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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- ----------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED December 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________.
COMMISSION FILE NO. 0-22622
INTERACTIVE ENTERTAINMENT LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA I.R.S. NO. 98-0170199
(Jurisdiction of Incorporation) (I.R.S. Employer
Identification No.)
Cedar House, 41 Cedar Street
Hamilton HM 12, Bermuda
(Address of principal executive offices)
Registrant's telephone number, including area code: 604 947-2555
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which
registered
Common Stock, Par Value $0.01 OTC Bulletin Board
per share ("Common Stock")
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing price of $0.5625 for the Common Stock as
reported by the OTC Bulletin Board March 31, 2000 is $28,125,000
The number of shares outstanding of the issuer's Common Stock, as of March 31,
2000: 50,000,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2000 Annual Meeting of
Shareholders, which will be filed within 10 business days, are incorporated by
reference into Part III hereof.
INTERACTIVE ENTERTAINMENT LIMITED
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
Part 1
Item 1
Corporate History and Development 1
Business Overview 1
The Product 2
The Industry 2
Competition 2
Market and Marketing 2
Manufacturing 2
Sky Games System Acquisition 2
The Amalgamations 3
Major Customers 4
Employees 4
Item 2
Properties 4
Item 3
Legal Proceedings 4
Item 4
Submission of Matters to a Vote of Security Holders 4
Part II
Item 5
Market for Registrant's Common Equity and Related
Stockholder Matters 5
Item 6
Selected Financial Data 7
Item 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Overview 7
Results of Operations 9
Liquidity and Capital Resources 10
Forward-Looking Information 11
Item 8
Financial Statements and Supplementary Data 11
Item 9
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
Part III
Item 10
Directors and Executive Officers of the Registrant 11
Item 11
Executive Compensation 11
Item 12
Security Ownership of Certain Beneficial Owners
and Management 12
Item 13
Certain Relationships and Related Transactions 12
Part IV
Item 14
Exhibits, Financial Statement Schedules and Reports
on Form 8-K 13
Signatures 16
Report of Independent Auditors 17
Financial Statements F-1 - F14
PART I
ITEM 1. BUSINESS
Corporate History and Development
Interactive Entertainment Limited (the "Company" or "IEL") was incorporated
pursuant to the laws of the Province of British Columbia on January 28, 1981
under the name Tu-Tahl Petro Inc. On May 10, 1990, the Company changed its
name to Creator Capital Inc. The Company was reincorporated through the
continuance of its corporate existence from the Province of British Columbia to
the Yukon Territory on July 15, 1992. On January 23, 1995, the Company changed
its name to Sky Games International Ltd. ("SGI"). Effective February 22, 1995,
the Company continued its corporate existence from the Yukon Territory to
Bermuda as an exempted company under the Companies Act 1981 (Bermuda) (the
"Bermuda Act"). In June, 1997, the Company changed its name to Interactive
Entertainment Limited following consummation of the amalgamation of the
Company's wholly-owned subsidiary, SGI Holding Corporation Limited ("SGIH"),
and SGIH's formerly 80% owned subsidiary, then known as Interactive
Entertainment Limited ("Old IEL"), which was followed immediately by an
amalgamation of SGI with the survivor of the first amalgamation, (the
"Amalgamations"). Unless the context otherwise requires, the term "Company"
refers to Interactive Entertainment Limited, its wholly-owned subsidiaries, IEL
(Singapore) Pte. Ltd., Sky Games International Corporation ("SGIC"), and
Creator Island Equities Inc., and for periods prior to June 17, 1997, also SGIH
and Old IEL, which was the Company's principal operating subsidiary from
December 30, 1994, through such Amalgamations. Also included is Inflight
Interactive Limited, a wholly-owned subsidiary of the Company, from January 13,
1998.
The initial purpose of the Company was natural resource exploration and
development. Beginning in January 1991 the Company concentrated its efforts on
acquiring, developing and commercializing a gaming technology marketed as Sky
GamesT for inflight use by international airline passengers and patrons in
other non-traditional gaming venues. In pursuit of this purpose, the Company
in 1991 acquired the principal assets of Nevada-based Sky Games International,
Inc. ("SGII"). In late 1994, the Company formed Old IEL as a joint venture
with subsidiaries of Harrah's Entertainment, Inc., ("Harrah's"). This resulted
in the transfer to Old IEL of the Company's inflight gaming business and the
execution of a management agreement with Harrah's with respect to Old IEL and
other related relationships. Pursuant to such management agreement, Old IEL's
operations were managed by a Harrah's subsidiary. The description herein of
the Company's operations from December 30, 1994 through June 17, 1997 with
respect to inflight gaming activities refers to the operations of Old IEL under
the management of this subsidiary of Harrah's.
Business Overview
The Sky Games system was developed to introduce gaming to international airline
passengers. The system is designed to enable users to play a number of casino-
type games from their seats by way of a built-in, color, interactive, in-seat
monitor. The Company believed that an opportunity existed to introduce casino
games on international air flights. In April of 1996, the Company announced
the signing of contracts for the provision of gaming services to Singapore
Airlines ("SIA"). The first flight with gaming was launched on June 1, 1998.
A second aircraft was added in mid-October, 1998. Passenger participation was
disappointing. On November 12, 1998, the Company announced that it had been
unable to attract the additional capital necessary for continued development of
its Sky Games inflight gaming business. The Company also announced that it had
discontinued all operations associated with the Sky Games product line. All
employees were terminated as of November 13, 1998. Those former employees that
subsequently had been retained on a part-time contract basis to continue
operations and support the Sky Play product, are no longer associated with IEL.
Two former employees, through their corporate entity, have been contracted to
attend to the Sky Play business
On January 13, 1998, IEL completed the acquisition of all the outstanding
capital stock of Inflight Interactive Limited ("IIL") in exchange for 500,000
shares of the Company's $.01 par value common stock (the "Common Stock"). IIL
is a United Kingdom developer and provider of amusement games to the airline
industry. The acquisition was accounted for using the purchase method. The
games are marketed under the name Sky Play. As at December 31, 1999 Sky Play
games were operating on a number of airlines, including Air China, American
Airlines, Cathay Pacific, Continental, Egypt Air, Japan Air Lines, Lauda Air,
Malaysia Airlines, and Virgin Atlantic.
The Product
Sky Play offers airlines the choice of up to 18 amusement games. Unlike
Nintendo-style games, which are designed to keep the player challenged and
interested over long periods of time, and which generally require player skill
developed over a period of time, IEL has selected and developed the Sky Play
amusement games which have very simple rules, are already well known or easy to
learn and are very simple to play. Games are licensed to airlines for a
monthly license fee for each game and each aircraft.
The Company has been granted federal registration of the Sky Games logo and the
slogan "We Make Time Fly" by the U.S. Patent and Trademark Office. At this
time the Company has not applied for any patents.
The Industry
The Boeing Company's 1999 Current Market Outlook forecast passenger traffic
growth of 4.7% annually over the next 20 years. The report noted that, to meet
that growth, airlines are expected to add over 20,000 airplanes worth more than
$1.38 trillion to their fleets. Boeing estimates that approximately 26% of
these new aircraft will be intermediate and large aircraft, which IEL believes,
will represent a substantial market for IFE systems and inflight content.
The Company anticipates that the IFE industry will grow rapidly over the next
three to five years as airlines commit to interactive IFE hardware based on
improved product reliability and competition. Accordingly, the Company is
committed to building its core business by focusing on the airline market but
is also prepared for other venues such as cruise ships, ferry boats, trains and
hotel rooms.
Competition
The Company has several competitors for its amusement games most of whom are
small companies like IEL.. The largest market share of the amusement game
business for airlines is believed to be held by Nintendo. The Company believes
that it has the second largest market share and is the only provider of
amusement games to the airline industry with games operational on more than one
IFE platform.
