerce and CTC.
In April 1999, the Company entered into its first licensing agreement (the
"Master License") for its gaming software with DCI, Inc. (the "Master
Licensee"), a corporation organized in Dominica which also operates under the
working name of "Dynamic Casino Investments". The Master License anticipates
that the Company will develop six Internet based casino websites for the
Master Licensee. The first website, Video Poker Palace, began operations in
mid-1999. In exchange for establishing the website and licensing its casino
software to the Master Licensee, the Company will receive 40% of the Master
Licensee's net gaming revenues, subject to certain rebates and discounts for
advertising and promotional efforts undertaken by the Master Licensee. Total
revenues received by the Company under the Master License in 1999 were
$90,900 and $105,500 for the three month period ended March 31, 2000. The
Master Licensee accounted for substantially all of the Company's revenues in
1999 and in the subsequent three month period. The Company intends to pursue
additional licensing agreements with other parties in the ordinary course of
business.
The Company entered into the Master License with the Master Licensee on April
8, 1999. Under the Master License the Company agreed to license to the
Master Licensee a minimum of 6 new casino software packages and websites per
year, and to provide any updates to such casino software and websites for a
term of 10 years at no extra cost. The Master License grants the Master
Licensee the right to extend the license for an additional five years. Under
the Master License, the Company will be entitled to 40% of the Net Gaming
Revenue derived from revenue generated by the casino or websites licensed to
the Master Licensee. Net Gaming Revenue is defined in the Master License as
gross revenues less customer payouts, e-cash charges, fees, holdbacks, and
chargebacks, and taxes or levies to which the Master Licensee is subject.
Additionally, the Company will be entitled to 50% of up-front fees charged by
the Master Licensee to any sub-licensees, and 10% of revenue derived from
sales of the software. Under the terms of an amendment to the Master License
the Company had the option to spend up to a specified amount on promotion of
the Master Licensee's website in exchange for an additional 10% share of net
gaming revenue, but not more than the total amount spent by the Company. The
amendment has subsequently expired and the Company spent approximately
$70,000 on such promotional activities.
Effective August, 1999 the Company purchased the proprietary rights to the
bingo software ("MetroBingo") that was being developed by Power Star Corp.
("Power Star"). The Company has been developing and improving the bingo
software and intends to begin licensing MetroBingo in the second quarter of
2000. Management believes that it will then have applications in both the
table game and casino gaming aspects of the Company's business plan.
On March 13, 2000, the Company's subsidiary, I crystal Software, Inc. ("I
crystal Software") a British Columbia corporation, licensed additional
software under the terms of an agreement (the "AA Agreement") from American
Amusements Co. ("American Amusements"). The software consists of additional
versions of video poker, slot machine blackjack, keno, scratch cards and
other games, which may be developed by American Amusements during the
five-year term of the AA Agreement. The Company believes I crystal
Software's acquisition of the additional software will broaden its product line.
The Company's expenses are based in part on the Company's product development
and marketing budgets. Many of the costs incurred by the Company to develop
sell and license its products are expensed as such costs are incurred, which
often is before a product is released or licensed. In addition, a significant
portion of the Company's expenses are fixed. As the Company increases its
production and licensing activities, current expenses will increase and, if
revenues from previously released products are below expectations, net income
is likely to be disproportionately affected.
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PRODUCTS
The Company's current and upcoming releases are based on a combination of games
derived from the Company's freely accessible traditional card and table games,
original game concepts created by the Company, and intellectual property or
other rights licensed from third parties. In releasing games and gaming items
based on licensed intellectual property rights, the Company intends to
capitalize on the name recognition, marketing efforts and goodwill associated
with the underlying property.
COMPANY CASINO SOFTWARE
The Company produces proprietary Internet based casino style gaming software
with on-line transaction processing capabilities. The Company's casino software
packages are generally based on a specific gaming theme or a specific gaming
venue. For example, the Company's "Video Poker Palace" program offers thirty
(30) versions of video poker, including versions like "Jacks or Better," "Deuces
Wild," and "Joker Poker." The Company has also developed its own versions of
poker such as "Flushorama," "King of the House," and "Straight Flush Bonus."
The Company believes its future success will be driven by its variety of
games, its website graphics and its relatively short development cycle, all
of which should attract and retain players. The Company's themed casino
software packages come with an accessory game package to provide a variety of
experiences for the players. For example, the Company's "Blackjack Castle"
software offers eight variations of blackjack. The Company's "Sizzling Slots"
software, currently under development, will offer more than 20 different slot
machines styles.
The Company's focus is to provide its licensees with a wide variety of gaming
themes, game versions and frequently updated graphics so that players will be
attracted to the website initially and will want to return to experience the
updated software, to try new applications and to use e-commerce applications.
The four main casino themes the Company has developed are: video poker,
blackjack, slot machines and a casino featuring games preferred by the Asian
market, such as pai gow and baccarat. The Company believes that players will
search for, and keep returning to, casino websites using its software due to
the variety of games and gaming themes offered. The Company believes that
players, given a choice of gaming venues, will prefer to play in environments
that present a wide variety of games that are regularly updated but offered
in a familiar environment. While the Company anticipates that most players
will seek sites with rich and colorful graphic displays, some players who
have more limited time or technology access may prefer a less rich
environment with faster access speeds. The Company intends to provide game
versions that meet both expectations.
As with all commercial Internet software, security for commerce and information
exchange is a paramount requirement imposed by the licensees and the regulatory
environments to which Internet gaming is subject. To this end, the Company has
developed a security protocol, a communications protocol, and financial
transaction software which utilize specially developed, state-of-the-art
encryption technology, to ensure security, ease of use, and real time banking
for its licensees, and to limit access to players who are eligible, by age,
credit status and residence, to participate.
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GAME APPLICATIONS
The Company's first general audience non-casino style game will be
MetroBingo, an internet bingo site currently under development by the
Company. The underlying game software was acquired by the Company from Power
Star in August 1999 for 1,450,000 shares of Common Stock. MetroBingo will be
a multi-player game designed to provide players with an interactive gaming
experience. The games are designed to be quick, approximately 18 per hour,
and will feature attractive graphics utilizing the Java programming language
which the Company believes will reduce lengthy downloading times. The Company
currently plans to complete development of the MetroBingo software and to
make it available for licensing in the third quarter of 2000.
PRODUCT DEVELOPMENT
INTERNAL DEVELOPMENT
The Company has one wholly-owned subsidiary, I crystal Software based in
Surrey, British Columbia, Canada, which researches, develops and tests each
software application licensed from third parties or being developed
internally by the Company. The Company has located its operations in the
Vancouver region partly because the area has a broad pool of technical
personnel, programmers, web designers and support services. In addition to
developing and testing the Company's Internet based casino software and
games, I crystal Software designs and develops each licensee's website and
the overall theme and visual design of the licensee's software package. To
this end I crystal Software maintains a team of software programmers, graphic
designers and website developers, specialized in 3-D and conventional
graphics programming.
I crystal Software has a webmaster department charged with researching
Internet developments and innovations related to the Internet based casino
industry and serves as the Company's security division and systems
administrator, in charge of securing both the Company and its software from
unauthorized penetration.
To develop its products, the Company relies principally on its group of
programmers, web designers and graphic artists who work at I crystal Software
as employees or who work at the Company under service contracts. The Company
also acquires software through licenses with third parties and plans to
acquire rights to other complimentary products through strategic and
distribution arrangements with other interactive entertainment and leisure
companies.
The Company has increased its spending on research and development over the
past two fiscal years to $658,000 for the fiscal year ending December 31,
1999, as compared to $90,000, in the year ended December 31, 1998. Research
and development spending was $61,600 for the three month period ended March
31, 2000.
The Company develops and produces it products using a model in which a core
group of creative, production and technical professionals on staff at the
Company, in cooperation with the Company's marketing group, have overall
responsibility of the development and production process and for the
supervisor and coordination of internal and external resources. This team
provides the creative elements to complete a project using, where
appropriate, outside programmers, artists and sound and special effects
experts.
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The Company currently is in a growth mode and plans to give first priority to
rapid response to product requests. As resources allow the Company plans to
expand its internal review and quality assurance process to include
pre-development, development and production phases, with specific milestones.
This procedure is consistent with other industry participants and is designed
to enable the Company to manage and control production timetables, to
identify and address production and technical issues at the earliest
opportunity, and to coordinate revenues, quality control and distribution
phases.
EXTERNAL DEVELOPMENT
The Company has relied heavily on software products it acquired from
independent developers. Acquired titles generally are acquired and marketed
under the Company's name. If titles are acquired through licenses, such
licenses will generally provide the Company with distribution rights for a
specific period of time and for specified platforms and territories. In other
instances titles may be acquired outright by the Company from third parties.
In consideration for its services, a developer may receive a royalty based on
revenues and may receive a nonrefundable advance which may or may not be
recouped by the Company.
PRODUCT SUPPORT
The Company provides various forms of product support to both its internally
and externally developed titles. The Company's quality assurance personnel
are involved throughout the development and production processes for each
title published by the Company. All such products are subjected to extensive
testing before release in order to insure compatibility with the widest
possible array of hardware configurations and to minimize the number of bugs
and other defects found in the products. To support its products after
release, the Company provides 24-hour operator help lines. The customer
support group tracks customer inquiries and this data is used to help improve
the development and production process.
PUBLISHING AND DISTRIBUTION ACTIVITIES
MARKETING
The Company's plans to expand its marketing efforts to include on-line
activities such as the creation of World Wide Web pages to promote specific
Company titles, as well as public relations, print and broadcast advertising,
industry promotions and product sampling through demonstration software
distributed through the Internet.
INDUSTRY
The Company is currently developing Internet based games with both gaming and
non-gaming attributes. In addition to the Company's casino software programs,
the Company is developing a free keno game site ("Free Keno") which it plans to
operate. The Free Keno site is based on the popular keno game. The Company's
website, will, when completed, offer free keno games to users with cash
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prizes to be supported by revenues from banner ad sales and direct e-mail
advertising directed at registered users of the free Keno site.
GAMING
There are many other licensors of Internet based casino software and various
providers of alternative entertainment activities, all competing for the
public's entertainment dollar. The Company competes for the public's monthly
expenditures on entertainment with other Internet based gaming activities, cable
television, movie theaters, sporting events and other recreational activities.
As the Company's primary source of revenues will be a percentage of the net
gaming revenues generated by its licensees at their Internet casino websites,
the Company's revenues will be directly affected by the increase or decrease in
participation in such activities by the public. The Company cannot estimate how
such competing activities may grow or to what extent such growth would decrease
the Company's revenues.
The Internet based gaming industry began in 1996 when the first on-line casinos
established operations, principally from operating bases in the Caribbean and
Central America. Technology constraints resulted in limited graphics, slow play
and a reliance on software which was difficult for the players to understand.
Companies such as Cryptologic and Microgaming were among the first to license
their software to the industry.
As of January 2000, the current Internet based casino industry has grown to over
650 e-gaming websites, while expected revenues for "e-gaming" sites in 1999 is
expected to be around $1.2 billion., expanding from its North American base, to
such markets as Europe, China and Australia. Expenditures for gambling in the
U.S. for 1997 exceeded $100 billion. Some predicted annual revenues for 2000
for the Internet based gaming in the U.S. alone at over $8 billion, while
other more recent sources are predicting that on-line gaming revenues will be
about $3 billion in 2002. Some in the industry are predicting an increase in
player participation from 3 million players in 1999 to 16 million players by
the year 2002.
COMPETITORS
There are several companies which offer free game websites similar to the
Company's planned Free Keno and Metrobingo websites. These include uproar.com
and gamesville.com, both of which operate bingo based websites.
More generally, the Company faces competition from a number of other
companies that license Internet based gaming software, many of which are well
established and have significantly greater resources than does the Company.
Currently, the Company believes its primary competitor is Starnet
Communications International Inc. ("Starnet"). Starnet and its subsidiaries
have been licensing Internet based casinos since 1997. Utilizing operating
subsidiaries in Antigua, Starnet also licenses adult entertainment websites,
lotteries, parimutuals, and a sportsbook. The Company also faces competition
from Boss Media, which has been licensing Internet based gaming websites
since 1997 and is known for high quality gaming software. Currently Boss
Media licenses are reported to require an upfront fee of $300,000, ongoing
royalty payments of 35% of net gaming revenue and a monthly charge of over
$25,000 to service each licensee's hosting and bandwidth requirements. In
addition, Microgaming, a privately held company based out of South Africa,
has been licensing software since 1997. Microgaming customizes most of its
game packages for its licensees. Cryptologic has been licensing
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Internet casinos through its wholly owned subsidiaries in Cyprus and Antigua,
since 1997. Cryptologic also handles credit card processing for all of its
licensees. Cryptologic recently settled a litigation matter in California in
which an on-line gambler refused to pay her casino debts, characterizing them
as illegal gambling contracts. Cryptologic settled the matter by paying the
legal fees and certain bank charges of the gambler. See also "REGULATORY
CONSIDERATIONS-North America" for additional discussion.
CUSTOMERS
The Company's Free Keno website will, when completed, be available for any
registered users and thus the number and scope of users is hard to predict.
The Company entered into its first gaming licensing agreement in April 1999 with
the Master Licensee, but has not yet secured licensing agreements with other
licensees. As a result, all of the Company's revenues are dependent on the
performance of the Master Licensee's website. However, the Company continues to
pursue additional licensing arrangements with other parties.
REGULATORY CONSIDERATIONS
Worldwide governmental regulation of Internet based gambling is varied and still
evolving. While it is currently legal in some countries, predominantly certain
countries in the Caribbean and Latin America, to set up regulated Internet based
gaming facilities, other countries, such as the United States, are considering
restrictions on Internet based gambling.
NORTH AMERICA
The United States Congress is currently considering passing the Internet
Gambling Prohibition Act, commonly known as "the Kyl Bill," sponsored by
Senator John Kyl from Arizona. If passed, the Kyl Bill would preempt state
laws and prohibit persons involved in a gambling business to use the Internet
to place, receive or otherwise make a bet or wager or to send, receive, or
invite information assisting in the placing of a bet or wager. An important
element of the Kyl Bill is that it does not place legal liability on the
individual player and only attempts to regulate persons engaged in a gambling
business who knowingly use the Internet to accept wagers from U.S. residents.
In its current form, the Kyl Bill provides for penalties of the greater of
the amount wagered or $20,000 and a maximum 4 year prison term against
persons who take or place bets, with the possibility of a permanent
injunction against such activities. State Attorneys General would be allowed
to bring actions under the Kyl Bill. The Kyl Bill was passed by the Senate
and sent to the House of Representatives in November 1999. In January 2000
the House referred the Kyl Bill to the House Committee on the Judiciary. The
House Judiciary Committee approved the Kyl Bill in April 2000 and sent the
Kyl Bill back for a vote by the full House of Representatives where it is
currently awaiting a vote.
While U.S. Federal law on Internet based casino style gaming remains
uncertain, federal courts have enforced the Wire Communications
Act (the "Wire Act") against on-line sports book operators. In February
2000, a U.S. Federal Court in New York found the president and owner of World
Sports Exchange; an internet based sports book, guilty of violating the Wire
Act for accepting wagers for sporting events over interstate telephone lines.
Individual U.S. states have also begun to prohibit or regulate Internet based
gambling. Some states such as Missouri and New York have directly prosecuted
operators of website casinos accepting wagers from residents of their
respective states, obtaining verdicts resulting in jail time and fines for
operators. Other states, such as Minnesota are obtaining court ordered
injunctions against website casinos to block them from accepting wagers from
state residents. In other states, such as California state authorities have
begun to apply to Internet based gambling laws prohibiting the use of
telephone lines for the transmission of gambling information and wager, as a
basis for prosecution of Internet based companies transmitting gambling
information. Civil suits in California have also prevented banks and credit
card companies from collecting amounts owed on credit cards used to place
wagers, thereby resulting in some credit card companies refusing to allow
their cards to be used for the placing of wagers in the future. Additionally,
in states such as California and New York where the legal status of internet
based gambling remains uncertain, legislatures are considering passage of
bills to specifically prohibit internet based gambling.
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While the Company designs and licenses the casino websites, and does not
engage in accepting or placing wagers, the Master Licensee does accept
wagers, as may future licensees of Company software. As a result, the Master
Licensee and future licensees may face prosecution in U.S. states, such as
those listed above, if their websites are used for gambling purposes by
residents of those states. Such violations could result in legal actions
against the Master Licensee, and possibly future licensees, resulting in
civil and criminal actions, convictions, fines and injunctions against them.
Although the Company has only engaged in the design and licensing of such
casino websites to third parties, and does not operate such websites, there
can be no assurance that state authorities would not pursue similar penalties
against the Company in the event a licensee of Company designed websites has
accepted wagers from a prohibited jurisdiction.
The Company's revenues would also be adversely affected by any legal actions
taken against the Master Licensee if such legal actions resulted in a
decrease in the amount of net gaming revenues generated by the Master
Licensee. Additionally, the Master Licensee and future licensee may find
that some revenues are denied to them by states, such as California, who
refuse to enforce payment by users of Company licensed casino websites. Such
an event would again adversely affect the Company as Company revenues are
directly tied to the net gaming revenues of its Master Licensee.
The gaming industry itself is examining possible forms of self-regulation for
online operations. An industry association, the Interactive Service Association,
has drafted a voluntary code of conduct for online gaming. These efforts at
self-regulation by the on-line gaming industry have been made more urgent by
federal law enforcement initiatives aimed at Internet gambling.
If the Kyl Bill passes, and the individual states proceed to prohibit or
restrict online gambling, the Company's Master Licensee and any future licensees
may no longer be able to pursue their business strategies in the U.S. market. As
the Company's primary source of revenues is the percentage of net gaming
revenues it receives from its Master Licensee, the Company's overall operations
and income would be adversely affected if it lost access to a major market.
Additionally, although the Company does not operate the websites it licenses,
should the Master Licensee or future licensee's of the Company's products
violate the laws of U.S. jurisdictions, the Master Licensee, future licensees
and the Company may be prosecuted for such violations. While the Company plans
to coordinate with the Master Licensee and future licensees to share information
concerning the developments which impact the jurisdictions in which such
licensees may operate, there can be no assurance that a licensee of the
Company's software will not violate changing U.S. gambling restrictions at the
state or federal level.
CANADA
Currently, each province sets its own regulations for Internet based gambling.
However, there has been some public discussion by federal politicians about
possibly enacting federal regulations on Internet based gambling in Canada.
Currently, however, there are no proposed or pending bills in the Canadian
Parliament which would regulate Internet based gambling in Canada on a national
level.
Due to an uncertain regulatory environment, the Company's Master Licensee
currently intends to focus on markets outside of North America until such time
as U.S. and Canadian laws regarding Internet gaming are clarified. The Company
has designed its software to be capable of blocking wagers originating from
specified jurisdictions, such as the U.S. and Canada, thereby enabling its
licensees to ensure that gaming laws inside or outside the U.S. and Canada are
not violated. Although the
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Company's software is capable of screening out wagers placed from any
jurisdiction, the Company does not have control over the operation of its
licensees servers or over the websites utilizing its software once such
software is licensed to third parties, including the Master Licensee. The
Company believes that the Master Licensee is not currently screening wagers.
However, the Company will also work with its licensee, major credit card
providers, Internet service providers and Internet based self regulatory
organizations to confirm that players at Company designed Internet based
casino websites are of legal age, and reside in jurisdictions where Internet
wagering is legal.
While the Company will work with the Master Licensee and its future licensees to
stay abreast of legal developments in which such licensees operate, there can be
no assurance that licensee of Company software will not violate changing
Canadian gambling restrictions at the provincial or federal level. Should the
Master Licensee or future licensees of the Company's products violate the laws
of the various Canadian jurisdictions, the Master Licensee, future licensees and
the Company may be exposed to claims for such violations.
AUSTRALIA
Australia has regulated, rather than prohibited, Internet based gaming. The
Australian Government has placed strict guidelines and taxation rates, as high
as 50%, on Internet based gaming operators. Recently, the country's Prime
Minister indicated his intention to seek a ban on Internet
based gambling in Australia despite strong opposition from that country's
states and territories.
One of the first Australian based Internet gaming sites to be established was
Lassiters Online Casino ("Lassiters"). Lassiters, which opened in April 1999
near Alice Springs in the Northern Territory, reported over 3,500 customers
producing over $2,000,000 in net gaming revenue by their third month of
operation.
GLOBAL OUTLOOK
With the exception of the U.S., a significant number of governments appear to
be accepting Internet based gaming and are attempting to regulate and tax
this industry. Many countries in Europe now allow Internet based lotteries,
and many have blueprints for full Internet gaming regulations.
Caribbean countries such as Antigua, Dominica, and Aruba currently allow
regulated Internet based gaming. Antigua, for example, had licensed 48 gaming
operators as of July 1, 1999. Dominica and Aruba together have nearly as
many. The Caribbean will likely continue to be a major center for the
Internet based casino industry even if other countries put regulations or
prohibitions in place. The Company's Master Licensee currently operates its
site out of Dominica.
SALES AND MARKETING
The Company currently has one staff member devoted to marketing and licensing
sales. The Company also has three staff members who devote a portion of their
time to analyzing market information for the Company and its Master Licensee.
The Company is seeking to add an additional person to its marketing staff in
2000 to increase the Company's marketing effectiveness.
INTELLECTUAL PROPERTY
The Company uses the tradename "I crystal Inc." under common law trademark
protection, but has no registered trademarks on such tradename or any other
tradenames or service marks utilized by it.
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The Company regards its software products as proprietary in that title to and
ownership of the software it develops resides exclusively with the Company.
The Company relies largely on its license agreements with licensees, its own
software protection schemes, confidentiality procedures and employee
agreements to maintain the trade secret aspects of its products. The Company
does not currently intend to apply for copyright or patent protection for its
software products. The Company believes that, due to the rapid pace of
innovation within the internet software industry, factors such as
technological and creative skill of personnel, knowledge and experience of
management, name recognition, maintenance and support of software products,
the ability to develop, enhance and market software products and services and
the establishment of strategic relationships in the industry are as important
as patent, copyright and other legal protections for its technology.
The Company believes that it has all necessary rights to market its products,
although there can be no assurance that third parties will not assert
infringement claims in the future.
EMPLOYEES
As of May, 2000, there were 12 persons dedicating full-time services to the
Company of whom four were acting as senior programmers, two were acting as
system administrators, and six were involved in website development,
marketing, graphic art development and project management. Of those persons,
six were full-time employees and six were under contractual arrangements with
the Company. Competition for qualified management and technical employees is
intense in the Internet software industry and the Company's success will
depend in large part upon its ability to continue to attract and retain
qualified employees. The Company believes that its relations with its
employees are excellent.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue creates risks for the Company. The Year 2000 issue is the
result of computer programs being written using two digits rather than four
digits to define the applicable year. Any computer software program or
hardware that has date-sensitive software of embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000 which could result
in system failures or miscalculations causing disruptions to operations and
normal business activities.
The Company is a comparatively new company and as a result, the software and
hardware the Company uses to operate its business have all been purchased or
developed in the last several years. While the Company cannot guarantee that
it has eliminated all risks related to the Year 2000, the Company can state
that steps have been taken to minimize the risks associated to the Year 2000
issue.
The Company has developed and implemented Year 2000 compliance plans related
to both its internal business operations, as well as its software
development. With respect to the Company's Year 2000 plan the Company has
ensured that all of its hardware equipment and software used in normal
business operations are certified as Y2K compliant. The Company's strategy
involves maintaining an extensive inventory of any and all computer-related
systems and software, whether initially thought to be exposed to the Y2K bug
or not. An assessment is made of each inventory item identifying potential
risks or
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uncertainties. All hardware that is not Year 2000 compliant is disposed of,
and all software used is certified to be Year 2000 compliant through written
documentation provided by the vendor.
The Company is committed to providing releases of software which are
certified as being Year 2000 compliant. The Company has not developed all of
its software internally but has taken steps to ensure that all date fields
are compatible to the year 2000. However, certain subcomponents may not have
been properly engineered to ensure date compatibility. Steps have been taken
to confirm sub-components compatibility, but this area still remains one of
moderate risk. Third party products that the Company has purchased, or
intends to license in the future have been, or will be, researched for Year
2000 compliancy.
The cost to the Company to address the Year 2000 issue has been minimal as
most of the Company's development work has taken the Year 2000 issue into
consideration from the onset of such development. This includes product
development, testing and the cost of ensuring that the hardware and software
used in internal operations are Year 2000 compliant.
The risks that the Company faces as a result of the Year 2000 issue include
complete interruption to its operations and development, however this risk
has been mitigated through the Company's Year 2000 plan. Other risks include
possible interruption to communication for the users of Company software.
Users of Company software include future licensees and the Master Licensee.
There is a risk of liability if the Master Licensee's website operations are
interrupted resulting in adverse affects in its business operations. In the
worst case scenario a licensee may lose the ability to operate a Company
designed website until such time as the Year 2000 bug is identified and
corrected. If the loss is of significance to the licensee, there is the
possibility of litigation and claims against the Company.
The Company has prepared a contingency plan that covers worst case scenarios
that the Company may face. The plan covers how to deal with both internal
systems that may be affected by the Year 2000 issues, as well as how to deal
with Company software problems and possible interruptions to its licensee's
operations.
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RISK FACTORS
The Company's business and investment in its securities is subject to a
number of risks which, in addition to ordinary business risks, include the
following:
DEVELOPMENT STAGE COMPANY WITH NO HISTORY OF EARNINGS
The Company has only recently entered into its first Internet based casino
software licensing agreement and has a limited history of revenues or
earnings from such activities. The Company may not be successful in securing
other licenses for its casino software or in developing its general game
related software. There is no assurance that the Company will generate either
revenues or earnings from its existing licensee or from any other licensing
arrangements that it may enter into in the future.
The Company is at an early stage of entering the commercial marketplace. The
Company's future operating results are subject to a number of risks,
including its ability to implement its strategic plan, to attract qualified
personnel and to raise sufficient financing as required. Management's
inability to effectively guide the Company's growth (including implementing
appropriate systems, procedures and controls) could have an adverse effect on
the Company's financial condition and operating results.
UNCERTAINTY OF ADDITIONAL CAPITAL
The Company does not anticipate achieving positive cash flows from operations
until the second quarter of 2000. Therefore, the Company's financial position
for at least the next 12 months is contingent on its ability to raise money
through equity or debt financing to meet the financial needs that are not
funded from operations. The Company will seek to raise additional capital
either through the sale of equity or debt securities in private or public
financing or through strategic partnerships, in order fully to finance,
develop, market and upgrade its casino software programs and websites. The
Company cannot offer assurances that funds will be raised when it requires
them or that the Company will be able to raise funds on suitable terms.
Failure to obtain such financing when needed could delay or prevent the
Company's planned software development and licensing projects, which could
adversely affect the Company's business, financial condition and results of
operations. If additional capital is raised through the sale of additional
equity or convertible securities, dilution to the Company's stockholders is
likely to occur.
COMPETITION
The Company faces direct competition from a number of other companies, many
of which have greater resources. Many of the Company's competitors have well
established track records and customer bases in developing software generally
or in developing software games and gaming. As a relatively new company
entering into the market place, the Company has not yet established a
reputation or market presence in the industry and there is no assurance that
it will. In addition, since the Company's revenues are substantially
all derived from its Master Licensee, the Master License is specifically
discussed and disclosed in this registration statement thereby making that
information available to current or future competitors or entities dealing
with the Company. This disclosure may impact business negotiations between
the Company and such entities in the future.
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TECHNOLOGICAL DEVELOPMENTS
Internet based industries in general, and the Internet based casino industry
in particular, are subject to rapid changes arising from new technological
developments and evolving industry standards. The Company's success will
depend heavily on its continuing ability to develop and introduce
enhancements to its existing casino software and new software or related
products that meet changing markets for on-line games and gaming. The Company
will constantly be required to commit significant resources to continued
research and development in order to remain competitive. However, the Company
cannot be certain that it will develop the software or technologies needed to
ensure the Company's future success or that its casino or general games
software will not become obsolete due to the introduction of alternative
technologies. If the Company cannot continue to innovate successfully, its
business and operating results could be adversely affected.
GOVERNMENT REGULATION
Every Internet business faces the risk of having to comply not only with the
laws of its home jurisdiction, but also with the laws of the countries where
its customers reside. With respect to Internet based casinos, many countries
have enacted or are considering enacting laws which may regulate or prohibit
Internet based gambling. The Company faces the risk that potential government
regulations in various jurisdictions could reduce the potential markets of
its licensees or the amount of revenues such licensees may generate in such
markets or both. The Company also faces the risk that its licensees may face
extra-territorial prosecution as a result of customers residing in regulated
countries visiting a licensee's Internet casino site thereby generating
increased uncertainty in the Company's revenues obtained from licensing. If
any such risks were to materialize, the Company's financial condition and
results of operations would be adversely affected. While the Company does not
engage in the operation of casino websites, and serves only as a developer
and licensor of casino websites, there can be no assurance that, in the event
of government regulation of Internet based gambling, the Company would not be
subjected to prosecutions by government authorities in jurisdictions where
Internet based gambling is prohibited. However, the Company has not been made
aware of any circumstances which would lead it to believe that it would be
prosecuted for the actions of its licensees.
To date, while general Internet games have not been subject to special
government regulations, there is no assurance that this sector will not
become subject to regulatory oversight. See "Regulatory Considerations" for a
more complete discussion.
THE COMPANY DERIVES A SUBSTANTIAL AMOUNT OF ITS REVENUES FROM FOREIGN SOURCES
The Company plans to license its software in countries outside North America
and to derive a portion of its games revenues and most of its gaming related
revenues from licensees in such jurisdictions. The Company intends to expand
these activities through licenses, direct and indirect software sales, and
localization activities. These activities will require separate management
focus and a full understanding of the international marketplace, including
skills not currently available at the Company. The Company's international
activities and its overall results will therefore be subject to certain
risks inherent in international trade, many of which are beyond its control,
such as changes in laws and policies affecting trade, investment and taxes
(including laws and policies relating to the repatriation of funds and to
withholding taxes), difficulties in attracting and retaining a skilled local
work force, differences in local fiscal discipline and the instability of
foreign economies and governments. There can be no assurance that the Company
will be able to increase international revenues or that the foregoing local
factors will not have a material adverse effect on the Company's future
revenues and, consequently, on the Company's overall business, operating
results and financial conditions.
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The Company's costs are generally paid in U.S. and Canadian currencies while
its revenues, generally paid in U.S. dollars, may at times be paid in
non-U.S. or Canadian currencies. Therefore, Company's revenues and operating
results may be affected by fluctuations in the exchange rates applicable to
its licensees. Currency exchange rates are determined by market factors
beyond the Company's control and may vary substantially during the course of
a production period. Further, the Company's ability to repatriate to Canada
funds arising in connection with foreign licensees may be adversely affected
by currency and exchange control regulations imposed by the country in which
the Company's casino software is exploited.
PROTECTION OF THE COMPANY'S INTELLECTUAL PROPERTY IS LIMITED
The Company, other than through confidentiality agreements and restrictions
it places on its licensee's through its licensing agreements, does not retain
or protect its proprietary and intellectual property rights. Unauthorized
parties may copy and distribute the Company's casino software or certain
portions or applications of its software. In addition, other companies may
independently develop and produce software which is similar to, or imitates,
the Company's software. The Company has no registered copyrights or patents
in either the U.S. or Canada for its gaming software.
The Company does not have and does not intend to apply for patents on its
casino or game software or its licensed websites. Management believes that
the patent application process in many countries in which the Company intends
to sell or license products would be time-consuming and expensive. In
addition, patents would have the effect of publicizing the source code or
other proprietary aspects of the Company's products. Finally, the Company
intends continually to improve and upgrade its casino and game software, and,
as a consequence, any patent protection may be out of date by the time the
patent is granted.
In addition, the Company may in the future be notified that it is infringing
upon certain patent and/or other intellectual property rights of others.
Although there are no such pending lawsuits against the Company or unresolved
notices that the Company is infringing upon intellectual property rights of
others, there can be no assurance that litigation or infringement claims will
not occur in the future. Such litigation or claims could result in
substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition and results of
operations. If it appears necessary or desirable, the Company may seek
licenses under patents or other intellectual property that it is allegedly
infringing. No assurance can be given, however, that licenses could be
obtained on commercially reasonable terms or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain the
necessary licenses or other rights could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL AND PROGRAMMING STAFF
The Company is highly dependent on key members of its management and its
programming staff . The loss of the services of any of them may adversely
affect the Company's ability to achieve its business plan. Recruiting and
retaining qualified technical personnel to carry out research and development
and technical support will be critical to the Company's future success.
Although management believes that
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<PAGE>
the Company will continue to be successful in attracting and retaining
skilled personnel, it can offer no assurance that the Company can accomplish
this objective on acceptable terms. The Company has not implemented key
person insurance on any management employee.
Although the Company performs almost all of its software development
in-house, the Company hires the services of some individuals on a contract
basis and pays for the provisions of some services related to its business
from third parties. A disruption in the supply of such services could have an
adverse impact on its business and financial results of the Company,
particularly at a time when the Company is attempting to develop new game
software, build brand identity and customer loyalty. In addition, an increase
in prices from its service providers could also have an adverse impact on the
Company's business and financial results.
THE COMPANY'S STOCK PRICE MAY BE VOLATILE
In recent years and months, the U.S. stock market has experienced significant
price and volume fluctuations. These fluctuations, which are often unrelated
to the operating performances of specific companies, have had a substantial
effect on the market price of stocks, particularly stocks like the Company's.
It is also possible that the Company's operating results will not meet the
expectations of its public market analysts, which could have an adverse
effect on the trading price of its common shares. Accordingly, the market
price for the Company's Common Stock may fluctuate substantially.
THE COMPANY DOES NOT PLAN TO PAY DIVIDENDS
The Company has not yet realized positive net income and has not, since
incorporation, paid dividends. The Company expects to use any earnings to
fund it ongoing operations and to fund future casino software development.
MANAGEMENT OF RAPID GROWTH AND LIMITED OPERATING EXPERIENCE
The Company anticipates that the management of its growth will be a key
challenge. Failure effectively to meet this challenge could have a material
adverse effect on its operating results. Successful commercialization and
licensing of internet based casino software and websites will require
management of a number of operational activities in which the Company has
little experience. There is no assurance that, if the Company's business
grows rapidly, the Company will be able to manage such growth successfully.
SHARES ELIGIBLE FOR FUTURE SALE
At April 3, 2000, the Company had outstanding 14,682,800 shares of common
stock, $.01 par value per share (the "Common Stock") of which 5,180,300
shares were eligible for resale without restriction. Subsequently in May
2000, an additional 1,000,000 shares of Common Stock are to be issued by the
Company for Common Stock sold in the first and second quarters of 2000 (the
"2000 Subscriptions"), all of which will be, when issued, restricted
securities eligible for resale within 1 year under Rule 144 and Regulation S.
The 2000 Subscriptions have "piggy-back" registration rights for a period of
one year in the event the Company proceeds to register shares of Common Stock
under the Securities Act of 1933. In addition, there are 2 million shares of
Common Stock held by directors and officers which will be eligible for resale
pursuant to Rule 144 of the Securities Act (but subject to the relevant
volume limitations) and 2.5 million shares of Common Stock held by
Diversified which would be eligible for resale but was being held for
distribution on liquidation of Diversified. See Part II, Item 4. Recent Sales
of Unregistered Securities. Under those exemptions such shares will
generally be available for resale in the U.S. one year from the date of
respective issuance. This may adversely affect the market price of the
Company's shares and could affect the amount of trading in such shares.
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This may adversely affect the market price of its shares and could affect the
amount of trading of such shares.
MINIMAL TRADING HISTORY OF COMMON STOCK - POSSIBLE STOCK PRICE VOLATILITY
The Company's Common Stock traded on the OTC Bulletin Board under the symbol
"ICRS" from August 1999 through March 2000, and under the symbol "ICRSE" from
March 2000 until April 4, 2000. The Company's stock currently has traded on
the National Quotation Bureau's "Pink Sheets" since April 5, 2000. The market
price of the Company's Common Stock could fluctuate substantially due to a
variety of factors, including market perception of its ability to achieve its
planned growth, the quarterly operating results of other Internet based
gambling and casino software development companies, the trading volume in its
Common Stock, changes in general conditions in the economy, the financial
markets or other developments affecting the Company or its competitors. In
addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to their
operating performance.
POSSIBLE UNAVAILABILITY OF PRIVATE PLACEMENT EXEMPTION
In March 1999, the Company sold, for an aggregate of $800,300 cash, net of
issue costs and investor relation services (recorded at $2,272,900), a total
of 1,914,000 shares of its Common Stock to less than thirty-five investors,
including individuals resident in Canada and the United States. The
transaction was undertaken as a direct transaction between the Company and
the investors. To the extent that U.S. securities laws were applicable, the
issuance was intended to be in reliance on Section 3(b) of the Securities Act
and Regulation D thereunder specifically Rule 504 (as in effect on that
date). Offerings made in reliance on Rule 504 are limited to $1,000,000 and
are subject to certain other conditions under the rule. In the process of
reviewing its prior equity offerings in connection with this Registration
Statement, management has become aware that it may have been improper for the
Company to calculate the amount of the issuance solely on the basis of the
net cash proceeds from the sale. In the event that all proceeds were
considered, the amount of the proceeds would have been in excess of
$1,000,000. If the proceeds were calculated as such the exemption would not
have been available, so the Company may have inadvertently conducted an
unregistered distribution of its securities in violation of Section 5 of the
Securities Act of 1933. While the period during which the investors had a
statutory right of rescission has now passed, other claims or enforcement
proceedings could still be timely asserted against the Company. If such
claims were asserted and the Company was held liable, monetary damages and
other remedies could be awarded or assessed against the Company or its
management.
PENNY STOCK REGULATION
Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by certain penny stock rules adopted by the Securities and Exchange
Commission (the "SEC" or the "Commission"). Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered
on certain national securities exchanges or quoted on Nasdaq provided that
current price and volume information with respect to transactions in such
securities is provided by the exchange or trading system).
The penny stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document that provides information about penny stocks and the
risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in connection with the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, the penny stock
rules generally require that prior to a transaction in a penny stock, the
broker-dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements may have
the effect of reducing the level of trading activity in the secondary market
for a stock that becomes subject to the penny stock rules. The Company's
securities are presently subject to the penny stock rules, and, as a result,
investors may find it more difficult to sell its securities.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
December 31, December 31, December 31, 3 Months Ended 3 Months Ended
1999 1998 1997 March 31, 2000 March 31, 1999
------------ ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $ 90,900 $ $ - $ 105,500 $ -
Net Income (Loss) from operations (5,538,300) (191,500) - (172,600) (2,455,200)
Net Income (Loss) (5,552,100) (191,500) - (172,800) (2,455,300)
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
At December 31, At December 31, At December 31, 3 Months Ended 3 Months Ended
1999 1998 1997 March 31, 2000 March 31, 1999
--------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Working Capital (Deficiency) $(215,600) $ (65,000) $ 6,500 $ 158,500 $ 751,873
Total Assets 118,300 - - 229,400 752,322
Long Term Debt 19,000 - - 19,000 -
Stockholders' Equity (Deficit) (216,700) (65,000) 6,500 (158,300) 216,700
</TABLE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31,
1999
Revenues - Revenues for the periods ending March 31, 2000 and March 31, 1999
were $105,500 and $0, respectively. The increase of $105,500 reflects the
cessation of the Company's development stage operations in the third quarter
of 1999, when it began collecting revenues from its license agreement (the
"Master License") with DCI, Inc. (the "Master Licensee") and continued
marketing strategies for revenue growth.
Operating Expenses - Operating expenses are primarily comprised of research
and development and general and administrative costs. Operating expenses were
$278,100 and $2,455,200 for the three months ended March 2000 and 1999,
respectively. The decrease of $2,177,100 was largely attributable to the
Company recognizing $2,287,900 of non-cash services received during the first
quarter of 1999 in exchange for issuance of stock. Similar non-cash services
received in exchange for stock during the first quarter of 2000 were
$131,200. Exclusive of these items, operating expenses in total were
comparable between periods.
Research and Development - The Company's research and development costs
consist primarily of costs associated with the continued development of its
Internet based casino software. Research and development costs were $61,600
and $8,000 for the three months ended March 31, 2000 and 1999, respectively.
The $53,600 increase reflects the Company's ongoing development costs to
develop, expand and maintain licensed Internet based gaming software.
General and Administrative - The Company's general and administrative costs
consist of salaries and wages, consulting fees, professional fees, investor
relation services, and office expenses. General and administrative costs
were $209,000 and $2,444,900 for the three months ended March 31, 2000 and
1999, respectively. The $2,235,900 reflects the Company recognizing
$2,287,900 of non-cash investor relation and consulting services received
during the first quarter of 1999 in exchange for issuance of stock. Non-cash
services received in exchange for stock during the first quarter of 2000 were
$131,200. Other factors affecting the decrease relate to the Company's
having incurred more consulting and investor relation services during the
first quarter of 1999, beyond though received in exchange for stock. These
costs were associated with the Company's financing efforts and corporate
restructuring, which followed the acquisition of certain technology from
Diversified Cosmetics International, Inc. and a change in the Company's
management in December 1998.