Market and Marketing
In the very competitive airline market, airlines are seeking a distinctive,
competitive edge to attract and retain paying customers. Entertainment and
service systems are forming a part of the airlines' current business strategy.
The Company believes that the principal benefit of its product to the airlines,
is the ability to enhance entertainment offerings to passengers. IFE systems
are capital intensive; however, providing passenger service and comfort,
especially for first and business class travelers, is a major area of
competition for airlines. The target market for Sky Play has been domestic and
foreign airlines which have committed to the purchase of or installed IFE
systems.
Manufacturing
As a software producer and operator, the Company has no manufacturing
capability. The Company's software is designed to interface with in-cabin
hardware, including onboard computers, file servers, distribution and
communication systems, manufactured by various suppliers for the airlines.
Sky Games System Acquisition
On November 7, 1991, the Company entered into an agreement, with subsequent
amendments, with Sky Games International, Inc. ("SGII") to purchase technology,
proprietary rights and prototypes of the casino games known as "Sky Games."
The purchase price of the assets was 300,000 shares of the Company's $.01 par
value common stock (the "Common Stock") issued to SGII at a deemed price of
$1.65 per share, plus an additional 3,000,000 shares of Common Stock held in
escrow to be released on the basis of one share for each U.S. $1.78 of net cash
flow generated from the assets over a ten-year period (the "Performance
Shares"). Of the 3,000,000 shares, 2,000,000 were issued to SGII and 1,000,000
shares to Anthony Clements, an advisor to and director of the Company. The
Performance Shares are held in escrow by Montreal Trust Company of Canada. As
of April 30, 1997, the holders of the Performance Shares agreed with the
Company to tender such shares to the Company when and if they are released from
the escrow, and the Company has agreed to cancel such shares. The holders of
the Performance Shares have also granted an irrevocable proxy to a bank which
has irrevocably agreed not to vote such shares. Even though the Performance
Shares are subject to cancellation and may not be voted, they remain issued and
outstanding. Therefore, the management of the Company has included the
Performance Shares in the outstanding.
The Amalgamations
Effective as of December 30, 1994, the Company, through SGIH, and Harrah's
Interactive Investment Company ("HIIC") completed the formation of Old IEL as a
joint venture corporation incorporated as an exempted company under the Bermuda
Act. At the same time, (i) Old IEL entered into a management agreement (the
"Management Agreement") with Harrah's Interactive Entertainment Company (the
"Manager"), (ii) the prior consulting agreement between Harrah's and SGIC was
terminated, (iii) SGIC assigned all right, title and interest in the Sky Games
system and related trademarks and trade names to the Company, and (iv) the
Company licensed the Sky Games system and certain related trademarks and trade
names to Old IEL. In connection with the Amalgamations, the contractual
agreements with the affiliates of Harrah's were terminated.
The ownership interests of the Company and HIIC in Old IEL were 80% and 20%,
respectively, prior to the Amalgamations. The Company and HIIC had funded a
total of $5 million to Old IEL. Additional capital, if not available from third
parties, was to have been provided by the Company and HIIC in proportion to
their shareholdings. The Executive Committee of Old IEL was to determine
whether additional capital was to be provided as equity or debt. Under the
shareholders agreement, each party had certain options with respect to the
other party's stock. The shareholders agreement was terminated effective June
17, 1997.
The Manager had been granted, and had assumed, broad responsibility for
managing the business of Old IEL. This included completing the development of
and improving the Sky Games software and all other systems, marketing to
airlines and customers and day-to-day gaming operations. The Management
Agreement had a two-year term, but could have been renewed at the Manager's
option for successive two-year terms up to a maximum term of 10 years. The
Manager had a right of first negotiation on a renewal agreement. Management
fees were dependent on the amount of gross revenues with a maximum fee of 7.5%
of gross revenues and a minimum monthly fee of $10,000. Old IEL was required
to pay all operating costs (including capital expenditures) of the business,
which included the cost of services and goods provided by the Manager and its
affiliates under the Management Agreement.
The Amalgamations were consummated on June 17, 1997. In conjunction with the
Amalgamations, the Management Agreement was terminated, and management of the
Company assumed direct responsibility for day to day operations. The Company
also entered into a Continuing Services Agreement with Harrah's for certain
services.
The Company had exclusively licensed Old IEL to use certain of the Sky Games
trademarks, trade names and other trade rights. This license was replaced in
the Amalgamations by a similar license to Harrah's for use of the Company's
software, as it existed on June 17, 1997, in traditional casino venues owned,
operated or managed by Harrah's. The license is royalty-free, worldwide and
non-terminable.
In 1994, the Company terminated certain contractual rights previously granted
to BEA in connection with the development of an earlier generation product for
inflight gaming use. In connection with this termination, the Company issued a
U.S. $2,500,000 convertible promissory note due March 30, 1997. The unpaid
balance of the note, including accrued interest, was exchanged for Redeemable
Convertible Class A Preference Shares in the Company on June 16, 1997.
Major Customers
The Company's Sky Play customers include Air China, American Airlines, Cathay
Pacific Airways, Continental, Egypt Air, Japan Air Lines, Lauda Air, Malaysia
Airlines and Virgin Atlantic Airways. The two largest customers accounted for
approximately 34% of Sky Play revenue during 1999.
Employees
All employees were terminated as of November 13, 1998. Those former employees
that subsequently had been retained on a part-time contract basis to continue
operations and support the Sky Play product, are no longer associated with IEL.
Two former employees, through their corporate entity, have been contracted to
attend to the Sky Play business
ITEM 2. PROPERTIES
Not applicable.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since March 25, 1999, the Company's Common Stock has been traded on the OTC
Bulletin Board under the symbol "IELSF." From July 8, 1997 until March 24,
1999, the Company's Common Stock was traded on the NASDAQ SmallCap Market under
the symbol "IELSF." From March 1, 1994 until July 8, 1997, the Company's shares
traded on the NASDAQ SmallCap Market under the symbol "SKYGF."
On October 5, 1998, the Company was notified by NASDAQ that the Company's
shares had failed to maintain a bid price greater than or equal to $1.00 per
share for the prior thirty consecutive trading days and were therefore subject
to delisting. The delisting was effective on March 24, 1999.
The table be low sets forth, for each fiscal quarter within the last two years,
the reported high and low closing prices of the Common Stock as reported by the
NASDAQ SmallCap and OTC Bulletin Board Markets.
Twelve Months Ended Twelve Months Ended
December 31, 1999 December 31, 1998
High Low High Low
First Quarter $0.1300 $0.0313 $3.6250 $2.4375
Second Quarter $0.2188 $0.1250 $3.7500 $2.3125
Third Quarter $0.2188 $0.0625 $3.0000 $0.6250
Fourth Quarter $0.0976 $0.0250 $0.7813 $0.0313
As of September 3, 1999, there were 256 shareholders of record. Since certain
of the shares of Common Stock are held by brokers or other nominees, the number
of record holders may not be representative of the number of beneficial
holders. The Company believes there are approximately 2,200 beneficial holders
of the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future.
In June, 1997, the company issued 2,737 Class A Preference Shares in exchange
for a promissory note in the amount of $2,737,000. During 1998, the Company
and the holder agreed that the Company would redeem the Class A Preference
Shares in installments beginning June 30, 1998. As of August 31, 1998, the
Company had redeemed 500 shares at their redemption price of $1,000 per share.
The Company was unable to redeem additional shares. As of March 31, 2000,
2,237 Class A Preference Shares remained outstanding and were convertible at
$0.4626855 into 4,834,818 shares of Common Stock on that date. If the Class A
Preference Shares are converted into Common Stock, HIIC has the right to
receive additional shares of Common Stock at $0.01 per share. As of March 31,
2000, HIIC would be entitled to receive 476,320 shares. The actual number of
shares of Common Stock issuable upon conversion may be higher or lower and is
based on a discount to the 20 day average of the mean closing bid and ask price
of the Company's Common Stock. It is also inversely proportional to the market
price of the Company's Common Stock i.e. if the average share price decreases,
the number of shares of Common Stock issuable increases. Dividends of $252,126
on the Class A Preference Shares are in arrears from October 1, 1998 and are
included in Accounts Payable and Accrued Expenses on the Company's financial
statements.