Net Loss - The Company incurred a net loss of $(172,800) and $(2,455,300) for
the three months ended March 31, 2000 and 1999, respectively. The March 31,
1999 loss was the result of the expenses incurred by the Company during its
development stage, which ceased in the third quarter of 1999, when it began
to realize revenues from licensing its Internet based casino software. The
March 31, 2000 operating loss resulted because the research and development,
administrative costs, and sales and marketing costs of $278,100 exceeded the
$105,500 in licensing royalties and up-front fees recorded during that period.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998
Revenues - Revenues were $90,900 and $0 for the fiscal years ended December
31, 1999 and 1998, respectively. The increase of $90,900 reflects the
cessation of the Company's development stage operations in the third quarter
of 1999, when it began collecting revenues from its Master License agreement.
Operating Expenses - Operating expenses are primarily comprised of research
and development and general and administrative costs. Operating expenses
were $5,629,200 and $191,500 for the fiscal years ended December 31, 1999
and 1998, respectively. The increase of $5,437,700 was a result of the
Company's embarking on its new business strategy to develop and license
Internet based gaming technology and its emergence from development stage
operations in the third quarter of 1999. Of the total expenses incurred
during the fiscal years ended December 31, 1999 and December 31, 1998,
$4,350,500 were non-cash expenses paid for through the issuance of stock.
Research and Development - The Company's research and development costs
consist primarily of costs associated with the continued development of its
Internet based casino software and the acquisition of the rights to certain
Internet based bingo software known as MetroBingo. Research and development
costs were $658,000 and $90,000 respectively for the fiscal years ended
December 31, 1999 and 1998, respectively. The $568,000 increase again
reflects the
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Company's undertaking its new business strategy to develop and license
Internet based gaming software. MetroBingo was acquired in exchange for
1,450,000 shares of common stock valued at $0.19 per share, for a total cost
of $275,500. Because the technological feasibility of the bingo software had
not been established at the date of acquisition, the cost of the software
rights was expensed.
General and Administrative - The Company's general and administrative costs
consist primarily of investor relations services and e-cash services for
Internet based commercial transactions. Other costs include personnel costs,
professional and legal fees, consulting fees, travel, and Internet promotion.
General and administrative costs were $4,862,700 and $101,500 for the fiscal
years ended December 31, 1999 and 1998, respectively. The increase of
$4,761,200 again reflects the Company's undertaking its new business
strategy, which included establishing a head office in Surrey, British
Columbia, Canada and retaining fulltime staff and consultants. Of the total
amount of general and administrative costs, $4,041,200 represents one-time,
non-cash investor relations and e-cash expenses paid for through the issuance
of stock.
Net Loss - The Company incurred a net loss of $5,552,100 and $191,500 for the
fiscal years ended December 31, 1999 and 1998, respectively. The 1999 loss
was the result of the expenses incurred by the Company during its development
stage, which ceased in the third quarter of 1999, when it began to realize
revenues from licensing its Internet based casino software.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND DECEMBER 31,
1997
Revenue - The Company was in the development stage during 1998 and 1997 and
recorded no revenue for the years ended December 31, 1998 and 1997.
Operating Expenses - Operating expenses are comprised of research and
development expenses incurred in exchange for debt or stock, and general and
administrative expenses incurred in exchange for stock. Operating expenses
were $191,500 and $0 for the years ended December 31, 1998 and 1997,
respectively. The increase of $191,500 in operating expenses was a result of
the Company's embarking on its new business strategy to develop and license
Internet based gaming technology.
Research and Development - The Company's research and development costs
consisted exclusively of the cost to acquire the rights to certain Internet
based casino software from Diversified. Research and development costs were
$90,000 and $0 for the years ended December 31, 1998 and 1997, respectively.
The $90,000 reflects the Company's undertaking its new business strategy to
develop and license Internet based gaming technology. The software referred
to above was acquired in exchange for 2.5 million shares of Common Stock
valued at $0.01 per share, along with a $65,000 note payable, for a total
cost
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<PAGE>
of $90,000. Because the technological feasibility of the software had not
been established at the date of acquisition, the cost of the software rights
was expensed.
General and Administrative - The Company's general and administrative costs
consisted primarily of promotional costs and the cost of services of
corporate officers. These costs were $101,500 and $0 for the years ended
December 31, 1998 and 1997 respectively. The increase of $101,500 from 1997
to 1998 reflects the Company's efforts to restructure its operations to focus
on the development and licensing of Internet based casino software. All
expenses were incurred in exchange for stock.
Net Loss - The Company incurred a net loss of $191,500 and $0 for the years
ended December 31, 1998 and 1997, respectively. The 1998 loss was the result
of the expenses incurred by the Company during its development stage, as it
undertook its new business strategy to acquire, develop and license Internet
based gaming software.
FLUCTUATIONS IN ANNUAL AND QUARTERLY RESULTS
The Company's annual and quarterly operating results may fluctuate
significantly in the future as a result of numerous factors, including:
1. the amount and timing of expenditures required to develop the
Company's casino and bingo software and its licensing and strategic
relationships to enhance sales and marketing;
2. changes in the growth rate of Internet usage and the interest of
consumers in using Internet based casino and bingo websites for
recreation; and
3. the emergence of new services and technologies in the market in which
the Company now competes.
The Company also faces foreign currency exchange risk as a majority of its
revenue is denominated in U.S. currency and a majority of its operating costs
are incurred in Canadian currency. Significant fluctuations in the foreign
exchange rate between U.S. and Canadian currency will result in fluctuations
in the Company's annual and quarterly results.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficiency and working capital ratio at
December 31, 1999 were $215,600 and 0.3 to 1.0, respectively, compared to
$65,000 and 0.0 to 1.0 at December 31, 1998, respectively. At December 31,
1999 and 1998, stockholders' deficit was $216,700 and $65,000, respectively.
The working capital deficiency and stockholder deficit are attributable to
the Company's being in the development stage throughout 1998 and the first
half of 1999, during which time it generated no revenues. The increase in
the working capital deficiency and stockholders' deficit in 1999 is
attributable to an increase in costs incurred to begin developing and
marketing the Company's Internet gaming software and websites, without an
equivalent increase in licensing revenues. As discussed below, $98,700 of
the Company's current liabilities is due to a related party, with which it
may negotiate repayment terms favorable to the Company's financial condition.
Another $67,000 of current liabilities consists of deferred revenue, which
will not require an outlay of cash.
20
<PAGE>
Effective April 8, 1999, the Company entered into the Master License with the
Master Licensee for use of the Company's technology. Under the terms of the
Master License, the Company is obligated to provide a minimum of six new
theme-oriented software packages and websites per year, along with updates
and technical support, and development of specified electronic payment and
accounting technology. During the first year of the Master License the
Company provided the six packages required, however, the Master Licensee has
requested special upgrades to the graphics and the games in two of the
packages. The special modifications are expected to be completed by June
2000. The Company is also obligated to provide a monthly advertising rebate
equal to the lesser of 10% of monthly net gaming revenue derived from the
Master Licensee's use of its software or the amount expended by the Master
Licensee on advertising. The Company, in return, is to receive 40% of
monthly net gaming revenue derived from use of the software by the Master
Licensee and 50% of upfront fees charged by the Master Licensee to any
sub-licensee. In the event the Company produces certain of its games on
CD-ROM and enters into a reseller agreement with the Master Licensee, the
Company will receive 10% of gross revenue derived from the Master Licensee's
sales of the software. The Master Licensee is also obligated to spend $10,000
per month on advertising for each software package and website licensed from
the Company. Under terms of an amendment to the Master License dated May 1,
1999, the Company has the option to spend up to a specified amount on
promotion of the Master Licensee's website in exchange for an additional 10%
share of net gaming revenue, not to exceed the total amount spent by the
Company on promotion.
The Company began realizing revenues from its licensing activities in June of
1999, and such revenues amounted to $90,900 through December 31, 1999 and
$105,500 for the March 31, 2000 quarter. The Company anticipates sales
revenue for the remaining fiscal period ending December 31, 2000 to grow at
$5,830 per month. Although cash outflows from licensing revenues have been
increasing as games and websites are developed and licensed, management does
not anticipate that cash revenues will equal cash expenses until sometime
during this third quarter of 2000. The Company's liquidity over the next 12
months is contingent on its ability to raise money through debt or equity
financings to meet its short term needs.
In October 1999, the Company entered into a second ten-year agreement with
the Master Licensee related to licensing three specific theme-oriented
Internet casino websites. Under this agreement, once all three sites are
ready for operation, the Company is to receive a $100,000 upfront fee. It
will then receive 40% of the first $100,000 of monthly net gaming revenue
derived from the sites and 30% of monthly net gaming revenue in excess of
$100,000. In January 2000, the Company received $67,000 of the upfront fee.
The balance of $33,000 is due once the third casino website is delivered. The
Company's disclosure of the terms of the Master License may impact the
Company's ongoing relationships with future licensees who now have full
access to the information. Disclosure of such terms may also negatively
affect the Company's ability to negotiate more favorable licenses with other
licensees since they will be able to refer to the terms of the Master License.
In March 2000, the Company launched a free gaming website where people can
play the game Keno for free prizes. In the month of March, 2000 the site
received approximately 4,000,000 "hits". This site is structured to generate
banner-advertising revenue for the Company. Given the recent launch of this
site, management has not determined whether the current traffic is indicative
of future traffic or potential traffic growth and whether future revenues to
the Company from this or similar free sites will be significant.
As of March 31, 2000, current monthly cash flows from licensing royalties are
approximately $45,000 per month. Currently, average monthly operating cash
needs are approximately $70,000. Although cash flows from licensing revenues
have been increasing as games and websites are developed and licensed,
management does not anticipate that cash revenues will equal cash expenses
until sometime during the third quarter of 2000. However, the high level of
non-cash expenses incurred by the Company during 1999 and 1998 in exchange
for stock issued is expected to be reduced in 2000 and future periods as the
Company matures.
The Companys budgeted capital expenditures for the fiscal year ending
December 31, 2000 are approximately $25,000, of which $2,300 has been spent
as of March 31, 2000.
During 1999, the Company raised $915,300 of net cash proceeds (including
funding of subscription receivables) from exempt offerings or the private
placements of Common Stock. Another $78,200 of cash was raised in connection
with a convertible loan agreement. The loan obligation remains outstanding,
although the Company tendered the specified Common Stock. (See Legal
Proceedings). Financing was also provided in 1999 in the form of advances
from Diversified, a related party. The 98,700 of advances outstanding at
December 31, 1999 represent various expenses paid by Diversified on the
Company's behalf, prior to the Company establishing its own bank account.
Though the advances bear no interest, during 1999, the Company paid
Diversified $6,700 of management fees for handling its cash receipts and
disbursements. Diversified has stipulated no terms for repayments of the
advances. Because the liability is due to a related party, management
believes it can negotiate repayment terms that are flexible and favorable to
the Company's financial circumstances. At March 31, 2000 the balance of the
advances was $102,057.
In January 2000 the Company commenced negotiations to raise an additional
$200,000 of equity financing, which was completed by the end of April 2000.
This financing raised an aggregate of $200,000 in cash in exchange for
1,000,000 shares of Common Stock of the Company, to be issued to
approximately 6 investors. During the remainder of 2000, the Company hopes to
raise another $1.5 million in private equity financing principally to fund
its software development projects. Management is pursuing numerous potential
financing sources for the $1.5 million, including existing equity holders and
new sources, but no commitments have been received. Management believes that
the Company's success in raising this additional financing will depend on the
Company's ability to demonstrate that it can fulfill its business strategy to
license its games and websites and generate significant royalty revenues.
Management also believes that stockholders will continue to support the
financing efforts of the Company as long as it continues to demonstrate that
it can fulfill that business strategy. Although cash operating expenses have
stabilized at approximately $70,000 per month, management estimates that
monthly cash from licensing royalties and other revenues will not be
sufficient to cover these expenses until sometime during the third quarter of
2000. Subsequent to that time, management believes that cash from operations,
coupled with the $1.5 million of private equity financing discussed above.
Will allow the Company to generate sufficient cash to support its operations
for the next twelve months. However, there can be no certainty that the
Company will be able to meet its financing goals or raise sufficient
financing to fund such future business plans. In the event that the Company
is unsuccessful in its efforts to raise the capital expected to be required
over the next twelve months, the Company will need to modify its business
strategy accordingly, to adjust its operating requirements to meet its
available liquidity and may need to consider reductions in operations until
capital resources or operating cash flows are sufficient to meet operating
needs.
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on its past
business.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company leases 1200 square feet of commercial space at 3237 King George
Highway, Suite 101-B, in Surrey, British Columbia, Canada. This facility houses
all of the Company's functions including its software development, production,
technical, marketing, and administrative operations. It also houses the
Company's subsidiary I crystal Software and all of its functions. The Company
entered into its lease on September 4, 1999 and the lease runs until January 31,
2003. The Company's total rent over the four year term of the lease is
Cdn$62,400 (approximately U.S.$43,500), at January 27, 2000, payable monthly in
installments of Cdn$1,300 (approximately U.S.$906). The Company also has an
21
<PAGE>
option to rent additional space adjacent to its current location during the
term of the lease and on the same terms.
The Company believes that existing facilities are adequate for its needs through
the middle of the year 2000. Should the Company require additional space at that
time, or prior thereto, the Company believes that such space can be secured on
commercially reasonable terms and without undue operational disruption.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following tables set forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 3, 2000 by (i) each
person who owns beneficially more than 5% of the Company's outstanding Common
Stock, (ii) each of the Company's directors and executive officers, and (iii)
all current directors and executive officers as a group. As of April 3, 2000
there were 14,682,800 shares of Common Stock issued and outstanding.
Additionally, the Company agreed in the first quarter of 2000 to issue 500,000
shares and in April 2000 the Company agreed to issue an additional 500,000
shares of Common Stock to various investors. Such shares have not yet been
issued subject to completion of appropriate documentation.
22
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ---------------------- -------------------- ----------------
<S> <C> <C>
OFFICERS AND DIRECTORS:
Larry J. Hrabi(2)(7) 349,535 2.3%
Gerald P. Slamko(3)(7) 1,037,327 7.0%
Douglas J. Slamko(4)(7) 1,232,631 8.2%
Derek Bodnarchuk(8) 100,000 *
H. Rex Hollett(9) 200,000 *
5% STOCKHOLDERS:
AG Capital Management, Ltd. 1,000,000 6.7%
P.O. Box 612
Times Square Providenciales
Turks 7, Caicos Islands, B.W.I
CEDE & Co. (5) 4,722,665 32.2%
P.O. Box 222 Bowling Green Station
New York, NY 10274
CTC, Inc. 1,000,000 6.7%
40 Hillsborough St
Roseau, Dominica,
West Indies
Diversified(6) 2,500,000 16.8%
1103 Toronto Dominion Tower
Edmonton Centre
Edmonton, Alberta
T5J 2Z1 CANADA
Digital Commerce Bank, Ltd. 1,000,000 6.7%
1815 Hornby Street, Suite 404
Vancouver, B.C. V4Z 2E6
Power Star Corp. 1,450,000 9.7%
33 Saint George Street
Commonwealth of Dominica
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
DIRECTORS AND OFFICERS AS A 2,919,493 18.8%
GROUP (3 PERSONS): (7)
</TABLE>
* Indicates that shares beneficially owned does not exceed five (5) percent of
the class.
- ------------------------
(1) Each of the directors and officers named can be reached at the Company's
executive offices located at 3237 King George Hwy., Suite 101-B, Surrey,
B.C. V5P 1B7 Canada, except for Gerald Slamko who can be reached at #206,
11062-156th Street, Edmonton, Alberta Canada. The persons named in the
table have sole voting and investment power with respect to all shares
shown to be beneficially owned by them, subject to community property laws
where applicable and the information contained in the footnotes to this
table.
(2) Mr. Hrabi is a shareholder of Diversified and based on his percentage
ownership in that company indirectly owns approximately 99,535 shares of
the Common Stock. Mr. Hrabi directly owns 100,000 shares of the
Company's Common Stock. Includes 150,000 options granted in May 2000 to
acquire Common Stock immediately exercisable at $.20 per share expiring in
May 2001.
(3) Mr. Gerald P. Slamko is a shareholder of Diversified and based on his
percentage ownership in that company indirectly owns approximately
282,327 shares of Common Stock. Mr. Slamko's common law wife, Ms. Diane
Dutnall, owns approximately 5,000 shares Common Stock through a
percentage shareholding in Diversified. Mr. Slamko directly owns 650,000
shares of the Company's Common Stock. Includes 100,000 options granted
in May 2000 to acquire Common Stock immediately exercisable at $.20 per
share expiring May 2001.
(4) Mr. Douglas J. Slamko is a shareholder of Diversified and based on his
percentage ownership in that company indirectly owns approximately
243,831 shares of Common Stock. Mr. Slamko's wife, Linda Slamko, owns
approximately 38,800 shares of Common Stock through a percentage
shareholding in Diversified. Mr. Slamko directly owns 650,000 shares of
the Company's Common Stock. Includes 300,000 options granted in May 2000
to acquire Common Stock immediately exercisable at $.20 per share expiring
May 2001.
(5) These shares represent beneficial holdings held of record in brokerage
accounts through Cede & Co.
(6) The shares of the Company's Common Stock owned by Diversified may be
treated as beneficially held by Diversified stockholders prorata to
their Diversified holdings including Doug Slamko (243,831 shares of
Common Stock), his wife Linda Slamko (38,800 shares of Common Stock),
Gerald Slamko (282,327 shares of Common Stock), his common law wife,
Diane Dutnall (5,000 shares of Common Sock) and Larry Hrabi (99,535
shares of Common Stock) and the remaining stockholders of Diversified
(73,5% held by approximately 300 persons) with such percentages subject
to any distributions that may be made to creditors in the dissolution
approved by Diversified's stockholders October 7, 1999. As a result of
that decision to dissolve, Diversified plans to distribute its shares of
the Company, subject to payment of the outstanding obligations, to its
shareholders.
(7) Includes percentage shareholdings in Diversified held by officers and
directors of the Company. The percentage ownership of Company Common Stock
held by the stockholder through ownership in Diversified does not take into
account the costs which will be associated with dissolving that company. A
certain portion of Company Common Stock held by Diversified will likely be
used to cover costs associated with its dissolution thereby reducing
pro-rata the Common Stock ownership of Diversified shareholders.
(8) Includes 100,000 options granted in May 2000 to acquire Common Stock
immediately exercisable at $.20 per share expiring May 2001.
(9) Includes 200,000 options granted in May 2000 to acquire Common Stock
immediately exercisable at $.20 per share expiring May 2001.
CHANGES IN CONTROL
There are no arrangements which would result in a change in control of the
Company.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Although the Company's Bylaws only authorize a Board consisting of one
director, the Company's Board currently consists of three individuals. The
Company is calling a Special Meeting of its stockholders to be held on June
5, 2000, at which
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<PAGE>
stockholders, among other things, will be asked to approve new Bylaws which
would provide for a Board of Directors consisting of not less than two nor
more than five directors, whose number would be determined by a properly
approved resolution of the Board.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
OFFICERS AND DIRECTORS:
<S> <C> <C>
Larry J. Hrabi 48 Director, Chairman and Chief Executive Officer of the Company.
Director and Chief Executive Officer of I crystal Software.
Douglas J. Slamko 45 President of the Company.
Director and President of I crystal Software.
Gerald P. Slamko 43 Vice President, Treasurer and Chief Financial Officer of the
Company
Director, Treasurer and Chief Financial Officer of I crystal
Software
Derek Bodnarchuk 25 Director.
H. Rex Hollett 68 Director.
SENIOR TECHNOLOGY PERSONNEL:
Fabrice L'Heureux 28 Project Development Coordinator and
Creative Director.
</TABLE>
LARRY J. HRABI is the Chairman of the Company's Board of Directors and its
Chief Executive Officer. Mr. Hrabi has been a Director since December 10,
1998 and the Chief Executive Officer of the Company since December 10, 1998.
Mr. Hrabi has also served as a Director and the Chief Executive Officer of
the Company's wholly owned subsidiary, I crystal Software since August 17,
1999. Prior to joining the Company Mr. Hrabi was the President of Klein's
Hair Care Centre, a private manufacturing company he has owned since 1975.
Mr. Hrabi is also the President and major shareholder of Cleanse-Rite
Solutions.