In October 1997, the Company sold 462,847 shares of Common Stock in a private
placement for $1.5 million (approximately $1,352,000 net of offering expenses).
An additional 286,123 shares were sold for $750,000 on April 21, 1998 followed
by another 286,123 shares for $750,000 on June 8, 1998. The investor received
a warrant to purchase 243,205 shares of Common Stock at an exercise price of
$2.62125 through April 21, 2000. The investor also received a warrant for the
purchase of 243,205 shares of Common Stock at an exercise price of $2.62125
through June 5, 2000.
On December 17, 1997, the Company issued 1,000 shares of Series A Convertible
Preference Shares of the Company's Class B Preferred Stock for a total
consideration of $1,000.000. The Class B Series A Preference Shares are
convertible into a number of shares of Common Stock, determined by dividing the
stated value of $1,000 per share by the lesser of: $3.2038 (the "Fixed
Conversion Price") and a price (the "Floating Conversion Price") calculated as
85% of the average of the three lowest closing bid prices for the Common Stock
during the thirty trading days occurring immediately prior to, but not
including, the conversion date. Dividends are cumulative and may be paid, at
the option of the Company and with prior notice, in additional shares of Common
Stock at an annual dividend rate of 8%. Warrants for the purchase of 61,718
shares of Common Stock were issued in connection with the issuance of the
Series A Class B Convertible Preference Shares. The warrants expired on
December 17, 1999. The Company exercised an option of selling a second tranche
with 123,432 warrants for an aggregate purchase price of $2,000,000 on July 24,
1998. As of December 31, 1999, 680 shares of the Class B Series A Preference
Shares had been submitted for conversion into 25,600,012 shares of Common
Stock. All Common Stock issuable upon the conversions has been issued except
for 3,492,426 shares which the Company lacks the authority to issue. Such
issuance would cause the Company to exceed its maximum authorized capital. In
January, 1999, two holders of the Class B Series A Preference Shares agreed to
amend the conversion terms so that the Floating Conversion Price will not be
less than $0.25 per share. As of December 31, 1999, a total of 1,720 shares of
the Class B Series A Preference Shares were outstanding. As of March 31, 2000,
1,000 Class B Series A Preference Shares, convertible at $0.25 per share, had
been submitted for conversion into 4,480,000 shares of Common Stock. As of
March 31, 2000, 600 of the Class B Series A Preference Shares were submitted
for conversion into 22,588,233 shares of Common Stock. The Company lacks the
authority to issue these shares since issuance would cause the Company to
exceed its maximum authorized capital. The remaining 120 Class B Series A
Preference Shares are convertible into 480,000 shares of Common Stock at $0.25
per share. As of March 31, 2000, these shares have not been submitted for
conversion.
On February 20, 1998, the Company sold 300 shares of Series B Class B
Convertible Preferred Stock at $1,000 per share. The Series B Class B
Convertible Preferred Shares have the same dividend and conversion features as
the Series A Class B Convertible Preferred Shares. The investor also received
a warrant to purchase 18,515 shares of Common Stock at a price of $3.2038 for
18 months. As of December 31, 1999, 38 shares of the Series B Class B shares
had been converted into 663,274 shares of Common Stock and 262 shares remained
outstanding. As of March 31, 2000, the 262 outstanding Series B Class B
Preference Shares had been submitted for conversion into 9,863,529 shares of
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands except per share and share data)
Twelve Months Twelve Months Ten Months
Ended Ended Ended Twelve Months Ended
December 31, December 31, December 31,
February 28 or 29,
1999 1998 1997 1997
1996
Statement of Operations Data:
Loss before extraordinary
Item $1,023 $29,056 $16,312 $4,180 $
4,167
Extraordinary (gain)loss (84)
- - 1,824 - -
Net loss $939 $ 29,056 $ 18,136 $
4,180 $ 4,167
Loss per share before
extraordinary item $0.03 $ 1.40 $
1.06 $ 0.46 $ 0.52
Extraordinary item -
.12 - -
Loss per share $0.03 $ 1.40 $ 1.18 $
0.46 $ 0.52
Weighted number of common
shares outstanding 47,785,147 20,998,189 15,562,834
9,043,687 7,942,332
Number of common shares
outstanding at period end 50,000,000 24,367,414
19,428,334 9,789,020 8,521,434
As of December 31, As of February 28 or 29,
1999 1998 1997 1997 1996
Balance Sheet Data:
Working capital (deficit) $ (535) $ (330)
$ 697 $ (172) $ (280)
Total assets $ 1,434 $ 2,509
27,511 3,525 3,861
Long term debt $ 81 -
530 2,600 2,346
Redeemable preferred stock 2,237 2,237 2,737
- -
Shareholders' equity
(deficit) $ 579 $ 1,885
26,337 (333) (54)
Equity (deficit) per
common share $ 0.01 $ 0.08 $
1.36 $ (0.03) $ (0.01)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Interactive Entertainment Limited ("IEL" or the "Company"), formerly known as
Sky Games International Ltd. ("SGI"), is a Bermuda exempted company which was
incorporated on January 28, 1981. Until November 12, 1998, the Company's
activities had been focused on providing inflight gaming software and services
by developing, implementing and operating a computer-based interactive video
entertainment system of gaming and other entertainment activities on, but not
limited to, the aircraft of international commercial air carriers.
On December 30, 1994, the Company entered into a Shareholders Agreement with
SGI Holding Corporation Limited ("SGIH"), a wholly-owned subsidiary of SGI, and
an affiliate of Harrah's Entertainment, Inc. ("Harrah's"), to form a
corporation then known as Interactive Entertainment Limited ("Old IEL"), the
result of which was that Old IEL became owned 80% by SGIH and 20% by Harrah's.
Pursuant to a management agreement, (the "Management Agreement"), Old IEL was
managed by an affiliate of Harrah's.
At a Special General Meeting of shareholders held on June 16, 1997, pursuant to
a Plan and Agreement of Merger and Amalgamation dated May 13, 1997, (the
"Amalgamation Agreement"), Old IEL was merged into SGIH and then into SGI (the
"Amalgamations"). Prior to the Amalgamations, Harrah's owned 20% of the
capital stock of Old IEL and did not own any capital stock or other securities
of SGI and had no representatives on the Board of Directors. As a result of
the amalgamation of Old IEL and SGIH and the termination of the Management
Agreement, the outstanding shares of Old IEL common stock held by Harrah's were
converted into 5,879,040 shares of $.01 par value common stock of the Company
(the "Common Stock"). Harrah's also received 1,007,875 shares of Common Stock
upon conversion of a loan, (the "Harrah's Loan"), made to Old IEL. Harrah's
therefore became the largest shareholder of the Company holding approximately
38.6% of the outstanding shares at the time of the amalgamation. As at March
31, 2000, Harrahs remained the largest shareholder of the Company, holding
13.77% of the outstanding shares.
Pursuant to the Amalgamation Agreement, Harrah's was provided with the right to
appoint persons to the Board and to specified committees in a number generally
proportionate to their share holdings calculated on a "fully diluted" basis as
defined in the Company's bye-laws. Additionally, Harrah's was provided with
the right to approve specified significant corporate actions by the Company for
as long as the ownership of Common Stock by Harrah's is in excess of 20% (10%
in some cases) of the outstanding voting shares of Common Stock, computed on a
fully-diluted basis.
Upon consummation of the Amalgamations, SGI changed its name to Interactive
Entertainment Limited.("IEL").
IEL's principal activities through December 31, 1998, consisted of developing,
testing and marketing the inflight gaming software and marketing and supporting
its amusement game software. As of December 31, 1998, IEL had a contract to
provide its gaming software to Singapore Airlines, ("SIA"), which has various
termination provisions. On March 22, 1999, SIA notified the Company that it
was exercising its termination rights under the contract. The contract with
Singapore Airlines was the Company's only contract to provide its gaming
software to an airline. Gaming is prohibited on the aircraft of U.S.
commercial air carriers and on all flights to and from the United States.
Other countries may introduce similar prohibitions, which could limit the
prospects for additional contracts. The Company continues to provide its
amusement game software to Air China, American Airlines, Cathay Pacific
Airways, Continental, EgyptAir, Lauda Air, Malaysia Airlines and Virgin
Atlantic. Japan Air Lines was added as a customer in 1999. IEL's Sky Play
revenues increased from US$266,000 during 1998 to US$507,000 during 1999.
The Company does not believe that it has exposure to the "Year 2000 Problem."
Software developed by the Company is compliant with dates in the year 2000.
The Company uses commercial software produced by a variety of vendors and
believes that all of its major systems are compliant.
On January 13, 1998, the Company completed the acquisition of all of the
outstanding stock of Inflight Interactive Limited ("IIL") in exchange for
500,000 shares of the Company's Common Stock. IIL is a U. K. developer and
provider of amusement games to the airline industry. IIL's games are currently
operating on Air China, American Airlines, Cathay Pacific, Continental,
EgyptAir, Japan Air Lines, Lauda Air, Malaysia Airlines, and Virgin Atlantic.
During 1999, the number of airline customers increased from seven to nine, and
the number of installed aircraft (excluding trials) increased from 79 to 119.
As of March 31, 2000 the number of installed aircraft increased from 119 to
128.
Results of Operations
Twelve Months Ended December 31, 1999 and December 31, 1998
Revenue increased from $266,259 to $506,723. The revenue increase is due to
the addition of two airline customers and the addition of new aircraft with
previous customers.
General and administrative expenses decreased by approximately $2.2 million due
to the termination of all employees in November, 1998 and cessation of the
inflight gaming operations.
Consulting and contract labor expenses decreased by $313,000 primarily due to
elimination of development costs related to the inflight gaming product.
Depreciation and amortization expenses decreased by $7.97 million due to the
1998 write off of $13.2 million in goodwill related to the June, 1997 purchase
of the minority interest in Old IEL and a write down in the carrying value of
its software by $1.4 million.
The Company incurred $357,000 in expenses in late 1998 related to the closing
of the Sky Games operations. This expense was primarily for severance payments
to former employees. There was no comparable expense in 1999.
Following the closing of the Sky Games operations in 1998, the Company wrote
off $1.9 million for the value of the Singapore Airlines agreements and the
remainder of the unamortized goodwill in the amount of $13.2 million related to
the June, 1997 purchase of the minority interest in Old IEL. The Company also
wrote down the carrying value of its software by $1.4 million.
Twelve Months Ended December 31, 1998 and Ten Months Ended December 31, 1997
Revenue increased from zero to $266,259. The revenue increase is due to the
acquisition of IIL in January, 1998 and the associated revenues. Inflight
gaming did not contribute significantly to revenues in 1998.
General and administrative expenses increased by approximately $306,000
primarily due to comparison of a twelve month period in 1998 to a ten month
period in 1997.
Consulting and contract labor expenses decreased by $2.7 million. The 1997
period included an expense of $2.4 million for Grymyr consulting agreement.
Legal expenses decreased by $345,000. The 1997 period included high expenses
related to the Amalgamations.
Interest expenses decreased by $4.3 million. Interest in 1998 was limited to
interest paid on the Company's convertible debentures which were converted to
Common Stock during the first quarter of the year. Interest in 1997 included
$3.5 million for the beneficial conversion feature of the Harrah's Loan.
Depreciation and amortization expenses increased by $4.2 million. $496,000 of
the increase is attributable to amortization of goodwill created with the
January, 1998 purchase of IIL. $413,000 of the increase is attributable to
amortization of the cost of development of the Company's gaming software which
began in June, 1998 when the software was placed in service. The remainder of
the increase is attributable to amortization of the excess of the purchase
price over assets acquired when the Company purchased the minority interest in
Old IEL previously owned by Harrah's; this was included for approximately six
months during the 1997 period and for eleven months of the 1998 period.
The Company incurred $287,000 in expenses related to the closing of the Sky
Games operations. This expense was primarily for severance payments to former
employees.
Following the closing of the Sky Games operations, the Company wrote off $1.9
million for the value of the Singapore Airlines agreements and the remainder of
the unamortized goodwill in the amount of $13.2 million related to the June,
1997 purchase of the minority interest in Old IEL. The Company also wrote down
the carrying value of its software by $1.4 million.
Liquidity and Capital Resources
At December 31, 1999 the Company had a working capital deficit of approximately
$535,000. During 1999, the Company's primary source of funding was through
cash flow generated from operations. Prior to 1999, the primary source of
funding was through sales of its equity and securities convertible into Common
Stock.
In June, 1997, the company issued 2,737 Class A Preference Shares in exchange
for a promissory note in the amount of $2,737,000. During 1998, the Company
and the holder agreed that the Company would redeem the Class A Preference
Shares in installments beginning June 30, 1998. As of August 31, 1998, the
Company had redeemed 500 shares at their redemption price of $1,000 per share.
The Company was unable to redeem additional shares. As of March 31, 2000,
2,237 Class A Preference Shares remained outstanding and were convertible at
$0.4626855 into 4,834,818 shares of Common Stock on that date. If the Class A
Preference Shares are converted into Common Stock, HIIC has the right to
receive additional shares of Common Stock at $0.01 per share. As of March 31,
2000, HIIC would be entitled to receive 476,320 shares. The actual number of
shares of Common Stock issuable upon conversion may be higher or lower and is
based on a discount to the 20 day average of the mean closing bid and ask price
of the Company's Common Stock and is inversely proportional to the market price
of the Company's Common Stock i.e. if the average share price decreases, the
number of shares of Common Stock issuable increases. Dividends of $252,126 on
the Class A Preference Shares are in arrears from October 1, 1998 and are
included in Accounts Payable and Accrued Expenses on the Company's financial
statements.
In October 1997, the Company sold 462,847 shares of Common Stock in a private
placement for $1.5 million (approximately $1,352,000 net of offering expenses).
An additional 286,123 shares were sold for $750,000 on April 21, 1998 followed
by another 286,123 shares for $750,000 on June 8, 1998. The investor also
received a warrant to purchase 243,205 shares of Common Stock at an exercise
price of $2.62125 through April 21, 2000 and a warrant for the purchase of
243,205 shares of Common Stock at an exercise price of $2.62125 through June 5,
2000.