DOUGLAS J. SLAMKO is the Company's President and has served in that capacity
since December 10, 1998. Mr. Slamko has also served as a Director and
President of the Company's wholly owned
25
<PAGE>
subsidiary, I crystal Software since August 17, 1999. Prior to joining the
Company, Mr. Slamko was President of IHC International Hair Consultants Inc.
("IHC") from 1997 and the president of HRS Hair Consultants International,
Inc. since 1993. Prior to that, Mr. Slamko was the President of Smart Hair
Care (California) and similar companies in other states which functioned as
the "Smart" group of companies. As the President of IHC, Mr. Slamko oversaw
the development of that company's franchise and licensee program, while the
business grew from one location into an international organization located in
over 40 cities. Mr. Slamko has been a director of Diversified since 1987. Mr.
Slamko has over 20 years of experience in leading company development,
including such companies as Relic Rent a Car and Budget Sports Rentals. Mr.
Slamko is the brother of Gerald P. Slamko, the Company's Treasurer and Chief
Financial Officer, and Leonard Slamko who served as a director of the Company
until he entered into a consulting relationship with the Master Licensee.
GERALD P. SLAMKO is the Company's Vice President, Treasurer and Chief
Financial Officer and has served in that capacity since December 10, 1998.
Mr. Slamko has also served as a Director, Treasurer and the Chief Financial
Officer of the Company's wholly owned subsidiary, I crystal Software, since
August 17, 1999. Mr. Slamko has been a member of the Canadian Institute of
Chartered Accountants of Alberta for the past 15 years. For more than 15
years Mr. Slamko has been the president and a director of Gerald P. Slamko
Professional Corporation, a partner in the firm of Slamko Visser, chartered
accountants. Slamko Visser provides accounting services to the Company. Mr.
Slamko has over 15 years of corporate development and accounting experience.
Since 1987 Mr. Slamko has also been a director of Diversified. Mr. Slamko is
the brother of Douglas J. Slamko, the Company's President, and Leonard Slamko
who served as a director of the Company until he entered into a consulting
relationship with the Master Licensee.
DEREK BODNARCHUK has been a member of the Company's Board of Directors since
November 3, 1999. Mr. Bodnarchuk is the president of 591879 BC Ltd., a
drive-through coffee kiosk established in October 1999 which is operated as
Celestial Blends Coffee. From August through January of 1999 Mr. Bodnarchuk
was the Manager of Delrios Restaurants. Prior to that he was a martial arts
instructor at the Academy of Martial Arts and Inner Power from December 1997
through December 1998. From June 1995 to December 1997 he was a waiter at
Delrios Restaurant.
HENRY REX HOLLETT has been a director of the Company since March 2000.
For the past 44 years Mr. Hollett has been the president and owner of B & H
Tire, Ltd. He also is presently on the council for the District of North
Cowichan, British Columbia, Canada, where he has held the title of Mayor for
over 10 years.
26
<PAGE>
FABRICE L'HEUREUX is not an executive officer but has been the Company's
Software Development Manager since July 1, 1999. Under a service contract the
Company entered into with 4250 Investments Ltd., Mr. L'Heureux is responsible
for development and design of the Company's and licensees websites and the
Company's MetroBingo Software and the overall creative and graphic design of
Company software. Mr. L'Heureux graduated form Laval University in 1995 with
a degree in Communications and Graphic Design and a degree in "Alias
Wavefront 3-D Software for the Motion Picture Industry". He has designed
numerous Websites and was the Art Director and Multi-media Producer for
ITV.net, an Internet broadcaster based in Vancouver, B.C. He is also a
creator and designer of the MetroBingo software acquired by the Company.
ITEM 6. EXECUTIVE COMPENSATION
The following table shows, for the three-year period ended December 31, 1999,
the cash and other compensation paid to the Company's Chief Executive
Officer. No other executive officer had annual compensation in excess of
$100,000 during such period.
SUMMARY COMPENSATION TABLE
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------ -------------------------- ---------
COMMON
NAME AND STOCK UNDER
PRINCIPAL OTHER ANNUAL OPTION/SAR'S PREFERRED LTIP ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION GRANTED STOCK PAYOUTS COMPENSATION
--------- ---- ------- ----- ------------ ------------ --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Larry Hrabi......
Chief Executive 1999 $6,000(1) -- $2,667 -- -- -- (1)
Officer 1998 0 -- -- -- -- -- --
1997 0 -- -- -- -- -- --
</TABLE>
(1) Mr. Hrabi's Service Contract with the Company provided that he be
granted 100,000 shares of Common Stock on or prior to November 1, 2000.
The compensation represented by the issuance of such stock is being
recognized monthly by the Company and Mr. Hrabi during the twelve month
period commencing November 1999 at a rate of $1,333. Additionally in
May 2000, Mr. Hrabi was granted 150,000 options to acquire Common
Stock, which are immediately exercisable at $.20 per share and which
expire in May 2001.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
In April 4, 2000 the Company's Directors approved the 2000 Incentive Plan of
the Company subject to approval of the Company's Stockholders at the Special
Meeting of stockholders of the Company currently scheduled for June 5, 2000.
Prior to April 2000, the Company had no employee stock option or other
incentive plans. To date, the Company has issued 1,350,000 options to acquire
the Common Stock to various officers, directors and employees of the Company
exercisable at $.20 per share, all of which vested immediately upon issuance
and which expire in May 2001.
27
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The Company has no options, exercises or values to report for its last fiscal
year.
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
The Company had no long term incentive plans during 1999 and therefore has no
awards to report for its last fiscal year.
COMPENSATION OF DIRECTORS
The Directors of the Company are not compensated for their services.
CONTRACTUAL ARRANGEMENTS FOR EMPLOYMENT
On February 3, 1999 the Company entered into a Service Contract with Leonard
Slamko, whereby he agreed to serve as a marketing consultant to the Company
to develop, maintain and monitor its marketing strategies. This Service
Contract could be terminated at any time upon the provision of 14 days notice
by either party and was terminated by the Company on December 2, 1999 at
which time Mr. Slamko entered into a consulting agreement with the Master
Licensee. The Company believes Mr. Slamko's relationship with the Master
Licensee will enable it to maintain a certain degree of oversight concerning
the security of the Company's proprietary software design, and revenue
generation at the Master Licensee website. Such a relationship will also
allow the Company to have indirect feedback on how to better design and
develop its products for future licensees. Under the Service Contract Mr.
Slamko was paid $5000 per month and was entitled to receive 100,000 shares of
Common Stock prior to February 3, 2000, unless the Service Contract had been
previously terminated. Although the Company was not obligated to issue the
shares of Common Stock to Mr. Slamko upon the termination of the Service
Contract on December 2, 1999, all 100,000 shares of Common Stock were issued
to Mr. Slamko in recognition for marketing services rendered to the Company
during the 10 months he served under his service contract.
On July 1, 1999 the Company entered into a Service Contract with 4250
Investments Ltd., a personal contract company whereby Mr. L'Heureux will act
as the Company's Software Development Manager to develop websites for its
corporate and licensee clients, to administer its MetroBingo software
development project and to oversee the overall creative, graphic direction
and design efforts of the Company. This Service Contract may be terminated at
any time upon the provision of 14 days notice by either party. Under the
Service Contract 4250 Investments Ltd. was paid $4000 per month, subject to
performance reviews every three months at which time the amount of
compensation could be adjusted upward in the discretion of the president. On
November 1, 1999 monthly compensation was increased to $5,000 per month.
On November 1, 1999 the Company entered into a Service Contract with Mr.
Larry Hrabi whereby Mr. Hrabi will perform consulting work to develop and
oversee Company investor relations, and the Company's overall licensing,
sales and marketing efforts. This Service Contract may be terminated at any
time upon the provision of 14 days notice by either party. Under the Service
Contract Mr. Hrabi
28
<PAGE>
is paid $3000 per month, and was entitled to receive 100,000 shares of Common
Stock prior to November 1, 2000, unless the Service Contract has been
previously terminated by either party. All 100,000 shares of Common Stock
were issued to Mr. Hrabi on January 11, 2000.
On December 2, 1999 the Company entered into a Service Contract with Douglas
Slamko, whereby Mr. Slamko agreed to serve as president of the Company to
organize, implement and oversee overall operations and to direct the
Company's marketing program. This Service Contract may be terminated at any
time upon the provision of 14 days notice by either party. Under the Service
Contract, Mr. Slamko is paid $5000 per month, and was entitled to receive
100,000 shares of Common Stock on or prior to February 3, 2000, for services
provided in 1999 unless the Service Contract had been previously terminated
by either party. All 100,000 shares of Common Stock were issued to Mr. Slamko
on January 11, 2000.
REPORT ON PRICING OF OPTIONS/SARS
The Company had no stock option plan during the fiscal year ending
December 31, 1999.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On December 1, 1998, the Company entered into the Diversified License with
Diversified, whereby the Company agreed to license, for a period of five
years, the Internet based casino software developed by Diversified. As
consideration for the license of the casino software, the Company agreed to
pay a royalty of 10% of the net revenues it obtained from the casino software
to Diversified, and Diversified was granted the Put Option to require the
Company to purchase all of the rights to the casino software from Diversified
for 2,500,000 shares of the Company's Common Stock. Messrs. Doug Slamko,
Gerald Slamko and Larry Hrabi, officers and directors of the Company, are
also shareholders of Diversified. At the time the Diversified License was
entered into the Company was managed by Mr. Robert Wallace, who, in arms
length negotiations, entered into the Diversified License with Diversified.
Messrs. Hrabi, Douglas Slamko and Gerald Slamko subsequently became
shareholders, officers and directors of the Company on December 10, 1998 when
Diversified exercised the Put Option. Thus, the transaction was negotiated on
an arms length basis on terms fair to the Company from the perspective of its
management at the time of the transaction. See Part I, Item 4--Security
Ownership of Certain Beneficial Owners and Management.
On December 10, 1998, Diversified exercised the Put Option and the Company
acquired the casino software from Diversified for 2,500,000 shares of its
Common Stock, issued to Diversified, as well as additional consideration in
the form of a promissory note for Cdn$100,000 (approximately U.S.$65,000)
issued to Diversified for continued development work performed on the casino
software (the "Diversified Transaction"). As a result of the Diversified
Transaction, the 10% royalty obligation was extinguished. Prior to the
Diversified Transaction, the Company became obligated to issue 2,000,000
shares of Common Stock to Doug Slamko, Gerald Slamko, Leonard Slamko and Pat
VanBoximeer, their sister, as payment for future services to be performed
for the Company over the next twelve months. Such shares were subsequently
issued on December 10, 1998. Additionally, on December 16, 1998 2,500,000
shares of Common Stock were sold to certain individuals who facilitated the
transfer of the software from Diversified to the Company. Douglas J. Slamko
the president of the Company is also a director, the Chief Executive Officer,
the President and a shareholder of Diversified and his wife is a shareholder
of Diversified. Gerald P. Slamko the Vice President, Treasurer and Chief
Financial Officer of the Company is also a Director, Secretary, Treasurer and
a shareholder of Diversified and his common law wife is a shareholder of
Diversified. Leonard Slamko served as a director of the Company until he
entered into a consulting relationship with the Master Licensee, and he is
also a shareholder of Diversified.
Subsequent to the transfer of technology and prior to the date when the Company
established its own bank account in late 1999, all cash transactions were
deposited in and disbursed from Diversified's bank account. Diversified has also
paid various expenses on the Company's behalf. The net effect of these
circumstances has resulted in the Company owing Diversified $98,700 at December
31, 1999. The advances bear no interest since they are among related parties but
during the 1999 the Company recorded a $6,700 of management fees to Diversified
for the services provided by Diversified.
29
<PAGE>
On April 8, 1999 the Company entered into an Agreement with the Master
Licensee whereby the Company agreed to license to the Master Licensee a
minimum of 6 new casino software packages and websites per year, and to
provide any updates to such casino software and websites for a term of 10
years at no extra cost. The Agreement grants the Master Licensee the right to
extend the license for an additional five years. Under the Agreement, the
Company will be entitled to 40% of the Net Gaming Revenue derived from
revenue generated by the casino or websites licensed to the Master Licensee.
Net Gaming Revenue is defined in the Agreement as gross revenues less
customer payouts, e-cash charges, fees, holdbacks, and chargebacks, and taxes
or levies to which the Master Licensee is subject. Additionally, the Company
will be entitled to 50% of up-front fees charged by the Master Licensee to
any sub-licensees, and 10% of revenue derived from sales of the software.
Under the terms of an amendment to the Licensing Agreement the Company has
the option to spend up to a specified amount on promotion of the Master
Licensee's website in exchange for an additional 10% share of net gaming
revenue, not to exceed the total amount spent by the Company. At the time the
Master License was entered into the parties engaged in an arms length
negotiation of the terms of the Master License and Mr. Leonard Slamko
abstained from voting on the matter as a director. Leonard Slamko, a director
of the Company at the time the Agreement was entered into, has entered into a
consulting arrangement with the Master Licensee.
Effective April 14, 1999, the Company issued 1,000,000 shares of Common Stock
pursuant to a Letter of Intent with Digital Commerce Bank, Ltd. ("Digital
Commerce") where in exchange for such shares Digital Commerce issued to the
Company a merchant number for use in processing credit card transactions. A
non-refundable up front fee for receipt of the Digital Commerce merchant
number was paid by the Company and recorded as an expense of $1,436,500.
Although Digital Commerce is a shareholder of the Company and provides
merchant banking services to Company licensees, no other relationship exists
between the Company and Digital Commerce.
On October 7, 1999, the Company agreed to issue 1,000,000 shares of Common
Stock valued at $180,000 to CTC Inc., in lieu of payment by the Company of a
one-time service fee for the provision of electronic commerce and cash
services. All 1,000,000 of these shares were subsequently issued on January
11, 2000. Although CTC is a shareholder of the Company and provides merchant
banking services to Company licensees, no other relationship exists between
the Company and CTC.
On October 15, 1999 the Company entered into an additional Agreement with the
Master Licensee whereby the Company agreed to license to the Master Licensee
three new casino software packages and websites, including updates to such
casino software and websites for a term of 10 years. Under this Agreement the
Master Licensee has the right to extend the license indefinitely. Under the
Agreement, the Company is to be paid a fee of $100,000, payable in
installments, of which $67,000 has already been paid, with the remaining
$33,000 is to be paid upon completion of the third casino software package
and website. The Company will also be entitled to 40% of the Net Gaming
Revenue derived from revenue generated by the casino or websites licensed to
the Master Licensee, up to the first $100,000 generated per month, and 30% of
Net Gaming Revenue generated per month over $100,000. The Master Licensee
shall be required to spend 10% of monthly Net Gaming Revenue on advertising,
all of which shall be subject to a rebate by the Company. The Company had
agreed to license one MetroBingo software package and websites to the Master
Licensee for no charge and a second such software package and website for a
fee of $200,000, provided that a deposit of $10,000 was paid to the Company
by December 31, 1999 and a second deposit of $40,000 was paid on January 31,
2000 with the balance due on completion of the software package. Neither
deposit was paid and the Metrobing site will not be provided. Leonard Slamko,
a director of the Company at the time the Agreement was entered into, has
entered into a consulting arrangement with the Master Licensee. Leonard
Slamko is the brother of Douglas Slamko and Gerald Slamko. At the time the
Agreement was entered into, the parties engaged in an arms-length negotiation
of the terms of the Agreement and Mr. Leonard Slamko abstained from voting on
the matter as a director.
On May 1, 1999, the Company and the Master Licensee amended the April 8, 1999
Agreement to provide that Company could spend up to $70,000 to promote its
Internet casino website over a six month period beginning May 1, 1999. In
return the Company was eligible to retain up to an additional 10% of Net
Gaming Revenue until such time as either the total of $70,000 was spent on
such promotional activities or December 31, 1999. The term of this amendment
has expired and approximately $70,000 was spent by the Company in furtherance
of that amendment during its term. Leonard Slamko, a director of the
Company at the time the Agreement was entered into, has entered into a
consulting arrangement with the Master Licensee. Leonard Slamko is the
brother of Douglas Slamko and Gerald Slamko. At the time the amendment to the
Agreement was entered into, the parties engaged in an arms-length negotiation
of the terms of the Agreement and Mr. Leonard Slamko abstained from voting on
the matter as a director.
30
<PAGE>
On August 28, 1999, the Company entered into an Agreement with Power Star
pursuant to which the Company purchased the rights to certain software known
as MetroBingo that was being developed by Power Star in exchange for an
aggregate of 1,450,000 shares of Common Stock valued at $275,500. Fabrice
L'Heureux, the Company's Project Development Coordinator and Creative
Director through the Company's Service Contract with 4250 Investments Ltd.,
formerly provided services to Power Star in connection with the creation and
development of the MetroBingo software. At the time the Agreement was
entered, Mr. l'Heureux was not an employee of the Company and the transaction
was the result of arms length negotiations between the Company and PowerStar.
ITEM 8. DESCRIPTION OF SECURITIES.
The securities to be registered pursuant to this Form 10-SB are all of the
Company's authorized shares of Common Stock. There are no preemptive rights
associated with these securities and no cumulative voting is authorized by the
By-laws. The Company's Certificate of Incorporation authorizes a total share
capital of 30,000,000 of which all such shares are designated as Common Stock,
par value $0.01 per share.
Each shareholder is entitled to one vote for each share of Common Stock owned
of record. The holders of shares of Common Stock do not possess cumulative
voting rights, which means that the holders of more than 50% of the
outstanding shares voting for the election of directors can elect all of the
directors, and in such event the holders of the remaining shares will be
unable to elect any of the Company's directors. Holders of outstanding shares
of Common Stock are entitled to receive dividends out of assets legally
available at such times and in such amounts as the Company's board of
directors may determine. Upon liquidation, dissolution, or winding up, the
assets legally available for distribution to the Company's shareholders will
be distributed ratably among the holders of the shares outstanding at the
time. Holders of the Company's shares of Common Stock have no preemptive,
conversion, or subscription rights, and the Company's shares of Common Stock
are not subject to redemption. All the Company's outstanding shares of Common
Stock are fully paid and non-assessable.
There are no restrictions in the Company's Certificate of Incorporation, as
amended to date or its current Bylaws, which restrict or inhibit changes in the
voting control or ownership in the Company.
31
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's shares of Common Stock formerly traded on the OTC Bulletin
Board Market under the trading symbol "ICRS." The Company's Common Stock
initially began trading on the OTC Bulletin Board on May 20, 1998 under the
symbol "CGSI." The Company changed its name to SoftNet Industries Inc. on
November 18, 1998 and the Company's trading symbol was subsequently changed
to "SFNT" on November 24, 1998. On July 29, 1999 the Company's name was
changed to I crystal Inc. due to a conflicting name being used by another
company and its trading symbol was changed to "ICRS" on August 3, 1999 until
March 1999 when the Company's symbol changed to "ICRSE." On April 5, 2000 the
Company's stock began trading on the National Quotation Bureau's pink sheets.
As of April 3, 2000, there were approximately 102 holders of record and
approximately 14,682,800 shares of Common Stock outstanding, not including
the 2000 Subscriptions for 1,000,000 shares of Common Stock the Company has
committed to issue to various investors as of the first quarter of 2000 and
April 2000, subject to the completion of appropriate documentation. The high
and low bid prices of the Company's Common Stock for each quarter of its last
two fiscal years as quoted from the OTC Bulletin Board were:
<TABLE>
<CAPTION>
QUARTER HIGH BID PRICE LOW BID PRICE
<S> <C> <C>
3rd Quarter 1998 (CGSI) $0.38 $0.25
4th Quarter 1998 (CGSI) $0.50 $0.13
4th Quarter 1998 (SFNT) $4.75 $0.13
1st Quarter 1999 (SFNT) $4.06 $1.38
2nd Quarter 1999 (SFNT) $2.00 $0.55
3rd Quarter 1999 (SFNT) $0.56 $0.33
3rd Quarter 1999 (ICRS) $0.40 $0.13
4th Quarter 1999 (ICRS) $0.26 $0.14
1st Quarter 2000 (ICRS) $0.90 $0.16
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
ITEM 2. LEGAL PROCEEDINGS.
On February 15, 2000 West Peak Ventures of Canada, Inc. ("West Peak") filed a
claim against the Company in the Supreme Court of British Columbia, Canada
claiming breach of a loan agreement by the Company. West Peak has asked for
a judgment in the amount of $78,196.20, plus interest, costs and such other
relief as the court may deem necessary. As of May 2000 the Company does not
believe that it has been properly served in the matter and has made no formal
response.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Effective December 9, 1999, the Company dismissed Albright Persing &
Associates ("Albright Persing"), the Company's prior independent auditor, and
appointed Moss Adams LLP ("Moss Adams")
32
<PAGE>
as its independent auditor. The Company's decision to change its independent
auditor was made as a result of the Company's undertaking a new business
strategy and the proximity of offices of Moss Adams to the Company's new
facilities located in Surrey, British Columbia, Canada.
The Company's financial statements for the years ended December 31, 1997,
1996, and 1995 were audited by Albright Persing, whose report dated March 30,
1998 included an explanatory paragraph describing conditions that raised
substantial doubt about the Company's ability to continue as a going concern.
In addition, during these years and the years ending December 31, 1998 and
1999, there was no disagreement with Albright Persing on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to the satisfaction of
Albright Persing, would have caused Albright Persing to make a reference to
the subject matter of the disagreement in connection with its report.
During 1997 and prior years and through December 9, 1999, the Company did not
consult with Moss Adams regarding either the application of accounting
principles to a specified transaction, either completed or proposed, or the
type of audit opinion that might be rendered on the Company's financial
statements or any matter that was either the subject of a disagreement or a
reportable event with Albright Persing.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information concerning the currently
outstanding securities of the Company which were sold or issued by the
Company during the last three years without the registration of the
securities under the Securities Act in reliance on exemptions from such
registrations requirements.
At December 31, 1996 there were 3,000,000 shares of Common Stock issued and
outstanding (without giving effect to the 8:1 reverse stock split undertaken
in Fall 1998). On December 30, 1997, the Company sold an aggregate of 130,000
shares of the Company's Common Stock to less than thirty-five investors, for
an aggregate of $6,500 in cash. To the extent that U.S. securities laws were
applicable to the issuance, the issuance was made in reliance on Section 4(2)
of the Securities Act and under Rule 505 of Regulation D thereunder.
On July 6, 1998, the Company issued, for an aggregate of $15,000 in
services, an aggregate of 3,000,000 shares (or 375,000 shares after giving
effect to the 8:1 reverse stock split) of the Company's Common Stock to the
former president of the Company in a private transaction between him and the
Company with an ascribed value of $3800 in exchange for services rendered. To
the extent that U.S. securities laws were applicable to the issuance, the
issuance was made in reliance on Section 4(2) of the Securities Act and under
Rule 505 of Regulation D thereunder. As a result of the above, there were
6,130,000 shares of Common Stock of the Company issued and outstanding
without giving effect to the 8:1 reverse stock split and 766,250 shares after
the reverse split. Unless otherwise indicated, all share data set forth below
gives effect to the reverse split.
33
<PAGE>
On December 10, 1998, the Company issued 2,500,000 shares of its Common Stock
to Diversified when Diversified exercised the option granted to it on
December 1, 1998. The transaction for Diversified's casino software was
valued at $25,000. The Company also delivered a Cdn$100,000 (U.S.$65,000)
Note for additional development undertaken by Diversified after the
transaction. The note was subsequently paid. Certain officers and
shareholders of Diversified are directors or executive officers of the
Company. Diversified is a corporation organized under the laws of Alberta
with a number of shareholders, including certain officers and directors of
the Company. The transaction was negotiated between the Company and
Diversified. To the extent that U.S. securities laws were applicable to the
issuance, the issuance was made in reliance on Section 4(2) of the Securities
Act and under Rule 506 of Regulation D thereunder as a private transaction
between the two entities, not involving a public offering. The 2,500,000
shares continue to be held by Diversified and no distribution of the shares
has been made.
On December 10, 1998, the Company issued 2,000,000 shares of Common Stock to
four persons, three of whom are officers and directors, and one of whom was
their adult sister and all of whom are residents in Canada. The consideration
consisted of a $20,000 cash subscription receivable and services in the
amount of $60,000 to be rendered to the Company by the officers and directors
and cash paid by all parties. The services were rendered throughout 1999 and
the $20,000 was paid in March 1999. To the extent that U.S. securities laws
were applicable to the issuance, the issuance was made in reliance on Section
4(2) of the Securities Act and under Rule 506 of Regulation D thereunder as
a private transaction between the Company and 3 related parties and one party
with prior knowledge and understanding of the Company.
On December 16, 1998, the Company issued 2,500,000 shares of Common Stock to
persons all of which are residents of Canada in exchange for $25,000 in
subscription receivables and for services rendered to the Company in the
amount of $75,000 by the individuals, including persons who provided
promotional and investor services. To the extent that U.S. securities laws
were applicable to the issuance, the issuance was of exempt securities made
in reliance on Section 3(b) of the Securities Act and under Rule 504 (as in
effect on that date) of Regulation D thereunder.
On March 30, 1999, the Company sold, for an aggregate of $800,300 cash,
net of issue costs, and investor relation services recorded at $2,272,800, a
total of 1,914,000 shares of its Common Stock to less than thirty-five
investors including individuals resident in Canada and the United States. The
transaction was undertaken as a direct transaction between the Company and
the investors. To the extent that U.S. securities laws were applicable to the
issuance, the issuance was intended to quality as exempt securities in
reliance on Section 3(b) of the Securities Act and Regulation D thereunder
specifically under Rule 504 (as in effect on that date). The Company reached
the conclusion that the exemption was available by calculating the net cash
proceeds of the offering.
Effective April 14, 1999, the Company issued 1,000,000 shares of Common Stock
pursuant to a Letter of Intent with Digital Commerce whereby Digital Commerce
would issue to the Company a merchant number for use in processing credit
card transactions. A non-refundable up front fee for receipt of the Digital
Commerce merchant number was paid by the Company and recorded as an expense
of $1,436,500. To the extent that U.S. securities laws were applicable to the
issuance, the issuance was made in reliance on Section 4(2) of the Securities
Act and under Rule 506 of Regulation D thereunder as a private transaction
negotiated between the two entities and in connection with their overall
business transaction.
On August 16, 1999, the Company received a convertible loan in the amount of
$78,196 from West Peak. The proceeds of the loan were paid to the Company
through Diversified which acted as account manager for the Company. The loan
was repayable as of November 30, 1999, and bore an interest rate equal to the
U.S. prime rate plus 2%. Although the Company converted the principal into
200,000 shares of Common Stock in December 1999, in February 2000 West Peak
filed suit claiming breach of the terms of the loan and claimed as damages
repayment of the principal amount of approximately $78,200 plus interest and
costs. For purposes of the registration statement the shares are treated as
not outstanding at April 3, 2000, without prejudice to the Company's position
in the litigation. To the extent the U.S. securities laws applied to the loan
and the conversion, the transaction with West Peak, a Canadian entity with
business and investment experience, was undertaken as a private transaction
between the Company and West Peak in reliance of Section 4(2) of the
Securities Act and under rule 506 of Regulation D thereunder.
On August 28, 1999, the Company entered into an Agreement with Power Star
pursuant to which the Company purchased all of the rights to certain software
known as MetroBingo that was being developed by Power Star in exchange for
1,450,000 shares of Common Stock with an aggregate value of $275,500. To the
extent that U.S. securities laws were applicable to the issuance, the issuance
was
34
<PAGE>
made in reliance on Section 4(2) of the Securities Act and under Rule 505 and
506 of Regulation D thereunder as a private transaction negotiated between
the two entities not involving a public offering.
On October 5, 1999, the Company agreed to issue 1,000,000 shares of Common
Stock to AG Capital Management, Ltd. ("AG Capital") in exchange for cash and
services rendered in the aggregate amount of $200,000. All 1,000,000 of these
shares were subsequently issued on January 11, 2000. To the extent that U.S.
securities laws were applicable to the issuance, the issuance was made in
reliance on Section 4(2) of the Securities Act and under Rule 506 of
Regulation D thereunder as a private transaction negotiated between two
entities, not involving a public offering.
On October 7, 1999, the Company agreed to issue 1,000,000 shares of Common
Stock valued at $180,000 to CTC, in lieu of payment by the Company of a
one-time service fee for the provision of electronic commerce and cash
services. All 1,000,000 of these shares were subsequently issued on January
11, 2000. To the extent that U.S. securities laws were applicable to the
issuance, the issuance was made in reliance on Section 4(2) of the Securities
Act and under Rule 506 of Regulation D thereunder as a private transaction
negotiated between two entities, not involving a public offering.
On March 13, 2000, I crystal Software entered into an Agreement with
American Amusements whereby 250,000 shares of Common Stock of the Company in
exchange for the granting to I crystal Software a five year exclusive license
for Internet based use of a variety of video gaming software developed by
AAC. Under the terms of the Agreement AAC will be entitled to receive 11% of
the net gaming revenue derived from casino websites which I crystal Software
re-licenses using AAC software. To the extent that U.S. securities laws were
applicable to the issuance, the issuance was made in reliance on Section 4(2)
of the Securities Act and under Rule 506 of Regulation D thereunder as a
private transaction negotiated between two entities, not involving a public
offering.
During the quarter ended March 31, 2000, the Company committed to issue
the first portion of the 2000 Subscriptions for 500,000 shares of Common
Stock, and in April 2000 the Company committed to issue the remaining 500,000
shares of Common Stock under the 2000 Subscriptions to approximately 6
non-U.S. resident investors for an aggregate of $200,000 in cash. The 2000
Subscriptions have "piggy-back" registration rights for a period of one year
in the event the Company proceeds to register shares of Common Stock under
the Securities Act of 1933. To the extent U.S. securities laws were
applicable to the issuance, the issuance was made in reliance of Rule 506
under Regulation D and in any event under Section 4(2) as a private
transaction, not involving a public offering.
Additionally, the Company has issued Common Stock in exchange for services
rendered by the following companies and individuals. To the extent that U.S.
securities laws were applicable to the issuance, the issuance was made in
reliance on Section 4(2) of the Securities Act and under Rule 701 thereunder
with respect to the individuals listed and Rule 506 with respect to the
entities based on their knowledge of the Company and its business and general
investment experience:
<TABLE>
<CAPTION>
NAME DATE OF ISSUE NUMBER OF SHARES PRICE PER SHARE AGGREGATE PRICE
---- ------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
RSA Software 4-22-99 25,000 $1.35 $33,800
734633 Alberta Ltd. 6-28-99 127,500 $0.50 $63,800
Sean Comeau 7-01-99 100,000 $0.47 $47,000
Larry J. Hrabi 11-01-99 100,000 $0.16 $16,000
Douglas J. Slamko 12-02-99 100,000 $0.17 $17,000
Leonard Slamko 12-02-99 100,000 $0.17 $17,000
</TABLE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Eight of the Company's Certificate of Incorporation provides that the
directors of the Company shall not be liable to the Company or the
shareholders of the Company for a breach of fiduciary duty unless such breach
involves (1) the director's duty of loyalty to the Company, (2) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law, (3) liability for unlawful payments of
dividends or stock purchases or redemption's by the Company, or (4) a
35
<PAGE>
transaction from which a director derives an improper personal benefit. The
Company has no other provisions or arrangements covering Director or Officer
indemnification.
36
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
INDEPENDENT AUDITOR'S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<PAGE>
I CRYSTAL INC.
TABLE OF CONTENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORT..................................... 1
FINANCIAL STATEMENTS
Balance Sheet............................................... 2
Statement of Operations..................................... 3
Statement of Stockholders' Deficit.......................... 4
Statement of Cash Flows..................................... 5
Notes to Consolidated Financial Statements................ 6-14
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
I crystal, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of I crystal,
Inc. (formerly named Softnet Industries, Inc. and Cable Group South, Inc.)
and Subsidiary as of December 31, 1999, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of
the two years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of I crystal, Inc.
and Subsidiary as of December 31, 1999, and the results of their consolidated
operations and their cash flows for each of the two years then ended in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses since its inception and
has a net stockholders' deficit. These conditions raise substantial doubt
about its ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Moss Adams LLP
Bellingham, Washington
March 31, 2000
<PAGE>
I CRYSTAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 23,800
Accounts receivable 75,700
Prepaid expenses 900
----------------
Total current assets 100,400
PROPERTY AND EQUIPMENT, net 17,900
----------------
TOTAL ASSETS $ 118,300
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 72,100
Advances from related party 98,700
Deferred revenue 67,000
Convertible debt 78,200
----------------
Total current liabilities 316,000
ADVANCES FROM STOCKHOLDERS 19,000
----------------
Total liabilities 335,000
----------------
STOCKHOLDERS' DEFICIT
Common stock, $0.01 par value, 30 million shares authorized;
14,682,800 shares issued and outstanding 146,900
Additional paid-in capital 5,471,300
Deferred compensation (59,300)
Accumulated deficit (5,775,600)
----------------
Total stockholders' deficit (216,700)
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 118,300
================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 2
- -------------------------------------------------------------------------------
<PAGE>
I CRYSTAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUE
Software royalties $ 90,900 $ -
--------------- ----------------
OPERATING EXPENSES
General and administrative 4,862,700 101,500
Research and development 658,000 90,000
Sales and marketing 108,500 -
--------------- ----------------
Total operating expenses 5,629,200 191,500
--------------- ----------------
LOSS FROM OPERATIONS (5,538,300) (191,500)
---------------- -----------------
OTHER EXPENSE
Finance costs 12,000 -
Interest 1,800 -
--------------- ----------------
Total other expense 13,800 -
--------------- ----------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (5,552,100) (191,500)
PROVISION FOR INCOME TAXES -
-------------- ----------------
NET LOSS $ (5,552,100) $ (191,500)
============== ================
EARNINGS (LOSS) PER SHARE
Basic and diluted $ (0.52) $(0.26)
======== ======
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 3
- -------------------------------------------------------------------------------
<PAGE>
I CRYSTAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Stock
----------------------- Paid-in Subscription Deferred Accumulated
Shares Amount Capital Receivable Compensation Deficit Total
---------- --------- ---------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 3,130,000 $ 31,300 $ 7,200 $ - $ - $ (32,000) $ 6,500
Effect of one-for-eight
reverse stock split (2,738,700) (27,400) 27,400 - - - -
Stock issued for services 375,000 3,800 11,200 - - - 15,000
Stock issued to related
party for acquired
research and development 2,500,000 25,000 - - - - 25,000
Stock issued to officers
for services and stock
subscription receivable 2,000,000 20,000 60,000 (20,000) (60,000) - -
Stock issued for future
services and stock
subscription receivable 2,500,000 25,000 75,000 (25,000) - - 75,000
Amortization of deferred
compensation - - - - 5,000 - 5,000
Net loss - - - - - (191,500) (191,500)
----------- -------- ---------- --------- --------- ----------- ------------
BALANCE, December 31, 1998 7,766,300 77,700 180,800 (45,000) (55,000) (223,500) (65,000)
Stock issued for cash and
investor relations services,
net of $156,600 issue costs 1,914,000 19,100 3,054,000 - - - 3,073,100
Stock issued for merchant
banking services 1,000,000 10,000 1,426,500 - - - 1,436,500
Stock issued for computer
programming services 25,000 300 33,500 - - - 33,800
Stock issued for future
computer programming
services 127,500 1,300 62,500 - (63,800) - -
Stock issued for future
computer programming
services 100,000 1,000 46,000 - (47,000) - -
Stock issued for acquired
research and development 1,450,000 14,500 261,000 - - - 275,500
Stock issued to officer for
future management services 100,000 1,000 15,000 - (16,000) - -
Stock issued for cash and
consulting services 1,000,000 10,000 190,000 - - - 200,000
Stock issued to officer and
former officer for
management services 200,000 2,000 32,000 - - - 34,000
Stock issued for merchant
banking services 1,000,000 10,000 170,000 - - - 180,000
Collection of stock
subscription receivable - - - 45,000 - - 45,000
Amortization of deferred
compensation - - - - 122,500 - 122,500
Net loss - - - - - (5,552,100) (5,552,100)
----------- -------- ---------- --------- --------- ----------- ------------
BALANCE, December 31, 1999 14,682,800 $146,900 $ 5,471,300 $ - $ (59,300) $(5,775,600) $ (216,700)
=========== ======== =========== ========= ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 4
- -------------------------------------------------------------------------------
<PAGE>
I CRYSTAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,552,100) $ (191,500)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH FROM OPERATING ACTIVITIES
Amortization of deferred compensation 122,500 5,000
Depreciation 1,600 -
Noncash research and development expenses
incurred in exchange for debt - 65,000
Noncash research and development expenses
incurred in exchange for stock 309,300 25,000
Noncash general and administrative expenses
incurred in exchange for stock 4,041,200 90,000
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable (75,700) -
Prepaid expenses (900) -
Accounts payable 72,100 -
Deferred revenue 67,000 -
------------- -------------
Net cash from operating activities (1,015,000) (6,500)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (19,500) -
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceed from stock issuances 836,400 -
Advances from related parties, net 98,700 -
Proceeds from convertible debt 78,200 -
Collection of stock subscription receivables 45,000 -
------------- -------------
Net cash from financing activities 1,058,300 -
------------- -------------
NET CHANGE IN CASH 23,800 (6,500)
CASH, BEGINNING OF PERIOD - 6,500
------------- -------------
CASH, end of period $ 23,800 $ -
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 1,600 $ -
============= =============
Income taxes paid $ - $ -
============= =============
NONCASH TRANSACTIONS
Stock issued for future services $ 126,800 $ 60,000
============= =============
Stock issued for stock subscriptions receivable $ - $ 45,000
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 5
- -------------------------------------------------------------------------------
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND CESSATION OF DEVELOPMENT STAGE OPERATIONS
ORGANIZATION
I crystal, Inc. (the Company or I crystal) was incorporated October 5,
1994 in the state of Delaware as Cable Group South, Inc. In November
1998, the Company changed its name to Softnet Industries, Inc.; and, in
June 1999, to avoid a conflict with another company with a similar name,
the name was changed again to I crystal, Inc.
In July 1998, after giving affect to the reverse stock split discussed
below, the Company president received 375,000 shares of common stock in
exchange for services. Effective October 19, 1998, stockholders approved
an eight to one reverse stock split, reducing the number of outstanding
shares from 6,130,000 to 766,300. All references in the accompanying
financial statements to number of shares and per share amounts have been
restated to reflect the reduced number of shares outstanding.
On December 1, 1998, the Company entered into a memorandum of agreement
with Diversified Cosmetics International, Inc. (Diversified), a related
party (Note 8), to license the rights to certain internet-based gaming
software that was in the process of being developed by Diversified.
Under terms of the agreement, Diversified had the option to require the
Company to purchase the rights, including all source code and technical
specifications, graphics, domain names and trademarks, in exchange for
2.5 million shares of common stock. Diversified exercised its option on
December 10, 1998. Consideration also included a $65,000 note payable
given for the additional amount of development undertaken by Diversified
subsequent to entering into the agreement. The note was paid in full
during 1999.
Concurrent with the acquisition of the software rights, the Company
issued two million shares to certain owners of Diversified. The shares
were issued in exchange for stock subscriptions receivable and for
future services to be provided in their capacity as corporate officers
of I crystal. Another 2.5 million shares were issued to certain
individuals in exchange for stock subscriptions receivable and for
services provided in connection with facilitating the transfer of the
software from Diversified to the Company.
CESSATION OF DEVELOPMENT STAGE OPERATIONS AND GOING CONCERN
For the period October 5, 1994 through June 30, 1999, the Company's
efforts were devoted to corporate structuring, financial and business
planning, recruiting directors and advisors, raising additional
financing, establishing the technological feasibility of the gaming
software acquired from Diversified, and negotiating a master license
agreement. Accordingly, through June 30, 1999, the Company was
characterized as a development stage company. Development stage
operations were financed primarily through the issuance of shares of
common stock for services and, in March 1999, the issuance of 1,914,000
shares of common stock for net proceeds of $800,300. Prior to the March
1999 issuance, the Company had no material amount of assets or
liabilities.
In September 1999, the Company established offices in Surrey, British
Columbia, where it engages in developing and licensing software related
to the internet gaming industry. Products include various theme-oriented
blackjack and poker games, slot machines, and bingo games. The Company
does not conduct any gaming activities itself but has entered into a
nonexclusive master license agreement with DCI, Inc. (Master Licensee),
a related party (Note 8), for use of the Company's gaming technology. In
the third quarter of 1999, the Company began realizing revenues from
this agreement and development stage operations ceased.
On August 17, 1999, I crystal Software Inc. (I crystal Software) was
incorporated in the province of British Columbia, Canada. Upon
incorporation, all founding shares were issued to the officers of I
crystal. Effective December 13, 1999, the officers contributed all
shares to the Company, at which time I crystal Software became a
wholly-owned subsidiary of I crystal. I crystal Software has
subsequently carried out essentially all of the Company's software
development activity.
6
- -------------------------------------------------------------------------------
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND CESSATION OF DEVELOPMENT STAGE OPERATIONS (Continued)
The Company has incurred net losses since inception; and, at
December 31, 1999, it had a working capital deficiency of $215,600 and
a stockholders' deficit of $216,700. The Company has not yet
generated revenues sufficient to fund its operations. Accordingly,
the Company's ability to accomplish its business strategy and to
ultimately achieve profitable operations is dependent on its capacity
to obtain additional financing and execute its business plan.