On December 17, 1997, the Company issued 1,000 shares of Series A Convertible
Preference Shares of the Company's Class B Preferred Stock for a total
consideration of $1,000.000. The Class B Series A Preference Shares are
convertible into a number of shares of Common Stock, determined by dividing the
stated value of $1,000 per share by the lesser of: $3.2038 (the "Fixed
Conversion Price") and a price (the "Floating Conversion Price") calculated as
85% of the average of the three lowest closing bid prices for the Common Stock
during the thirty trading days occurring immediately prior to, but not
including, the conversion date. Dividends are cumulative and may be paid, at
the option of the Company and with prior notice, in additional shares of Common
Stock at an annual dividend rate of 8%. Warrants for the purchase of 61,718
shares of Common Stock were issued in connection with the issuance of the
Series A Class B Convertible Preference Shares. The warrants expired on
December 17, 1999. The Company exercised an option of selling a second tranche
with 123,432 warrants for an aggregate purchase price of $2,000,000 on July 24,
1998. As of December 31, 1999, 1,280 shares of the Class B Series A Preference
Shares had been submitted for conversion into 28,550,710 shares of Common
Stock. All Common Stock issuable upon the conversions has been issued except
for 3,492,426 shares which the Company lacks the authority to issue. Issuance
would cause the Company to exceed its maximum authorized capital. In January,
1999, two holders of the Class B Series A Preference Shares agreed to amend the
conversion terms so that the Floating Conversion Price will not be less than
$0.25 per share. As of December 31, 1999, a total of 1,720 shares of the Class
B Series A Preference Shares were outstanding. As of March 31, 2000, 1,000
Class B Series A Preference Shares convertible at $0.25 per share, had been
submitted for conversion into 4,000,000 shares of Common Stock. As of March
31, 2000, 600 of the Class B Series A Preference Shares were submitted for
conversion into 22,588,233 shares of Common Stock. The Company lacks the
authority to issue these shares. Issuance would cause the Company to exceed
its maximum authorized capital. The remaining 120 Class B Series A Preference
Shares are convertible into 480,000 shares of Common Stock at $0.25 per share.
These shares have not yet been submitted for conversion.
As of February 20, 1998, the Company sold 300 shares of Series B Class B
Convertible Preferred Stock at $1,000 per share. The Series B Class B
Convertible Preferred Shares have the same dividend and conversion features as
the Series A Class B Convertible Preferred Shares. The investor also received
a warrant to purchase 18,515 shares of Common Stock at a price of $3.2038 for
18 months. As of December 31, 1999, 38 shares of the Series B Class B shares
had been converted into 663,274 shares of Common Stock and 262 shares remained
outstanding. As of March 31, 2000, the 262 outstanding Series B Class B
Preference Shares had been submitted for conversion into 9,863,529 shares of
Common Stock.
Forward-Looking Information
This Form 10-K contains forward-looking statements that include, among others,
statements concerning the Company's plans to implement its software products,
commence generating revenue from certain of its products, expectations as to
funding its capital requirements, the impact of competition, future plans and
strategies, statements which include the words "believe," "expect," and
"anticipate" and other statements of expectations, beliefs, anticipated
developments and other matters that are not historical facts. These statements
reflect the Company's views with respect to such matters. Management cautions
the reader that these forward-looking statements are subject to risks and
uncertainties that could cause actual events or results to materially differ
from those expressed or implied by the statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data are provided as an exhibit to Item
14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 22, 1999, Ernst & Young LLP notified Interactive Entertainment Limited
(the "Company") that they were resigning as auditor for the Company. At the
time of their resignation, Ernst & Young LLP was reviewing whether certain
capitalized software had been impaired at December 31, 1998 and should not
continue to be carried as an asset by the Company. That review was not
completed. Upon receipt of the resignation, IEL approached its previous
auditors, Buckley Dodds. Buckley Dodds accepted the appointment, and completed
the December 31, 1998 audit.
On March 6, 2000, Ernst & Young (U.K.) resigned as auditors of IEL's wholly
owned subsidiary IIL. Ernst & Young confirmed that there were no circumstances
connected with their resignation which should be brought to the attention of
the members or creditors of IEL.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
See the information set forth in the sections of the Proxy Statement entitled
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance," which sections are incorporated herein by reference.
EXECUTIVE OFFICERS
See the information set forth in the section of the Proxy Statement entitled
"Executive Officers and Significant Employees," which section is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the information set forth in sections of the Proxy Statement entitled
"Executive Compensation," "Summary Compensation Table," and "Option Grants in
the Last Fiscal Year" which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth under "Security Ownership by Directors, Officers
and Five Percent (or More) Shareholders" as set forth in the Proxy Statement
and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth in the section of the Proxy Statement entitled
"Certain Relationships and Related Transactions," which section is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS
1. Financial Statements
Consolidated Balance Sheets at December 31, 1999 and December 31, 1998.
Consolidated Statements of Operations for:
Twelve Months Ended December 31, 1999
Twelve Months Ended December 31, 1998
Ten Months Ended December 31, 1997
Consolidated Statements of Shareholder's Equity
February 29, 1997 through December 31, 1999
Statements of Cash Flow
Twelve Months Ended December 31, 1999
Twelve Months Ended December 31, 1998
Ten Months Ended December 31, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
3. Other Exhibits
EXHIBIT DESCRIPTION
2. Plan and Agreement of Merger and Amalgamation, dated as of May 13, 1997,
among the Company, SGI Holding Corporation Limited, IEL and Harrah's
Interactive Investment Company. (Incorporated by reference to the same
numbered exhibit to the Registrant's Form 8-K as filed with the SEC on June 27,
1997.)
3.i(a) Articles of Incorporation (Yukon Territory). (Incorporated by
reference to Exhibit 1.1 to the Registrant's Annual Report on Form 20-F (File
No. 0-22622) as filed with the SEC on October 12, 1993.)
3.i(b) Certificate of Continuance (Bermuda). (Incorporated by reference
to Exhibit 1.2 to the Registrant's Annual Report on Form 20-F (File No. 0-
22622) as filed with the SEC on September 16, 1996.)
3.ii Bye-Laws as amended. (Incorporated by reference to the same numbered
exhibit to the Registrant's Annual Report on Form 10-K/A No. 2 as filed with
the SEC on July 8, 1998.)
4.1 Escrow Agreement dated May 27, 1992, as amended, among Montreal Trust
Company of Canada, the Company and certain shareholders. (Incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report on Form 20-F (File
No. 0-22622) as filed with the SEC on October 12, 1993.)
4.2 Redemption Agreement, dated as of February 25, 1997, between the Company
and Anthony Clements and Rex Fortescue. (Incorporated by reference to Exhibit
3.12 to the Registrant's Annual Report on Form 20-F (File No. 0-22622) as filed
with the SEC on September 12, 1997.)
4.3 Redemption and Cancellation Agreement, dated as of April 30, 1997,
between the Company and Sky Games International, Inc. (Incorporated by
reference to Exhibit 3.13 to the Registrant's Annual Report on Form 20-F (File
No. 0-22622) as filed with the SEC on September 12, 1997.)
4.4 Shareholder Rights Agreement, dated June 17, 1997, between the Company
and Harrah's Interactive Investment Company. (Incorporated by reference to
Exhibit 3.15 to the Registrant's Annual Report on Form 20-F (File No. 0-22622)
as filed with the SEC on September 12, 1997.)
4.5 Registration and Preemptive Rights Agreement, dated June 17, 1997,
between the Company and Harrah's Interactive Investment Company. (Incorporated
by reference to Exhibit 4(a) to the Registrant's Form 8-K as filed with the SEC
on June 27, 1997.)
4.6 Registration Rights Agreement, dated June 17, 1997, between the Company
and B/E Aerospace, Inc. (Incorporated by reference to Exhibit 4(b) to the
Registrant's Form 8-K as filed with the SEC on June 27, 1997.)
4.7 Subscription Agreement, dated as of October 22, 1997, between the Company
and Henderson International Investments Limited. (Incorporated by reference to
Exhibit 3.22 to the Registrant's Quarterly Report on Form 10-Q/A No. 1 as filed
with the SEC on July 8, 1998.)
4.8 Subscription Agreement, dated as of October 22, 1997, between the Company
and Michael A. Irwin. (Incorporated by reference to Exhibit 3.23 to the
Registrant's Quarterly Report on Form 10-Q/A No. 1 as filed with the SEC on
July 8, 1998.)
4.9 First Amendment to Registration and Preemptive Rights Agreement dated
March 18, 1998 between the Company and Harrah's Interactive Investment
Company. (Incorporated by reference to Exhibit 99.22 to the Registrant's
Amended Registration Statement on Form S-3 as filed with the SEC on July 15,
1998.)
4.10 First Amendment to Subscription Agreement between the Company and
Henderson International Investments Limited dated as of April 2, 1998.
(Incorporated by reference to Exhibit 99.23 to the Registrant's Amended
Registration Statement on Form S-3 as filed with the SEC on July 15, 1998.)
4.11 Securities Purchase Agreement between the Company and each of Marshall
Capital Management, Inc. (formerly Proprietary Convertible Investment Group,
Inc.) and CC Investments, LDC dated as of December 17, 1997. (Incorporated by
reference to Exhibit 99 to the Registrant's Form 8-K as filed with the SEC on
December 24, 1997.)
4.12 Registration Rights Agreement between the Company and each of Marshall
Capital Management, Inc. (formerly Proprietary Convertible Investment Group,
Inc.) and CC Investments, LDC dated as of December 17, 1997. (Incorporated by
reference to Exhibit 4(c) to the Registrant's Form 8-K as filed with the SEC on
December 24, 1997.)
4.13 Securities Purchase Agreement between the Company and Palisades Holding,
Inc. dated February 20, 1998. (Incorporated by reference to Exhibit 99.6 to
the Registrant's Amended Registration Statement on Form S-3 as filed with the
SEC on July 15, 1998.)
4.14 Registration Rights Agreement between the Company and Palisades Holding,
Inc. dated February 20, 1998. (Incorporated by reference to Exhibit 99.5 to
the Registrant's Amended Registration Statement on Form S-3 as filed with the
SEC on July 15, 1998.)
4.15 Securities Agreement between the Company and B/E Aerospace, Inc. dated
June 25, 1998. (Incorporated by reference to Exhibit 99.1 to the Registrant's
Form 8-K filed with the SEC July 2, 1998.)
10.5* Services Agreement, dated as of November 7, 1995, between IEL and
Singapore Airlines Limited. (Incorporated by reference to Exhibit 3.9 to the
Registrant's Annual Report on Form 20-F (File No. 0-22622) as filed with the
SEC on September 16, 1996.)
10.6* Software License and Software Services Agreement, dated as of November 7,
1995, between IEL and Singapore Airlines Limited. (Incorporated by reference
to Exhibit 3.10 to the Registrant's Annual Report on Form 20-F (File No. 0-
22622) as filed with the SEC on September 16, 1996.)
10.7 Sublease Agreement dated as of June 5, 1997, between IEL and Harrah's
Operating Company, Inc. (Incorporated by reference to Exhibit 3.11 to the
Registrant's Annual Report on Form 20-F (File No. 0-22622) as filed with the
SEC on September 12, 1997.)
10.8 Consulting Agreement, dated as of April 30, 1997, between the Company and
James P. Grymyr. (Incorporated by reference to Exhibit 3.14 to the
Registrant's Annual Report on Form 20-F (File No. 0-22622) as filed with the
SEC on September 12, 1997.)
10.9* Software License Agreement, dated June 17, 1997, between the Company and
Harrah's Interactive Investment Company. (Incorporated by reference to Exhibit
3.16 to the Registrant's Annual Report on Form 20-F (File No. 0-22622) as filed
with the SEC on September 12, 1997.)
10.10 Continuing Services Agreement, dated June 17, 1997, between the Company
and Harrah's Interactive Entertainment Company. (Incorporated by reference to
Exhibit 3.17 to the Registrant's Annual Report on Form 20-F (File No. 0-22622)
as filed with the SEC on September 12, 1997.)
10.11 Termination Agreement and Release, dated as of June 17, 1997, among the
Company, SGI Holding Corporation Limited, IEL, Harrah's Interactive Investment
Company, and Harrah's Interactive Entertainment Company. (Incorporated by
reference to Exhibit 3.21 to the Registrant's Annual Report on Form 20-F (File
No. 0-22622) as filed with the SEC on September 12, 1997.)
27** Financial Data Schedule
*Confidential treatment has been granted.
**Submitted herewith.
(b) REPORTS FILED ON FORM 8-K
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Interactive Entertainment Limited
By: /s/ Deborah Fortescue-Merrin
Dated: June 30, 2000 Chairman and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Eppie Canning Director, Secretary June 30, 2000
Eppie Canning
/s/ Anthony P. Clements Director June 30, 2000
Anthony P. Clements
/s/ Deborah Fortescue-Merrin Chairman, President June 30, 2000
Deborah Fortescue-Merrin and Director
/s/ Anastasia Kostoff-Mann Director, Vice President June 30, 2000
Anastasia Kostoff-Mann
/s/ Stephen Rosenberg Director June 30, 2000
Stephen Rosenberg
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Interactive Entertainment Limited
We have audited the accompanying balance sheets of Interactive Entertainment
Limited as of December 31, 1999 and 1998, and the related statements of
operations, shareholders' equity, and cash flows for the year ended December
31, 1999 and 1998. These financial statements are the responsibilty of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Interactive Entertainment Limited and subsidiaries for the 10 month period
ended December 31, 1997 were audited by other auditors whose report dated
February 11, 1998 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted audited
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our
audit provided a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Company as of December 31,
1999 and 1998, and the results of operations and cash flows for the year ended
December 31, 1999 and 1998, 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 limited operations, products, or
facilities, and requires significant resources to implement its plan of
operations that raises substantial doubt about its ability to be a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Vancouver, BC "BUCKLEY DODDS"
June 29, 2000 Chartered Accountants
INTERACTIVE ENTERTAINMENT LIMITED CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
December 31,
1999 1998
Current Assets
Cash and cash equivalents $
56,785 $ 95,642
Accounts and notes receivable, less allowance
for doubtful accounts of $46,828
92,481 82,356
Prepaid expenses
89,106 115,232
Total current assets
238,372 293,230
Furniture, fixtures and equipment, at cost
447,666 729,578
Less: accumulated depreciation
(203,667) (259,457)
Furniture fixtures and equipment, net
243,999 470,121
Software development costs, net
421,271 702,118
Goodwill 530,196
1,043,289
Total assets $ 1,433,838
$ 2,508,757
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses
$ 755,173 $ 623,614
Notes payable, current liabilities
18,000 -
Total current liabilities
773,173 623,614
Notes payable, long term 81,322
-
854,495 623,614
Shareholders' equity
Class A preferred shares, $0.01 par value, authorized - 3,000
shares, outstanding - 2,237 shares
22 22
Class B preferred shares, $0.01 par value, authorized - 5,000,000
shares, outstanding - 2,075 shares and 2,662 shares
21 27
Common shares, $0.01 par value, authorized - 50,000,000
shares, outstanding - 50,000,000 and 24,367,414 shares
500,000 243,674
Additional paid-in-capital
65,616,313 65,895,695
Accumulated deficit (65,537,013)
(64,254,275)
579,343
1,885,143
Total liabilities and shareholders' equity
$ 1,433,838 $ 2,508,757
APPROVED BY THE DIRECTORS:
"Deborah Fortescue-Merrin" Director
" Stephen Rosenburg" Director
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
INTERACTIVE ENTERTAINMENT LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Months Twelve Months
Ten Months
Ended Ended Ended
December 31, December 31,
December 31,
1999 1998 1997
Revenue $ 506,723 $
266,259 $ -
Operating Expenses
General and administrative 407,109
2,639,601 2,376,127
Consulting and contract labor 30,876
343,667 3,092,289
Marketing 9,825
174,058 351,582
Management fees -
- - 107,584
Legal 47,968 295,781
640,456
Interest expense 1,573
188,249 4,478,244
Depreciation and amortization 947,366
8,917,960 4,669,730
Amalgamation expense -
- 100,000
Interest income (2,333)
(34,865) (17,616)
Business discontinuation expenses
16,612 287,298 -
Write-down/sale of assets 70,312
16,510,507 676,899