Although cash flows from licensing revenues have been increasing as
games and websites are developed and licensed, management does not
anticipate that cash revenues will be adequate to fund its cash
expenses until mid 2000. The high level of non-cash expenses
incurred during 1999 and 1998 in exchange for stock is not expected
to be repeated in 2000 and future periods. Management also believes
that it may be able to negotiate favorable terms of repayment for
the $98,700 of advances from Diversified, a related party (Note 8).
In January 2000, the Company commenced negotiations to raise an
additional $200,000 of equity financing, which management hopes to
complete by the end of April 2000. During the remainder of 2000, the
Company intends to raise another $1.5 million in private equity
financing. Proceeds will be used to fund its software development
projects. Success in raising this additional financing is dependent
on the Company's ability to demonstrate that it can fulfill its
business strategy to license its games and websites and generate
significant royalty revenues. Management believes these plans will
allow the Company to generate sufficient cash to support its
operations through December 31, 2000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts reported in the financial statements
and accompanying notes. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of I crystal, Inc. and Subsidiary
include the accounts of its wholly-owned subsidiary, I crystal Software,
Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
All highly liquid investments, with a maturity of three months or less
at the time of purchase, are considered to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company extends credit to licensees on an unsecured basis.
Management establishes allowances for doubtful accounts based on
evaluation of historical and current payment trends as well as
consideration of specific collection issues that may require additional
specific allowances. At December 31, 1999, all accounts receivable were
considered to be fully collectible.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed
using the straight-line method over six years.
VALUATION OF LONG-LIVED ASSETS
The Company periodically reviews long-lived assets, including
identifiable intangible assets, whenever events or changes in
circumstances indicate that the carrying amount of an asset may be
impaired and not recoverable. Adjustments are made if the sum of the
expected future undiscounted cash flows is less than the carrying
amount.
REVENUE RECOGNITION
The Company recognizes revenue when earned, in accordance with American
Institute of Certified Public Accountants Statement of Position (SOP)
97-2, SOFTWARE REVENUE RECOGNITION, and SOP 98-9, MODIFICATION OF SOP
97-2 WITH RESPECT TO CERTAIN TRANSACTIONS. Royalties based upon
licensees' net gaming revenues are recognized as licensees' revenues are
earned. In the event that licensee's revenue recognition criteria are
not met, revenue is recognized when received. Revenue from packaged
product sales to and through distributors and resellers is recorded when
related products are shipped. Revenue attributable to significant
undelivered elements, including maintenance and technical support, is
recognized over the contract period as elements are delivered.
7
- -------------------------------------------------------------------------------
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SOFTWARE DEVELOPMENT COSTS
Costs incurred for research and development of software developed for
resale or licensing are expensed until either technological feasibility
is proven or a working copy of the software is completed. Costs incurred
once feasibility has been established, but prior to release to
customers, are capitalized and amortized on a product-by-product basis.
At the time the software rights described in Note 1 were acquired in
exchange for stock and a note payable from Diversified, a related party
(Note 8), technological feasibility of the software had not been
established. Accordingly, the $90,000 of consideration given by the
Company for the software rights was charged to research and development
expense. Technological feasibility of the software was established in
late March 1999. As described in Note 8, on April 8, 1999, the Company
entered into a master license agreement for the use of the software. Due
to the short period of time between which technological feasibility was
established and the product was available for release to the Master
Licensee, the Company incurred no material amount of development costs
requiring capitalization.
Effective August 28, 1999, the Company acquired from Power Star, Inc.
(Power Star) the software rights and related source codes, domain names,
websites, and trademarks for certain internet-based gaming technology
under development known as METROBINGO. In exchange, the Company is
obligated to issue 1,450,000 shares of common stock to Power Star. At
the time of the acquisition, technological feasibility of the software
had not been established, and the consideration given by the Company for
the software rights was charged to research and development expense. The
Company has continued to develop the software, but as of December 31,
1999 technological feasibility was still not established. The Company
hopes to complete development during the third quarter of 2000.
INCOME TAXES
The Company accounts for income taxes using the liability method.
Deferred income taxes are provided for temporary differences between the
basis of assets and liabilities for financial reporting and income tax
purposes at enacted tax rates. Deferred tax amounts represent the future
tax consequences of those differences, which will be either deductible
or taxable when the assets and liabilities are recovered or settled.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the weighted
average number of shares outstanding during the period, after giving
retroactive effect to stock splits. Diluted earnings per share are
computed by determining the number of additional shares that are deemed
outstanding due to share equivalents.
SEGMENT INFORMATION
The Company reports segments in accordance with Statement of Financial
Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 requires that
reportable segments be designated using a management approach, which
relies on the internal organization used by management for making
operational decisions and assessing performance. SFAS No. 131 also
requires certain disclosures about products and services, geographic
areas, and major customers. Management assesses the performance of its
operations as a single segment.
ADVERTISING
Advertising costs are charged to operations when incurred. During 1999
and 1998, advertising expense totaled $84,000 and $-0-, respectively.
8
- -------------------------------------------------------------------------------
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Among
other provisions, SFAS No. 133 requires that entities recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those financial instruments at fair value. Accounting for
changes in fair value is dependent on the use of the derivatives and
whether such use qualifies as hedging activity. The new standard, as
amended, becomes effective for the Company in fiscal 2001, and
management is currently assessing the impact, if any, it may have on
financial position and results of operations.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1999:
<TABLE>
<S> <C>
Computer equipment $ 17,200
Furniture and fixtures 2,300
---------------
19,500
Less accumulated depreciation (1,600)
---------------
$ 17,900
===============
</TABLE>
Depreciation expense in 1999 and 1998 was $1,600 and $-0-,
respectively.
NOTE 4 - CONVERTIBLE DEBT
In August 1999, the Company received a $78,200 loan from West Peak
Ventures of Canada, Inc. (West Peak). Under the terms of the loan,
the advance is unsecured and bears interest at 2% above the prime
banking lending rate. The loan was due in full on November 30, 1999,
unless converted into 200,000 common shares of the Company, which the
Company agreed to register for resale at the request of West Peak. On
December 23, 1999 the Company issued 200,000 common shares to West
Peak. West Peak did not accept the shares tendered based on its
position that the shares were to be registered on delivery. On
February 15, 2000, after negotiations to resolve the issue failed,
West Peak filed a claim against the Company in the Supreme Court of
British Columbia, Canada, claiming breach of the loan agreement.
West Peak is seeking $78,200 plus interest, costs and such other
relief as the Court may deem necessary. As of March 31, 2000,
management believes that the Company has not yet been properly served
in the action. Due to the uncertainties surrounding this matter, the
Company continues to report an obligation for the $78,200 loan rather
than present the 200,000 common shares as issued and outstanding.
NOTE 5 - INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Deferred income tax benefit $ 1,887,700 $ 65,100
Increase in valuation allowance (1,887,700) (65,100)
-------------- ---------------
$ - $ -
=============== ===============
</TABLE>
The total provision differs from the amount computed using statutory tax
rates as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Tax benefit at statutory rate of 34% $ 1,887,700 $ 65,100
Increase in valuation allowance (1,887,700) (65,100)
-------------- ---------------
$ - $ -
=============== ===============
</TABLE>
9
- -------------------------------------------------------------------------------
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
NOTE 5 - INCOME TAXES (Continued)
Tax effects of temporary differences that give rise to deferred tax
assets, based on a 34% tax rate, consist solely of a $1,963,700 benefit
from net operating loss carryforwards. The Company has incurred losses
since its inception and has filed no income tax returns. The losses
incurred to date may be limited due to a change in control of the
Company and limitations on the deductibility of services received in
exchange for issuance of common stock. Management currently believes
uncertainty exists surrounding realization of the deferred tax asset and
has recorded a $1,963,700 valuation allowance to offset completely the
carrying amount of the asset.
In the event the Company files all delinquent tax returns and is able to
recognize some portion of the losses generated, the carryforward period
of net operating losses begins to expire in 2009.
NOTE 6 - EARNINGS PER SHARE
The numerators and denominators of basic and diluted earnings per share
are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Numerator - net loss $ (5,552,100) $ (191,500)
============== ===============
Denominator - weighted average
number of shares outstanding 10,754,100 735,300
=============== ===============
</TABLE>
At December 31, 1999 and 1998, the Company had no potential common
shares that would have had a dilutive effect.
NOTE 7 - CAPITAL STOCK AND STOCK-BASED COMPENSATION
The Company has a single class of $0.01 par value common stock. Thirty
million shares are authorized and 14,682,800 shares are issued (or
committed to be issued) and outstanding at December 31, 1999. On October
19, 1998, the Board of Directors approved a one-for-eight reverse stock
split. The par value of common stock remained unchanged. All references
in the accompanying financial statements to number of shares and per
share amounts have been restated to reflect the reduced number of shares
outstanding.
During 1999, the Company issued (or committed to be issued) a total of
6,916,500 shares, as follows:
- 1,914,000 shares issued on March 30, 1999 for $800,300 of net
cash proceeds and investor relation services.
- 1.0 million shares issued on April 14, 1999 for merchant banking
services.
- 25,000 shares issued on April 22, 1999 for computer programming
services.
- 127,500 shares issued on June 28, 1999 for future computer
programming services. Deferred compensation is being recognized
ratably over seven months.
- 100,000 shares issued on July 1, 1999 for future computer
programming services. Deferred compensation is being recognized
ratably over 25 months.
- 1,450,000 shares issued on August 24, 1999 for certain gaming
technology under development known as METROBINGO
- 100,000 shares issued on November 1, 1999 to an officer of the
Company for future management services. Deferred compensation is
being recognized ratably over 12 months.
NOTE 7 - CAPITAL STOCK AND STOCK-BASED COMPENSATION (Continued)
10
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
- 1.0 million shares issued on December 1, 1999 for $70,000 of cash
proceeds and consulting services.
- 100,000 shares issued on December 2, 1999 to an officer of the
Company.
- 100,000 shares issued on December 2, 1999 to a former officer of
the Company.
- 1.0 million shares issued on December 3, 1999 for merchant
banking services.
In December 1999, the Company issued an additional 200,000 shares of
common stock that are not reflected above. The shares were issued in
connection with the terms of the convertible debt described in Note 4.
Because the shares were not accepted as settlement for the convertible
debt, they have not been presented as issued and outstanding.
During 1998, after giving affect to the reverse stock split, the Company
issued (or committed to issue) a total of 7,375,000 shares, as follows:
- 375,000 shares issued July 6, 1998 for services of the Company
President through November 1998.
- 2.5 million shares issued December 10, 1998 to Diversified, a
related party (Note 7), along with a $65,000 note payable, for
the rights to certain software under development (Notes 1 and 2).
- 2.0 million shares issued December 10, 1998 to the Company's
officers for a $20,000 stock subscription receivable and for
future services. Deferred compensation is being recognized
ratably over twelve months.
- 2.5 million shares issued December 16, 1998 for a $25,000 stock
subscription receivable and for services provided in connection
with facilitating the transfer of the software from Diversified
to the Company.
Subsequent to December 31, 1999, the Company was in the process of
exploring several options to raise additional private equity financing.
As of March 31, 2000, it had made no firm commitments. It was also in
the process of developing a stock option plan.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company is affiliated with the following entities:
DIVERSIFIED COSMETICS INTERNATIONAL, INC. (DIVERSIFIED)
The Company is affiliated with Diversified through common ownership.
Diversified is an Alberta corporation that was previously listed on the
Alberta Stock Exchange. As described in Note 1, in December 1998, the
Company acquired certain software rights from Diversified. Subsequent to
the transfer of the technology to the Company, Diversified has had no
significant business operations; and, as of March 23, 2000, it was in
the process of winding down its affairs.
Prior to the Company establishing its own bank account, all cash
transactions were deposited in and disbursed from Diversified's bank
account. Diversified has also paid various expenses on the Company's
behalf. The net effect of these circumstances has resulted in the
Company owing Diversified $98,700 at December 31, 1999. During 1999, the
Company paid $6,700 of management fees to Diversified for providing
these services.
11
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
Unaudited summarized financial information for Diversified as of January
31, 1999 and for the year then ended is as follows:
<TABLE>
<CAPTION>
1/31/99
(UNAUDITED)
---------------
<S> <C>
Current assets $ 101,600
Investment in I crystal 25,000
Due from I crystal 43,900
---------------
Total assets $ 170,500
===============
Current liabilities $ 120,700
Noncurrent Liabilities 1,400
Redeemable preferred stock 1,500
Stockholders' equity 46,900
---------------
Total liabilities and stockholders' equity $ 170,500
===============
</TABLE>
<TABLE>
<CAPTION>
1/31/99 1/31/98
(UNAUDITED) (UNAUDITED)
--------------- ---------------
<S> <C> <C>
Revenue $ 400 $ 500
Operating expenses 279,900 46,700
--------------- ---------------
Operating loss (279,500) (46,200)
Other income 138,000 -
Income tax - -
--------------- ---------------
Net loss $ (141,500) $ (46,200)
=============== ================
</TABLE>
DCI, INC. (THE MASTER LICENSEE)
Effective April 8, 1999, the Company entered into a ten-year
nonexclusive master license agreement with the Master Licensee for use
of the Company's technology. Essentially all of the Company's subsequent
revenue has been realized under this agreement. Leonard Stamko, a
consultant retained by the Master Licensee, is a stockholder of the
Company and a relative of officers and directors of the Company.
The Master Licensee is incorporated in the Commonwealth of Dominica,
where it is licensed to conduct international wagering,
lotteries and games of chance by way of telecommunications.
Under terms of the license agreement, the Company is obligated to
provide a minimum of six new theme-oriented software packages and
websites per year, along with updates and technical support, and
development of specified electronic payment and accounting technology.
The Company is also obligated to provide a monthly advertising rebate
equal to the lesser of 10% of monthly net gaming revenue derived from
the Master Licensee's use of its software or the amount expended by the
Master Licensee on advertising.
The Company, in return, is to receive 40% of monthly net gaming revenue
derived from use of the software by the Master Licensee and 50% of
upfront fees charged by the Master Licensee to any sub-licensee. In the
event the Company produces certain of its games on CD-ROM and enters
into a reseller agreement with the Master Licensee, the Company will
receive 10% of gross revenue derived from the Master Licensee's sales of
the software. The Master licensee is also obligated to spend $10,000 per
month on advertising for each software package and website licensed from
the Company. Under terms of an amendment to the licensing agreement
dated May 1, 1999, the Company has the option to spend up to a specified
amount on promotion of the Master licensee's website in exchange for an
additional 10% share of net gaming revenue, not to exceed the total
amount spent by the Company on promotion.
12
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
In connection with the agreement, the Company also received $67,000
of a $100,000 upfront fee. The remaining $33,000 is due from the Master
Licensee when the Company has completed development of a specified
software package. Recognition of the $67,000 of revenue received in 1999
has been deferred. Once the final amount is received, the total balance
will be recognized over the remainder of the ten-year term of the
agreement, as ongoing maintenance, support and upgrades are delivered.
In October 1999, the Company entered into a second ten-year agreement
with the Master Licensee related to licensing three specific
theme-oriented internet casino sites. Under this agreement, once all
three sites are ready for operation, the Company is to receive an
upfront fee. It will then receive 40% of the first $100,000 of monthly
net gaming revenue derived from the sites and 30% of monthly net gaming
revenue in excess of $100,000.
SLAMKO VISSER, CHARTERED ACCOUNTANTS (SLAMKO VISSER)
The Company is affiliated with the Canadian chartered accounting firm
Slamko Visser through common ownership. Subsequent to December 31, 1998,
the Company employed the services of Slamko Visser to maintain its
accounting system and records. During 1999, the Company paid $22,000 to
Slamko Visser for consulting and accounting fees and related costs.
NOTE 9 - SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
SEGMENT INFORMATION
The Company's primary operations consist of the development and
licensing of internet-based gaming technology. Management assesses the
performance of its operations as a single segment. Through June 30,
1999, the Company's efforts were focused primarily on development stage
operations, and no material activities occurred within this segment
prior to that date. The following tables and schedules summarize certain
information about this segment.
<TABLE>
<CAPTION>
Internet Gaming
Software Development
--------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
External revenues $ 90,900 $ -
Intersegment revenues - -
Interest expense 800 -
Depreciation and amortization 1,400 -
Segment loss before tax (688,800) (90,000)
Income tax expense - -
Segment loss (688,800) (90,000)
Segment assets 101,900 -
Expenditures for segment assets 15,600 -
Total revenues for reportable segments $ 90,900 $ -
Less intersegment revenues - -
--------------- ---------------
$ 90,900 $ -
=============== ===============
Total loss before tax for reportable segments $ (688,800) $ (90,000)
Corporate headquarters expense (4,863,300) (101,500)
--------------- ---------------
Consolidated total $ (5,552,100) $ (191,500)
=============== ===============
</TABLE>
13
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
NOTE 9 - SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS (Continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Total assets for reportable segments $ 101,900 $ -
Corporate headquarters assets 16,400 -
--------------- ---------------
Consolidated total $ 118,300 $ -
=============== ===============
</TABLE>
GEOGRAPHIC INFORMATION
Following is a summary of revenues and long-lived assets related to the
respective countries in which the Company operates. Revenues are
attributed to countries based on location of customers.
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------
Long-Lived
Revenues Assets Revenues
--------------- --------------- ---------------
<S> <C> <C> <C>
Canada $ - $ 17,900 $ -
Commonwealth of Dominica 90,900 - -
--------------- --------------- ---------------
Consolidated total $ 90,900 $ 17,900 $ -
=============== =============== ===============
</TABLE>
MAJOR CUSTOMERS
As described in Note 8, in April 1999, the Company entered into a master
license agreement with the Master Licensee, a related party, from which
it has realized essentially all of the $90,900 revenue earned during
1999.
NOTE 10 - COMMITMENTS
Commencing in September 1999, the Company entered into an operating
lease agreement for use of facilities located in Surrey, British
Columbia, Canada.
Minimum future annual obligations under terms of the lease is as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
2000 $10,800
2001 10,800
2002 5,400
-------
$27,000
=======
</TABLE>
During 1999 and 1998, rent expense totaled $4,400 and $ -0-,
respectively.
NOTE 11 - CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, and accounts receivable. The Company places its temporary
cash investments with major Canadian financial institutions. Balances
may at times exceed federally insured limits. The Company extends credit
to its Master Licensee, which operates in the Commonwealth of Dominica
(Note 7). Collateral is not required. Essentially all accounts
receivable were due from the Master Licensee at December 31, 1999.
NOTE 12 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash, accounts receivable and payable, and other
current liabilities approximate their carrying amounts. The fair value
of advances from stockholders approximates its carrying amount because
of the short-term nature of the financial instrument.
14
- -------------------------------------------------------------------------------
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
INDEPENDENT ACCOUNTANT'S REPORT
AND
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 2000 AND
YEAR ENDED DECEMBER 31, 1999
<PAGE>
I CRYSTAL INC.
TABLE OF CONTENTS
QUARTER ENDED MARCH 31, 2000 AND YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT ACCOUNTANT'S REPORT............................................1
FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet..................................2
Condensed Consolidated Statement of Operations........................3
Condensed Consolidated Statement of Cash Flows........................4
Notes to Condensed Consolidated Financial Statements ................4-10
</TABLE>
<PAGE>
[LETTERHEAD]
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders
I crystal, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of I
crystal Inc. as of March 31, 2000, and the related condensed consolidated
statements of operations and cash flows for the three months ended March 31,
2000. These financial statements are the responsibility of I crystal Inc.'s
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses since its inception and
has a net stockholders' deficit. These conditions raise substantial doubt
about its ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of I crystal Inc. as of December
31, 1999, and the consolidated related statements of operations,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated March 31, 2000, which included an
explanatory paragraph describing conditions that raised substantial doubt
about the Company's ability to continue as a going concern, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999, is fairly presented, in all material respects,
in relation to the balance sheet from which it has been derived.