1,529,308 29,322,256 16,475,295
Loss before minority interest
and extraordinary item 1,022,585
29,055,997 16,475,295
Minority Interest -
- (163,842)
Loss before extraordinary item -
29,055,997 16,311,453
Early extinguishment of debt 83,936
- - 1,824,222
Net Loss $ 1,305,800 $ 29,055,997
$ 18,135,675
BASIC AND DILUTED LOSS PER SHARE
Numerator for basic and diluted loss per share:
Loss before extraordinary item $1,022,585
$ 29,055,997 $ 16,311,453
Preferred stock dividends 367,151
389,339 206,512
Loss to common shareholders before
extraordinary item 1,389,736
29,445,336 16,517,965
Extraordinary item (83,936)
- 1,824,222
Loss to common shareholders $ 1,305,800
28,082,401 $ 29,445,336 $ 18,342,187
Denominator for basic and diluted loss
per share -- weighted average
shares outstanding 47,785,147
20,988,199 15,562,834
Loss before extraordinary item $
0.03 $ 1.40 $ 1.06
Extraordinary loss -
- 0.12
Net loss per share $ 0.03
$ 1.40 $ 1.18
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENT
INTERACTIVE ENTERTAINMENT LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Class A Preferred Stock Class B Preferred Stock Common Stock
Additional
Number Number Number Paid-in
Accumulated
of Shares Amount of Shares Amount of Shares Amount
Capital Deficit Total
Balance, February 28, 1997 13,314,020 106,752
16,027,379 (16,466,752) (332,621)
Net loss (18,135,675)
(18,135,675)
Preferred stock dividends
(206,512) (206,512)
Change in par value 26,387 (26,387)
-
Issuance of shares on Debenture conversion
808,520 8,085 1,625,165 1,633,250
Issuance of shares as Interest on debentures
44,289 443 140,120 140,563
Beneficial conversion feature on convertible debentures
628,041 628,041
Issuance of shares in connection with cancellation of performance
shares (Note 13) 588,923 5,889 1,834,495
1,840,384
Issuance of shares for consulting Agreement
586,077 5,861 2,411,707 2,417,568
Issuance of shares in connection with the amalgamation
7,086,915 70,870 31,141,628 31,212,498
Issuance of Class A preferred Stock 2,737 27
2,737,416 2,737,443
Beneficial conversion feature on Class A preferred stock
1,824,222 1,824,222
Issuance of Class B preferred Stock 1,000
10 934,000 934,010
Issuance of warrants 92,223
92,223
Issuance of shares 524,590 5,246
1,546,660 1,551,906
Balance, December 31, 1997 2,737 $ 27 1,000
$ 10 22,953,334 $229,533 $60,916,669 $(34,808,939)
$26,337,300
Net income (loss) (29,055,997)
(29,055,997)
Preferred stock dividends
(389,340) (389,340)
Purchase of Inflight Interactive Ltd 500,000
5,000 1,534,438 23,062 1,562,500
Issuance of shares 572,246 5,722
1,404,278 1,410,000
Issuance of shares on debenture Conversion
250,299 2,503 527,497 530,000
Issuance of shares as interest on Debentures
2,563 26 5,467 5,493
Redemption of Class A preferred Stock (500) (5)
(499,995) (500,000)
Issuance of Class B preferred Stock 2,300 23
2,275,977 2,276,000
Conversion of Class B preferred into common (638)
(6) 3,613,972 36,140 (36,134)
Issuance of options for consulting
51,000 51,000
Capital raising activity (341,814)
(341,814)
Eliminate effect of purchased Retained earnings
23,062 (23,062)
Balance December 31, 1998 2,237 $ 22 2,662 $
27 27,892,414 $279,924 $65,860,445 $(64,254,275) $ 1,885,143
Net income (loss) (938,649) 938,649
Preferred stock dividends
(367,151) (367,151)
Conversion of Class B preferred
Into common (587) (6) 22,107,586 221,076 (221,070)
-
Eliminate effect of purchased
Retained earnings (23,062) $
23,062 -
Balance, December 31, 1999 2,237 $ 22 2,075 $
21 $50,000,000 $500,000 $65,616,313 $(65,537,013) $
579,343
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
INTERACTIVE ENTERTAINMENT LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Twelve Months Ten Months
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1997
OPERATING ACTIVITIES
Net Loss $ (938,649) $ (29,055,975) $(18,135,675)
Reconciliation of net loss to net
cash used in operating activities
Depreciation and amortization 947,369 8,917,960 4,669,730
Write-down/sale of assets 69,047 16,510,507 676,899
Other - 4,394 1,939
Minority interest - - (163,842)
Issuance of warrants - - 92,223
Issuance of shares for financing fee - - 650,000
Issuance of shares for consulting
Agreement - - 2,417,568
Issuance of options for consulting - 50,000 -
Extraordinary loss on debt conversion - - 1,824,222
Non-cash interest expense - 5,494 4,372,115
Changes in assets/liabilities
Accounts receivable (10,125) (26,071) 115,909
Prepaid expenses 26,126 (18,030) (35,230)
Other assets - 165,599 (165,599)
Accounts payable and accrued
Expense 131,559 (62,561) (335,897)
Net cash provided by/(used in)
operating activities 225,236 (3,508,704) (4,015,638)
INVESTING ACTIVITIES
Purchases of furniture and
fixtures and equipment - (7,672) (683,786)
Proceeds from sales of property
and equipment 3,646 10,388 435,034
Software development - (101,280) (572,349)
Net cash provided by/(used in)
operating investing activities 3,646 (98,564) (821,101)
FINANCING ACTIVITIES
Issuance of common stock - 1,310,563 1,551,906
Issuance of preferred stock - 2,041,823 934,010
Advances from (to) affiliated
Companies - - 1,007,875
Borrowings on note payable 191,919 - -
Payment on notes payable (92,597) - -
Proceeds from issuance of
Debentures - - 2,163,250
Redemption of preferred stock - (500,000) -
Payment of preferred stock
Dividends 367,151 (389,340) (206,512)
Net cash provided by/
(used in) financing
activities (267,829) 2,563,046 5,450,529
Net (decrease)/increase in
Cash (38,857) (1,144,222) 613,790
Cash, beginning of period 95,642 1,239,864 626,074
Cash, end of period $ 56,785 $ 95,642 $ 1,239,864
Supplemental Cash Flow Information:
Cash paid for income taxes $ 537 $ 434 $ 7,469
Cash paid for interest $ 1,573 $ 182,756 $ 10,893
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS
The Company is a Bermuda exempted company which, in June 1997, changed its name
from Sky Games International Ltd. ("SGI") to Interactive Entertainment
Limited. The Company's activities have been focused on providing inflight
gaming and entertainment software and services by developing, implementing
and operating or licensing computerized video gaming and other entertainment
software on, but not limited to the aircraft of international commercial air
carriers. Gaming software was marketed using the name Sky GamesT, and the
entertainment software is marketed using the name Sky Play.
On January 13, 1998, the Company completed the acquisition of all the
outstanding capital stock of Inflight Interactive Limited ("IIL") in exchange
for 500,000 shares of Common Stock. IIL is a United Kingdom developer and
provider of amusement games to the airline industry. The games are marketed
under the name Sky Play and are currently operating on a number of airlines,
including Air China, American Airlines, Cathay Pacific, Continental, Egyptair,
Lauda Air, Malaysia Airlines and Virgin Atlantic. The Company is currently
earning positive cash flow from Sky Play. In addition Management is seeking to
expand this business as well as other ventures.
On April 23, 1997, the Board of Directors of the Company approved and adopted a
resolution changing the fiscal year end of the Company to December 31 of each
year from the last day of February of each year.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks and short-term
investments with maturities of three months or less as cash and cash
equivalents.
Software Development
All software production costs have been capitalized until the software was
available for general release to customers, in accordance with the provisions
of Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed. Amortization
of the software costs over a three year period started in June, 1998 upon
release of the software to SIA. Software development costs were written down
in December, 1998 to a value representing the value attributable to the Sky
Play software.