/s/ MOSS ADAMS LLP
Bellingham, Washington
May 18, 2000
1
<PAGE>
I CRYSTAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
QUARTER ENDED MARCH 31, 2000 AND YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
2000 1999
--------------- ----------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 86,700 $ 23,800
Accounts receivable -- Master Licensee 98,700 75,700
Prepaid expenses 24,800 900
--------------- ----------------
Total current assets 210,200 100,400
PROPERTY AND EQUIPMENT, net 19,200 17,900
--------------- ----------------
TOTAL ASSETS $ 229,400 $ 118,300
=============== ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 54,400 $ 72,100
Advances from related party 102,100 98,700
Deferred revenue -- Master Licensee 134,000 67,000
Convertible debt 78,200 78,200
--------------- ----------------
Total current liabilities 368,700 316,000
ADVANCES FROM STOCKHOLDERS 19,000 19,000
--------------- ----------------
Total liabilities 387,700 335,000
--------------- ----------------
STOCKHOLDERS' DEFICIT
Common stock, $0.01 par value, 30 million shares authorized;
15,182,800 and 14,682,800 shares issued and outstanding, respectively 151,900 146,900
Additional paid-in capital 5,678,800 5,471,300
Deferred compensation (40,600) (59,300)
Accumulated deficit (5,948,400) (5,775,600)
--------------- ----------------
Total stockholders' deficit (158,300) (216,700)
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 229,400 $ 118,300
=============== ================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS 2
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
--------------- ----------------
<S> <C> <C>
REVENUE
Software royalties $ 105,500 $ -
--------------- ----------------
OPERATING EXPENSES
General and administrative 209,000 2,444,900
Research and development 61,600 8,000
Sales and marketing 7,500 2,300
--------------- ----------------
Total operating expenses 278,100 2,455,200
--------------- ----------------
LOSS FROM OPERATIONS (172,600) (2,455,200)
--------------- ----------------
OTHER EXPENSE
Interest 200 100
--------------- ----------------
Total other expense 200 100
--------------- ----------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (172,800) (2,455,300)
PROVISION FOR INCOME TAXES - -
--------------- ----------------
NET LOSS $ (172,800) $ (2,455,300)
=============== ================
EARNINGS (LOSS) PER SHARE
Basic and diluted $(0.01) $(0.32)
====== ======
Weighted average common shares
outstanding (basic and diluted) 14,693,700 7,787,500
=============== ================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 3
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
QUARTER ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (172,800) $ (2,455,300)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH FROM OPERATING ACTIVITIES
Amortization of deferred compensation 18,700 15,000
Depreciation 1,000 -
Noncash general and administrative expenses
incurred in exchange for stock 112,500 2,272,900
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable (23,000) -
Prepaid expense (23,900) -
Accounts receivable - lawyer trust account - (577,000)
Accounts payable (17,700) -
Deferred revenue 67,000 -
--------------- ----------------
Net cash from operating activities (38,200) (744,400)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,300) (500)
--------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceed from stock issuances 100,000 800,300
Advances from (to) related parties, net 3,400 (100,400)
Collection of stock subscription receivables - 45,000
--------------- ----------------
Net cash from financing activities 103,400 744,900
--------------- ----------------
NET CHANGE IN CASH 62,900 -
CASH, beginning of period 23,800 -
--------------- ----------------
CASH, end of period $ 86,700 $ -
=============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ - $ -
=============== ================
Income taxes paid $ - $ -
=============== ================
NONCASH TRANSACTIONS
Stock issued for future services $ - $ 40,000
=============== ================
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 4
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTE 1 - ORGANIZATION AND CESSATION OF DEVELOPMENT STAGE OPERATIONS
ORGANIZATION
I crystal, Inc. (the Company or I crystal) was incorporated October 5,
1994 in the state of Delaware as Cable Group South, Inc. In November
1998, the Company changed its name to Softnet Industries, Inc.; and, in
June 1999, to avoid a conflict with another company with a similar name,
the name was changed again to I crystal, Inc.
In July 1998, after giving affect to the reverse stock split discussed
below, the Company president received 375,000 shares of common stock in
exchange for services. Effective October 19, 1998, stockholders approved
an eight to one reverse stock split, reducing the number of outstanding
shares from 6,130,000 to 766,300. All references in the accompanying
financial statements to number of shares and per share amounts have been
restated to reflect the reduced number of shares outstanding.
On December 1, 1998, the Company entered into a memorandum of agreement
with Diversified Cosmetics International, Inc. (Diversified), a related
party (Note 5), to license the rights to certain internet-based gaming
software that was in the process of being developed by Diversified.
Under terms of the agreement, Diversified had the option to require the
Company to purchase the rights, including all source code and technical
specifications, graphics, domain names and trademarks, in exchange for
2.5 million shares of common stock. Diversified exercised its option on
December 10, 1998. Consideration also included a $65,000 note payable
given for the additional amount of development undertaken by Diversified
subsequent to entering into the agreement. The note was paid in full
during 1999.
Concurrent with the acquisition of the software rights, the Company
issued two million shares to certain owners of Diversified. The shares
were issued in exchange for stock subscriptions receivable and for
future services to be provided in their capacity as corporate officers
of I crystal. Another 2.5 million shares were issued to certain
individuals in exchange for stock subscriptions receivable and for
services provided in connection with facilitating the transfer of the
software from Diversified to the Company.
CESSATION OF DEVELOPMENT STAGE OPERATIONS AND GOING CONCERN
For the period October 5, 1994 through June 30, 1999, the Company's
efforts were devoted to corporate structuring, financial and business
planning, recruiting directors and advisors, raising additional
financing, establishing the technological feasibility of the gaming
software acquired from Diversified, and negotiating a master license
agreement. Accordingly, through June 30, 1999, the Company was
characterized as a development stage company. Development stage
operations were financed primarily through the issuance of shares of
common stock for services and, in March 1999, the issuance of 1,914,000
shares of common stock for net proceeds of $800,300. Prior to the March
1999 issuance, the Company had no material amount of assets or
liabilities.
In September 1999, the Company established offices in Surrey, British
Columbia, where it engages in developing and licensing software related
to the internet gaming industry. Products include various theme-oriented
blackjack and poker games, slot machines, and bingo games. The Company
does not conduct any gaming activities itself but has entered into a
nonexclusive master license agreement with DCI, Inc. (Master Licensee),
a related party (Note 5), for use of the Company's gaming technology. In
the third quarter of 1999, the Company began realizing revenues from
this agreement and development stage operations ceased.
On August 17, 1999, I crystal Software Inc. (I crystal Software) was
incorporated in the province of British Columbia, Canada. Upon
incorporation, all founding shares were issued to the officers of I
crystal. Effective December 13, 1999, the officers contributed all
shares to the Company, at which time I crystal Software became a
wholly-owned subsidiary of I crystal. I crystal Software has
subsequently carried out essentially all of the Company's software
development activity.
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 5
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 6
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTE 1-ORGANIZATION AND CESSATION OF DEVELOPMENT STAGE OPERATIONS (Continued)
The Company has incurred net losses since inception; and, at March 31,
2000, it had a working capital deficiency of $158,500 and a
stockholders' deficit of $158,300. The Company has not yet generated
revenues sufficient to fund its operations. Accordingly, the Company's
ability to accomplish its business strategy and to ultimately achieve
profitable operations is dependent on its capacity to obtain additional
financing and execute its business plan.
Although cash flows from licensing revenues have been increasing as
games and websites are developed and licensed, management does not
anticipate that cash revenues will be adequate to fund its cash expenses
until the third quarter of 2000. The high level of non-cash expenses
incurred during 1999 in exchange for stock is not expected to be
repeated in 2000 and future periods. Management also believes that it
may be able to negotiate favorable terms of repayment for the $102,100
of advances from Diversified, a related party (Note 5).
During the quarter ended March 31, 2000, the Company raised $100,000 in
a private placement of common stock. Subsequent to March 31, 2000, it
raised an additional $100,000. During the remainder of 2000, the Company
plans to raise another $1.5 million in private equity financing.
Proceeds will be used to fund its software development projects. Success
in raising this additional financing is dependent on the Company's
ability to demonstrate that it can fulfill its business strategy to
license its games and websites and generate significant royalty
revenues. Management believes these plans will allow the Company to
generate sufficient cash to support its operations through March 31,
2001.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information included herein is unaudited; however, the
information reflects all adjustments (consisting solely of normal
recurring adjustments) that are in the opinion of management, necessary
to a fair presentation of the financial position, results of operations,
and cash flows for the interim periods.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of I crystal, Inc. and Subsidiary
include the accounts of its wholly-owned subsidiary, I crystal Software,
Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes revenue when earned, in accordance with American
Institute of Certified Public Accountants Statement of Position (SOP)
97-2, SOFTWARE REVENUE RECOGNITION, and SOP 98-9, MODIFICATION OF SOP
97-2 WITH RESPECT TO CERTAIN TRANSACTIONS. Royalties based upon
licensees' net gaming revenues are recognized as licensees' revenues are
earned. In the event that licensee's revenue recognition criteria are
not met, revenue is recognized when received. Revenue from packaged
product sales to and through distributors and resellers is recorded when
related products are shipped. Revenue attributable to significant
undelivered elements, including maintenance and technical support, is
recognized over the contract period as elements are delivered.
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 7
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Among
other provisions, SFAS No. 133 requires that entities recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those financial instruments at fair value. Accounting for
changes in fair value is dependent on the use of the derivatives and
whether such use qualifies as hedging activity. The new standard, as
amended, becomes effective for the Company in fiscal 2001, and
management is currently assessing the impact, if any, it may have on
financial position and results of operations.
NOTE 3 - CONVERTIBLE DEBT
In August 1999, the Company received a $78,200 loan advance from West
Peak Ventures of Canada, Inc. (West Peak). Under the terms of the loan,
the advance is unsecured and bears interest at 2% above the prime
banking lending rate. The loan is due in full on November 30, 1999,
unless converted into 200,000 common shares of I crystal, which the
Company agrees to register for resale at the request of West Peak.
On December 23, 1999 the Company issued 200,000 common shares to West
Peak. West Peak did not accept the shares tendered based on its position
that the shares were to be registered upon delivery. On February 15,
2000, after negotiations to resolve the issue failed, West Peak filed a
claim against the Company in the Supreme Court of British Columbia,
Canada, claiming breach of the loan agreement. West Peak is seeking
$78,200 plus interest, costs and such other relief as the Court may deem
necessary. As of May 18, 2000, management believes that the Company has
not yet been properly served in the action. Due to the uncertainties
surrounding this matter, the Company continues to report an obligation
for the $78,200 loan rather than present the 200,000 common shares as
being issued and outstanding.
NOTE 4 - CAPITAL STOCK AND STOCK-BASED COMPENSATION
The Company has a single class of $0.01 par value common stock. Thirty
million shares are authorized and 15,182,800 shares are issued (or
committed to be issued) and outstanding at March 31, 2000. During the
first quarter of 2000, the Company committed to be issued 500,000 shares
for $100,000 of cash proceeds and consulting services. Subsequent to
March 31, 2000, the Company received another $100,000 for an additional
500,000 shares.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company is affiliated with the following entities:
DIVERSIFIED COSMETICS INTERNATIONAL, INC. (DIVERSIFIED)
The Company is affiliated with Diversified through common ownership.
Diversified is an Alberta corporation that was previously listed on the
Alberta Stock Exchange. As described in Note 1, in December 1998, the
Company acquired certain software rights from Diversified. Subsequent to
the transfer of the technology to the Company, Diversified has had no
significant business operations; and, as of May 18, 2000, it was in the
process of winding down its affairs.
Prior to the Company establishing its own bank account, all cash
transactions were deposited in and disbursed from Diversified's bank
account. Diversified has also paid various expenses on the Company's
behalf. The net effect of these circumstances has resulted in the
Company owing Diversified $102,100 at March 31, 2000. Diversified has
stipulated no terms of repayment.
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 8
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTE 5-RELATED PARTY TRANSACTIONS (Continued)
DCI, INC. (THE MASTER LICENSEE)
Effective April 8, 1999, the Company entered into a ten-year
nonexclusive master license agreement with the Master Licensee for use
of the Company's technology. Essentially all of the Company's revenue
has been realized under this agreement. Leonard Slamko, a consultant
retained by the Master Licensee, is a stockholder of the Company and a
relative of officers and directors of the Company. The Master Licensee
is incorporated in the Commonwealth of Dominica, where it is licensed to
conduct international wagering, lotteries and games of chance by way of
telecommunications.
During the quarter ended March 31, 2000, the Company received $67,000 of
a $100,000 upfront fee from the Master Licensee. The remaining $33,000
is due when the Company has completed development of a specified
software package. Recognition of the $67,000 fee received in 2000 and
another $67,000 received under similar terms in 1999 has been deferred.
Once the final amounts are received, the total balance will be
recognized over the remainder of the ten-year term of the Master
Licensee agreement, as ongoing maintenance, support and upgrades are
delivered.
SLAMKO VISSER, CHARTERED ACCOUNTANTS (SLAMKO VISSER)
The Company is affiliated with the Canadian chartered accounting firm
Slamko Visser through common ownership. During the first quarter of 2000
and 1999, the Company paid $14,000 and $-0-, respectively, to Slamko
Visser for consulting and accounting fees and related costs.
NOTE 6 - SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
SEGMENT INFORMATION
The Company's primary operations consist of the development and
licensing of internet-based gaming technology. Management assesses the
performance of its operations as a single segment. Through June 30,
1999, the Company's efforts were focused primarily on development stage
operations, and no material activities occurred within this segment
prior to that date. The following tables and schedules summarize certain
information about this segment.
<TABLE>
<CAPTION>
Internet Gaming
Software Development
--------------------------------
March 31, March 31,
2000 1999
--------------- ---------------
<S> <C> <C>
External revenues $ 105,500 $ 90,900
Intersegment revenues - -
Segment income (loss) before tax 33,200 (11,500)
Segment assets 170,400 36,000
Total income (loss) before tax for reportable segments $ 33,200 $ (11,500)
Corporate headquarters expense (206,000) (2,443,800)
--------------- ---------------
Consolidated total $ (172,800) $ (2,455,300)
=============== ===============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 9
- --------------------------------------------------------------------------------
<PAGE>
ICRYSTAL, INC. AND SUBSIDIARY
NOTE 7 - SUBSEQUENT EVENTS
2000 INCENTIVE PLAN
Subject to stockholder approval, effective April 4, 2000, the Company
adopted the 2000 Incentive Plan (the "Plan"). Under the Plan, the
Company may make awards to employees, non-employees, directors,
consultants, and independent contractors of shares of common stock or
derivative securities such as incentive and nonqualified stock options,
stock purchase warrants, securities convertible into common stock, stock
appreciation rights, phantom stock, or any other form of derivative,
without limitation. The term of the Plan is ten years, and 3 million
shares are reserved for awards made under the Plan. The Plan stipulates
no terms or conditions for the awards to be granted. Subsequent to
adoption of the Plan, the Board of Directors granted 1,350,000 stock
options to employees, directors, and consultants, all of which have a
one-year vesting period and an exercise price of $0.20.
CORPORATE NAME CHANGE
Subject to stockholder approval, the Company has proposed a name change
from the I crystal, Inc. to iCrystal, Inc. The board believes the name
change better reflects the Company's business, given the popular usage
of the letter "i" to characterize Internet related businesses.
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 10
- --------------------------------------------------------------------------------
<PAGE>
PART III.
INDEX TO EXHIBITS
The following exhibits are filed pursuant to Rule 601 of Regulation S-B.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Certificate of Incorporation of the Company filed on October 5, 1994.*
3.2 Certificate for Renewal and Revival of Charter of the Company filed on
December 3, 1997.*
3.3 Certificate of Amendment of Certificate of Incorporation of the Company
filed November 18, 1998.*
3.4 Certificate of Amendment to the Certificate of Incorporation of the
Company filed on July 29, 1999.*
3.5 Bylaws of the Company adopted October 10, 1994.*
4.1 2000 Incentive Plan of the Company.
4.2 Form of Subscription Agreement for the 2000 Subscriptions.
10.1 License and Option to Sell Agreement dated December 1, 1998, by and
between Diversified and the Company.*
10.2 Notice of Exercise Put Option dated December 10, 1998, by and between
Diversified and the Company.*
10.3 Company Promissory Note dated December 10, 1998, issued to Diversified.*
10.4 Service Contract dated February 3, 1999, by and between the Company and
Leonard Slamko.*
10.5 Letter of Intent dated March 3, 1999, by and between the Company and
Digital Commerce.*
10.6 Agreement dated April 8, 1999, by and between the Company and the Master
Licensee.*
10.7 Agreement dated April 22, 1999, by and between the Company and RSA
Software, Inc.*
10.8 Addendum to Agreement dated May 1, 1999 by and between the Company and
Master Licensee.*
10.9 Service Contract dated June 28, 1999, by and between the Company 743633
Alberta Ltd. (DBA Computer Assistants).*
10.10 Service Contract dated July 1, 1999, by and between the Company and 4250
Investments Ltd.*
10.11 Service Contract dated July 1, 1999, by and between the Company and Sean
Comeau.*
10.12 Convertible Loan dated August 16, 1999, by and between the Company and
West Peak Ventures of Canada, Inc.*
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.13 Agreement dated August 28, 1999, by and between the Company and Power Star
Corp.*
10.14 Lease Indenture dated September 4, 1999 by and between Mario's Pinocchio
Ristorante, Ltd. and the Company.*
10.15 Agreement dated October 15, 1999, by and between the Master Licensee and
the Company.*
10.16 Service Contract dated November 1, 1999, by and between the Company and
Larry Hrabi.*
10.17 Service Contract dated December 2, 1999, by and between the Company and
Douglas Slamko.*
10.18 Agreement, dated March 13, 2000, by and between I Crystal Software and American
Amusements Co.
10.19 Agreement dated December 3, 1999 by and between the Company and CTC,
Inc.*
11.1 Statement re computation of per share earnings.*
16.1 Letter of Albright, Persing & Associates, Ltd. dated April 6, 2000.*
21.1 Subsidiaries of registrant.*
27.1 Financial Data Schedule.
</TABLE>
- --------------------
* Previously filed.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 23, 2000 I CRYSTAL INC.
By: /s/ Larry Hrabi
---------------------------
Larry Hrabi
Chief Executive Officer
By: /s/ Gerald P. Slamko
---------------------------
Gerald P. Slamko
Vice President, Treasurer and
Chief Financial Officer
<PAGE>
SUBSCRIPTION AGREEMENT
This SUSCRIPTION AGREEMENT ("Subscription Agreement") dated as of
____________________, 2000, is entered into by and between I crystal, Inc., a
Delaware corporation, and the individual or entity (the "Purchaser") whose
signature, name and address are set forth on the Purchaser's signature line of
this Subscription Agreement.
ARTICLE I
PURCHASE
Purchaser hereby purchases ____________________ fully paid and
non-assessable newly issued shares of the common stock (the "Common Stock"),
$0.01 par value per share, of the Company (the "Shares") at a price of
____________________ per share of Common Stock for an aggregate purchase price
of ____________________ payable in cash, immediately available funds or
________________________________________ upon the delivery of this Subscription
Agreement. Purchaser understands that this subscription is subject to acceptance
by the Company and that subscriptions not accepted shall be returned together
with amounts tendered.
ARTICLE II.
PURCHASER'S REPRESENTATIONS AND WARRANTIES
2. PURCHASER'S REPRESENTATIONS AND WARRANTIES. Purchaser hereby
represents and warrants to the Company as follows:
2.1 EXEMPTION FROM REGISTRATION. The Purchaser acknowledges that the
Shares have not been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and are being issued to Purchaser in reliance upon the
exemptions from such registration provided by Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
2.2 INVESTMENT INTENT. The Shares are being acquired by Purchaser for
investment purposes for Purchaser's own account only and not for sale or with a
view to distribution of all or any part of such Shares. No other person will
have any direct or indirect beneficial interests in the Shares.
2.3 ABILITY TO BEAR RISK. Purchaser can afford to bear the economic
risk of holding the Shares for an indefinite period and can afford to suffer the
complete loss of the investment.
2.4 ACCESS TO INFORMATION. Purchaser has been granted the opportunity
to ask questions of, and has received answers from, representatives of the
Company concerning the business, properties and condition of the Company and the
terms and conditions of the purchase of the Shares and has been granted the
opportunity to obtain any information that it deems necessary to undertake this
investment.
1
<PAGE>
2.5 REVIEW OF MATERIALS. By execution of this Subscription Agreement,
Purchaser acknowledges having read, understood and agreed to each and every
provision of the Subscription Agreement and EXHIBIT 1 hereto, which sets forth
the definition of an "Accredited Investor" under the Securities Act. Purchaser
acknowledges that no other materials have been provided.
2.6 RESTRICTED SECURITIES. Purchaser hereby confirms that it has been
informed that the Shares will be, when issued, restricted securities under the
Securities Act and may not be resold or transferred unless first registered
under the federal securities laws or unless an exemption from such registration
is available with respect to a resale in the United States or in an "offshore
transaction" (as such term is defined in Regulations S under the Securities
Act). Accordingly, Purchaser hereby acknowledges that it is prepared to hold the
Shares for an indefinite period. Purchaser is aware that Rule 144 promulgated by
the Securities and Exchange Commission (the "SEC") under the Securities Act is
not presently available to exempt the sale of the Shares from the registration
requirements of the Securities Act. Purchaser is aware that Rule 144 and
Regulation S, promulgated under the Securities Act, permit limited public
resales of securities acquired in non-public offerings, subject to the
satisfaction of certain conditions. Purchaser understands that under Rule 144
the conditions include, among other things: the availability of certain current
public information about the issuer, the resale occurring not fewer than one (1)
year or two (2) years, as applicable, after the party has purchased and paid for
the securities to be sold, the sale being through a broker in an unsolicited
"broker's transaction" and the amount of securities being sold during any
three-month period not exceeding specified volume limitations. Purchaser
acknowledges and understands that the Company may not be satisfying the current
public information requirement of Rule 144 at the time Purchaser wishes to sell
the Shares, or other conditions under Rule 144 which are required of the
Company. Purchaser understands that Regulation S, as currently in effect, allows
resales in private and public transactions in certain circumstances, only in
qualified offshore transactions and only when certain holding periods of at
least one (1) year have been fulfilled. Purchaser understands that he or she may
be precluded from selling any of the Shares under Rule 144 or Regulation S even
if the holding periods have been satisfied either because the other conditions
may not have been fulfilled or because markets for resales do not exist. Prior
to its acquisition of the Shares, Purchaser acquired sufficient information
about the Company to reach an informed and knowledgeable decision to acquire the
Shares. Purchaser has such knowledge and experience in financial and business
matters as to make it capable of utilizing said information to evaluate the
risks of the prospective investment and to make an informed investment decision.
2.7 ACCREDITED INVESTOR. Purchaser hereby makes the following
representations and warranties to the Company:
(a) He, she or it is an "Accredited Investor" as defined in
Regulation D promulgated under the Securities Act and defined in
EXHIBIT 1 hereto. The specific category or categories of
Accredited Investor applicable to Purchaser are as follows:
2
<PAGE>
(PLEASE INITIAL APPLICABLE BLANKS)
I am a natural person and have a net worth, either alone or with
---- my spouse, in excess of US$1,000,000.
I am a natural person and had individual income in excess of
---- US$200,000 (or joint income in excess of US$300,000 including
income of my spouse) during each of the previous two calendar
years and expect to have individual income in excess of such
amount during the current calendar year.
He, she or it is an authorized signatory for a partnership,
---- trust, corporation or other entity with a net worth of more than
US$5,000,000, or of which all the equity owners are Accredited
Investors.
The Shares are being acquired through an employee benefit plan
---- within the meaning of the Employee Retirement Income Security Act
of 1974 ("ERISA") that either (i) has its investment decisions
made by a plan fiduciary, as defined in Section 3(21) of ERISA,
which is a bank, savings and loan association, insurance company
or a registered investment advisor, (ii) has total assets in
excess of US$5,000,000 or (iii) if a self-directed plan, with its
investment decisions made solely by Accredited Investors as
described herein (Accredited Investors making investment
decisions for self-directed plans must also check one of the
first three items of this Section 2.7(a)).
I am a director and/or executive officer of the Company.
----
I have a continuing relationship with the Company because of
----
-------------------------------------------------------------.
(b) Purchaser has the ability to evaluate the risks and merits of the
investment and thus is able to protect his, her or its interests
as a result of:
(1) his, her or its business or financial experience;
----
(2) the business or financial experience of his, her or its
---- professional advisors who are unaffiliated with and who are
not compensated by the Company either directly or
indirectly; and/or;
(3) his, her or its pre-existing business relationship with the
---- Company or its officers, directors or controlling persons.
(c) Purchaser (i) has such knowledge and experience in financial
and business matters which enables Purchaser to evaluate the
merits and risks of the investment represented by the
Shares, and to protect his, her or its own
3
<PAGE>
interests in connection with the investment and/or (ii) has
a preexisting personal or business relationship with the
Company or its officers, directors and/or principal
stockholders of a nature and duration which would enable a
reasonably prudent investor to be aware of the character,
business acumen and general business and financial
circumstances of the person with whom such relationship
exists. Purchaser recognizes that the acquisition of the
Shares involves special risks.
(d) Purchaser is not relying on the Company for advice with
respect to tax considerations, the suitability of his, her
or its investment in the Company or legal or economic
considerations.
(e) If Purchaser is a corporation, partnership, trust or other
entity, Purchaser represents and warrants that the
corporation, partnership, trust or other entity, is
authorized and qualified to become a stockholder of the
Company; and such entity and Purchaser signatory hereto for
such stockholder further represents and warrants that such
signatory has been duly authorized by the prospective
stockholder to execute this Subscription Agreement.
(f) If Purchaser is an employee benefit plan (a "Plan"), the
person signing this Subscription Agreement on behalf of such
Plan represents and warrants that (i) he or she is a
fiduciary of the Plan, (ii) he or she understands the
investment objectives, strategies and policies of the Plan,
(iii) he or she acknowledges that he or she is aware of the
provision of Section 404 of ERISA relating to the
requirements for investment and diversification of assets of
ERISA-governed Plans, (iv) he or she has given appropriate
consideration to such Plan's investment in the Company and
has determined that such investment furthers the purposes of
such Plan and (v) he or she has determined that, taking into
account other investments in such Plan's portfolio, the
Plan's investment in the Company is consistent with the
requirements of Section 404 and other provisions of ERISA
and is consistent with such Plan's cash flow requirements
and funding objectives.
2.8 ACKNOWLEDGMENT OF RISK. Purchaser acknowledges and is aware
that the Shares are speculative illiquid investments which involve a high degree
of risk of loss by Purchaser of his, her or its investment in the Company.
Purchaser understands that the Shares are restricted and may not be liquidated,
even in the event of an emergency, until the Shares are registered pursuant to
the Securities Act. Purchaser also understands that, for the foregoing reasons
and until such time as the Shares are registered under the Securities Act, the
Shares may not be readily accepted as collateral for a loan.
2.9 FURTHER ACKNOWLEDGEMENTS. Purchaser further certifies and
acknowledges as follows:
4
<PAGE>
(a) Purchaser has adequate means of providing for Purchaser's
current needs and possible personal or other contingencies,
and Purchaser has no need for liquidity of Purchaser's
investment in the Shares;
(b) Purchaser has a net worth sufficient to bear the economic
risk of losing Purchaser's entire investment in the Shares;
(c) Each and every representation set forth herein is true and
correct; and
(d) Purchaser does not have an overall commitment to non-readily
marketable investments which is disproportionate to
Purchaser's net worth and the investment subscribed for
herein will not cause such overall commitment to become
excessive.
2.10 NO GUARANTEES OR WARRANTIES. It has never been guaranteed or
warranted to Purchaser by the Company or by any other person, expressly or by
implication, that:
(a) Purchaser will be required to remain an owner of the Shares
any approximate or exact length of time;
(b) Purchaser will receive any approximate or exact amount of
return or other type of consideration, profit or loss as a
result of an investment in the Shares, or
(c) The past performance or experience on the part of the
Company, any director, officer or any affiliate thereof,
will in any way indicate or predict future operating results
of the Company or the overall success of the Company.
2.11 INDEPENDENT ASSESSMENT. Purchaser represents and warrants
that in making the decision to acquire the securities, the Purchaser has relied
upon independent consideration and investigations made by such Purchaser and
further that no representations have been made concerning the securities, the
Company, its business, prospects, or other matters.
2.12 DISPOSITION OF THE SHARES. Purchaser hereby agrees that
Purchaser shall make no disposition of the Shares unless and until:
(a) Purchaser shall have notified the Company of the proposed
disposition and provided a written summary of the terms and
conditions of the proposed disposition; and
(b) Purchaser shall have provided the Company an opinion of
counsel in form and substance satisfactory to the Company,
that (i) the proposed disposition does not require
registration of the Shares under the Securities Act or (ii)
all appropriate action necessary for compliance with the
registration requirements of the Securities Act or of any
exemption from
5
<PAGE>
registration available under the Securities Act (including
Rule 144) has been taken.
(c) The Company shall not be required (i) to transfer on its
books any Shares that have been sold or transferred in
violation of the provisions of this Section 2.12 or (ii) to
treat as the owner of the securities, or otherwise to accord
voting or dividend rights to, any transferee to whom the
securities have been transferred in contravention of this
Subscription Agreement.
2.13 RESTRICTIVE LEGENDS. In order to reflect the restrictions on
disposition of the Shares, the stock certificates for the Shares may be endorsed
with the following restrictive legend:
(a) "THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). SUCH SECURITIES MAY NOT BE
OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO
U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER THE SECURITIES ACT WHICH, EXCEPT
IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER THE
SECURITIES ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY
TO THE COMPANY."
(b) If required by the authorities of any state or other
jurisdiction in connection with the issuance of the Shares,
the legend or legends required by such jurisdiction shall
also be endorsed on all such certificates.
2.14 ADDRESS OF PURCHASER. The address set forth below is
Purchaser's true and correct residence and/or principal place of business, and
Purchaser has no present intention of becoming a resident of any other state or
jurisdiction.
2.15 FOREIGN PERSONS. Purchaser hereby represents and warrants to
the Company that it is not a United States ("U.S.") resident. Purchaser also
hereby represents and warrants that it will not resell the Shares to a U.S.
resident, except in compliance with U.S. federal and state securities
regulations and the terms and conditions set forth in this Subscription
Agreement, including but not limited to Section 2.12 herein. The Purchaser
agrees to provide to the Company such additional representations, warranties,
covenants and undertakings as the Company may request in order to comply with
the applicable securities laws of the jurisdiction(s) in which Purchaser is
deemed to reside.
6
<PAGE>
ARTICLE III.
MISCELLANEOUS
3.1 "PIGGY-BACK" REGISTRATION. The Purchaser shall have the
right to include the Shares as part of any registration of securities filed by
the Company (other than in connection with a transaction contemplated by Rule
145(a) promulgated under the Securities Act or pursuant to Form S-8) and must be
notified in writing of such filing, as set forth below; PROVIDED, HOWEVER, that
the Purchaser agrees it shall not have any piggy-back registration rights
pursuant to this Section if the Shares may be sold in the United States pursuant
to the provisions of Rule 144. The Shares, or any of them, shall cease to be
covered by this Section 3.1, (i) if they have been effectively registered under
the Securities Act and disposed of pursuant thereto or (ii) registration under
the Securities Act is no longer required for the immediate public distribution
of such Shares as a result of the provisions of Rule 144. The Company shall give
written notice to the Purchaser, as set forth in Section 3.7, at least thirty
(30) days before the filing with the SEC of such Registration Statement. Such
notice shall offer to include in such filing that number of shares of Common
Stock then held by the Purchaser as the Purchaser may request pursuant to
written notice. The Purchaser shall have five (5) business days to notify the
Company in writing as to whether the Company is to include the Purchaser or not
include the Purchaser as part of the registration; PROVIDED, HOWEVER, that if
any registration pursuant to this Section shall be underwritten, in whole or in
part, the Company may require that the Shares requested for inclusion pursuant
to this Section be included in the underwriting on the same terms and conditions
as the securities otherwise being sold through the underwriters. If in the good
faith judgment of the underwriter evidenced in writing of such offering only a
limited number of the Shares should be included in such offering, or no such
Shares should be included, the Purchaser, and all other selling stockholders,
shall be limited to registering such proportion of their respective shares as
shall equal the proportion that the number of shares of selling stockholders
permitted to be registered by the underwriter in such offering bears to the
total number of all shares then held by all selling stockholders desiring to
participate in such offering. Those Shares which are excluded from an
underwritten offering pursuant to the foregoing provisions of this Section (and
all other Shares) shall be withheld from the market by the Purchasers thereof
for a period, not to exceed one hundred eighty (180) days, which the underwriter
may reasonably determine is necessary in order to effect such underwritten
offering. The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section prior to the effectiveness of
such registration. All registration expenses incurred by the Company in
complying with this Section shall be paid by the Company, exclusive of
underwriting discounts, commissions and legal fees and expenses for counsel to
the Purchaser.
3.2 SURVIVAL; INDEMNIFICATION. The foregoing representations and
warranties are made by the Purchaser with the intent that they may be relied
upon in determining its qualification and suitability to purchase the Shares,
and Purchaser hereby agrees that such representations and warranties shall
survive the acceptance of this Subscription Agreement. Purchaser hereby agrees
to indemnify, defend and save harmless the Company, its representatives and
agents and each other stockholder from and against any and all losses, claims,
damages, liabilities, expenses (including attorneys' reasonable fees and
disbursements), judgments and amounts paid in settlement or actions resulting
from the untruth of any of the warranties and representations contained herein.
7
<PAGE>
Notwithstanding the foregoing, however, no representation, warranty,
acknowledgment, covenant or agreement by Purchaser made herein shall in any
manner be deemed to constitute a waiver of any rights granted to it under the
federal or state securities laws.
3.3 ATTORNEYS' FEES. In the event that any dispute among the
parties to this Subscription Agreement should result in litigation, the
prevailing party in such dispute shall be entitled to recover from the losing
party all fees, costs and expenses of enforcing any right of such prevailing
party under or with respect to this Subscription Agreement, including without
limitation, such reasonable fees and expenses of attorneys, which shall include,
without limitation, all fees, costs and expenses of appeals.
3.4 JOINT AND SEVERAL LIABILITY. If Purchaser is more than one
person, the obligations of Purchaser shall be joint and several, and the
representations and warranties herein contained shall be deemed to be made by
and be binding upon such persons, and ownership of the Shares subscribed for by
Purchaser shall be as set forth on the signature page attached hereto.
3.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. At the request
of the Company, Purchaser will promptly execute such other instruments or
documents as may reasonably be required in connection with the purchase of the
Shares. Purchaser hereby agrees that the representations and warranties set
forth in this Subscription Agreement shall be binding upon the heirs, executors,
administrators, successors and assigns of Purchaser, but this subscription is
not voluntarily transferable or assignable by Purchaser.
3.6 SECTION HEADINGS. The section and other descriptive headings
in this Subscription Agreement are included for the convenience only and shall
not affect the construction of this Subscription Agreement.
3.7. NOTICES. Any notice pursuant to this Subscription Agreement
by the Company or by the Purchaser shall be in writing and shall be deemed to
have been duly given if delivered by (i) hand, (ii) by facsimile and followed by
mail delivery or (iii) if mailed by certified mail, return receipt requested,
postage prepaid, addressed as follows:
(a) If to the Purchaser, to its address set forth herein.
(b) If to the Company, at the Company's business address:
3237King George Hwy., Suite 101-B, Surrey, B.C., Canada V5P
1B7, Attn. Chief Executive Officer.
or to such other address as a either party may designate by written notice to
the other party. Notices shall be deemed given at the time they are delivered
personally or five (5) business days after they are mailed in the manner set
forth above. If notice is delivered by facsimile and followed by mail, delivery
shall be deemed given two (2) days after such facsimile is sent.
8
<PAGE>
IN WITNESS WHEREOF, Purchaser has executed this Subscription Agreement
dated as of ____________________, 2000.
SIGNATURE FOR INDIVIDUAL INVESTOR:
- ---------------------------------------------------------
(Signature)
- ---------------------------------------------------------
(Print Name)
- ---------------------------------------------------------
Address:
- ---------------------------------------------------------
- ---------------------------------------------------------
(Social Security Number, If Applicable)
- ---------------------------------------------------------
(Telephone Number)
- ---------------------------------------------------------
(Telecopy Number)
- ---------------------------------------------------------
(Signature of Spouse, If Applicable)
---------------------------------------------------------
(Print Name of Spouse, If Applicable)
- ---------------------------------------------------------
(Social Security Number of Spouse, If Applicable)
If Joint Ownership. Check One:
Husband and Wife, as Community Property
Joint Tenants with Right of Survivorship
Tenants-in-Common
Note: The address given above must be the residence address of the investor.
Post office boxes and other addresses will not be accepted.
[SIGNATURE PAGE NO. 1 TO SUBSCRIPTION AGREEMENT]
9
<PAGE>
IN WITNESS WHEREOF, Purchaser has executed this Subscription Agreement as
of ____________________, 2000.
SIGNATURE FOR PARTNERSHIP, TRUST, LLC. CORPORATION OR OTHER ENTITY:
- ---------------------------------------------------------
(Print Name of Entity)
- ---------------------------------------------------------
(Signature)
- ---------------------------------------------------------
(Print Name of Signatory)
- ---------------------------------------------------------
(Title)
- ---------------------------------------------------------
(Print Type of Entity and Jurisdiction)
- ---------------------------------------------------------
(Address)
- ---------------------------------------------------------
- ---------------------------------------------------------
(U.S. Taxpayer Identification Number, If Applicable)
- ---------------------------------------------------------
(Telephone Number)
- ---------------------------------------------------------
(Telecopy Number)
[SIGNATURE PAGE NO. 2 TO SUBSCRIPTION AGREEMENT]
10
<PAGE>
ACCEPTANCE:
The subscription of the above-named investor is hereby accepted by the
Company.
I CRYSTAL, INC.
a Delaware corporation
- -------------------------
Name:
Title:
SIGNED, SEALED AND DELIVERED
in the presence of:
- -------------------------------
Signature of Witness
- -------------------------------
- -------------------------------
Address
- -------------------------------
Occupation
The Common Seal of _____________ C/S
was hereunto affixed in the presence of:
- -------------------------------
Authorized Signatory
- -------------------------------
Authorized Signatory
11
<PAGE>
SPOUSAL CONSENT
(To be signed by the spouse of any person who is a resident in California or any
other jurisdiction with community property marital legislation)
To the extent that the undersigned, as spouse of __________, may have a
community property or other interest in the assets owned in the name of my
spouse under the laws of the state in which I reside, I hereby consent to and
agree to be bound by Subscription Agreement, of even date herewith, between my
spouse, __________, and I crystal, Inc., a Delaware corporation, to the fullest
extent my spouse is bound thereby.
Dated as of: ------------------------------
Name:
12
<PAGE>
EXHIBIT 1
DEFINITION OF ACCREDITED INVESTOR
ACCREDITED INVESTOR. "Accredited investor" shall mean any person who comes
within any of the following categories, or who the issuer reasonably believes
comes within any of the following categories. at the time of the sale of the
securities to that person:
(1) Any bank as defined in section 3(a)(2) of the Securities Act, or any
savings and loan association or other institution as defined in section
3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934; any insurance company as defined in section
2(13) of the Securities Act; any investment company registered under the
Investment Company Act of 1940 or a business development company as defined in
section 2(a)(48) of that Act; Small Business Investment Company licensed by the
U.S. Small Business Administration under section 301 (c) or (d) of the Small
Business Investment Act of 1958; any plan established and maintained by a state,
its political subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan has total
assets in excess of $5,000,000; employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974 if the investment decision is
made by a plan fiduciary, as defined in section 3(21) of such Act, which is
either a bank, savings and loan association, insurance company, or registered
investment adviser, or if the employee benefit plan has total assets in excess
of $5,000,000 or, if a self-directed plan, with investment decisions made solely
by persons that are accredited investors;
(2) Any private business development company as defined in section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of
the securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that person's spouse
in excess of $300,000 in each of those years and has a reasonable expectation of
reaching the same income level in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in 230.506(b)(2)(ii); and
(8) Any entity in which all of the equity owners are accredited investors.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ICRYSTAL
INC.'S AUDITED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND DECEMBER 31,
1998.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-2000
<PERIOD-START> JAN-01-1999 JAN-01-1998 JAN-01-2000
<PERIOD-END> DEC-31-1999 DEC-31-1998 MAR-31-2000
<CASH> 0 0 86,700
<SECURITIES> 0 0 0
<RECEIVABLES> 75,700 0 98,700
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 100,400 0 210,200
<PP&E> 19,500 0 21,700
<DEPRECIATION> 1,600 0 2,500
<TOTAL-ASSETS> 118,300 0 229,400
<CURRENT-LIABILITIES> 316,000 65,000 368,700
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 146,900 77,200 5,830,700
<OTHER-SE> (363,600) (142,700) (5,989,000)
<TOTAL-LIABILITY-AND-EQUITY> 118,300 0 229,400
<SALES> 0 0 0
<TOTAL-REVENUES> 90,900 0 105,500
<CGS> 0 0 0
<TOTAL-COSTS> 5,641,200 191,500 278,100
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,000 0 200
<INCOME-PRETAX> (5,552,100) (191,500) (172,800)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (5,552,100) (191,500) (172,800)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (5,552,100) (191,500) (172,800)
<EPS-BASIC> (0.52) (0.26) (0.01)
<EPS-DILUTED> (0.52) (0.26) (0.01)
</TABLE>