Property and Equipment
The Company's property and equipment is recorded at cost and depreciated using
the straight-line and declining balance methods over its estimated economic
life which is generally three to five years.
Additions and improvements that materially extend the useful lives are
capitalized, while repairs and maintenance costs are expensed as incurred.
Depreciation expense was approximately $153,000, $214,000 and $88,000 for the
years ended December 31, 1999 and 1998 and the ten month period ended December
31, 1997, respectively.
Goodwill
The goodwill, which arose from the acquisition of IIL is being amortized on a
straight-line basis over three years. Management regularly evaluates whether
or not the future undiscounted cash flows are sufficient to recover the
carrying amount of this asset. Additionally, management continually monitors
such factors as the competitive environment and advances in the computer
software and hardware industries. If the estimated future undiscounted cash
flows are not sufficient to recover the carrying amount of this assets and,
accordingly, an impairment has occurred, management intends to write down the
carrying amount to its estimated fair value based on discounted cash flows.
Amortization expense attributable to the IIL purchase was approximately
$513,000 for the year ended December31, 1999 and approximately $496,000 the
period from the date of acquisition (January 13, 1998) through December 31,
1998.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, management continually evaluates whether events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable. Based on management's evaluations, and as discussed below,
significant impairments of long-lived assets occurred during the year ended
December 31, 1998.
The goodwill, which arose from the acquisition of the minority interest of Old
IEL discussed in Note 3, was being amortized on a straight-line basis over
three years. During the year ended December 31, 1998, management determined
that, with the cessation of gaming operations, the future undiscounted cash
flows were not sufficient to recover the carrying amount of this asset and,
accordingly, an impairment had occurred and unamortized goodwill in the amount
of $13.2 million was written off in 1998.
In conjunction with the acquisition of the minority interest of Old IEL, the
Company allocated approximately $1,856,000 of the purchase price to the value
of an agreement with Singapore Airlines. Management determined that, with the
cessation of gaming operations, the value of the contract was impaired and the
value was written off in 1998.
The Company also allocated a portion of the purchase price of the acquisition
of the minority interest of Old IEL to the value of the Company's software.
Additional direct development costs were also incurred for a total cost of $2.5
million. Upon the cessation of inflight gaming, it was determined that an
impairment had occurred since the future cash flows were not sufficient to
recover the carrying amount of the asset. Since a portion of the asset
continues to have value for the Company's continuing operations future cash
flows were re-estimated resulting in a write down of $1.4 million in 1998.
In December, 1999, the Company decided to dispose of all furniture, fixtures
and equipment that was not currently in use for its Sky Play operations.
Assets with an original cost of $281,000 and a net book value of $75,000 were
written down to an estimate net realizable value of $5,000 and a valuation
adjustment expense of $70,000 was incurred.
Stock-Based Compensation
The Company accounts for employee stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, (APB No. 25) and related
interpretations.
Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share (SFAS No. 128). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. For the periods ended December 31, 1999, December
31, 1998 and December 31, 1997, there is no difference between basic and
diluted loss per share as all stock options, warrants, convertible debentures
and convertible preferred stock are antidilutive for the periods presented.
All loss per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS No. 128 requirements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries: Sky Games International Corp. (a Nevada
corporation), Creator Island Equities Inc., (a Yukon Territory corporation),
IEL (Singapore) Pte. Ltd. (a Singapore corporation), and, since January 13,
1998, Inflight Interactive Limited (a U.K. corporation). For periods prior to
the acquisition of the minority interest in Old IEL discussed in Note 3, the
consolidated financial statements also include the accounts of SGI Holding
Corporation Ltd. and the Company's 80% ownership of Old IEL. All material
intercompany transactions have been eliminated in consolidation.
Comprehensive Income
The Company adopted SFAS No. 130 Reporting Comprehensive Income effective
January 1, 1998. SFAS No. 130 established standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The requirements of SFAS No. 130 include: (a)
classifying items of other comprehensive income by their nature in a financial
statement and (b) displaying the accumulated balance of other comprehensive
income separately from retained earning and additional paid-in capital in the
equity section of the balance sheet. The Company's comprehensive income (loss)
is substantially equivalent to net income (loss) for the twelve months ended
December 31, 1999 and 1998 and the ten months ended December 31, 1997.
Segment Reporting
In 1998, the Company adopted SFAS No. 131 Disclosures about Segments of an
Enterprise and Related Information effective for fiscal years beginning after
December 15, 1997. This statement requires financial statements to disclose
information about products and services, geographic areas and major customers
based on a management approach. The management approach requires disclosing
financial and descriptive information about an enterprise's reportable
operating segments based on reporting information the way management organizes
the segments for making decisions and assessing performance. It also
eliminates the requirement to disclose additional information about
subsidiaries that were not consolidated. For the year ending December 31,
1999, the adoption had no material impact to the Company's disclosure
information and its results of operations.
Foreign Currency Translation
Foreign currency assets and liabilities are translated into United States
dollars at the exchange rate prevailing at the balance sheet date. Revenue and
expenses are translated at the average exchange rate during the year.
Translation gains and losses are not material.
Revenue Recognition
Revenue for Sky Games was recognized at the end of each month upon accumulation
of monthly gaming totals and calculation of the settlement with Singapore
Airlines. Revenue for Sky Play is recognized each month upon the invoicing of
customers.
NOTE 3--ACQUISITION OF MINORITY INTEREST
Prior to June 17, 1997, the Company operated its principal business activities
through its indirectly 80%-owned subsidiary, Interactive Entertainment Limited
("Old IEL"). The remaining 20% of Old IEL was held by an affiliate of Harrah's
Entertainment, Inc. ("Harrah's"). Harrah's also managed the operations of Old
IEL.
Effective June 17, 1997, Old IEL was merged into the Company. As part of the
Amalgamation, the Management Agreement with Harrah's was terminated. Harrah's
received a total of 5,879,040 shares of the Company's $.01 par value common
stock (the "Common Stock") in exchange for its 20% ownership interest in Old
IEL and as consideration for the termination of the Management Agreement.
The Amalgamation has been accounted for under the purchase method. The shares
issued to Harrah's were valued at $26,255,793 based on the average quoted
market price of the Company's Common Stock when the Amalgamation was announced,
or $4.466 per share. The total value of the shares issued was allocated among
the assets acquired, including the Company's agreement with Singapore Airlines
and the Company's software under development. This transaction represents a
non-cash transaction for purposes of the Consolidated Statements of Cash Flows.
Prior to the Amalgamation, Harrah's had agreed, pursuant to a funding
agreement, to loan up to $1,000,000 (the "Harrah's Loan") to Old IEL. Upon
closing of the Amalgamation, the outstanding principal and accrued interest of
the Harrah's Loan converted automatically into 1,007,875 shares of Common Stock
at $1.00 per share. Since the Harrah's Loan was convertible into Common Stock
at less than the current market, a beneficial conversion feature was included
in the Harrah's Loan. This beneficial conversion feature was valued at
$3,466,000 and has been included in interest expense for the ten months ended
December 31, 1997.
NOTE 4--CONVERTIBLE DEBENTURES
During the ten months ended December 31, 1997, the Company issued $2,163,250 of
8% convertible debentures due in 1999. At December 31, 1997, $1,633,250 of the
debentures had been converted into 808,520 shares of Common Stock. The
outstanding balance of convertible debentures as of December 31, 1997 totaled
$530,000.
Subscription dates ranged from July 7 through September 29, 1997. The
debentures were convertible at the lower of 85% of the average of the closing
bid prices of the Common Stock for the five trading days immediately preceding
the execution by the subscriber of its individual subscription for debentures
or 77.5% of the average of the closing bid prices of the Common Stock for the
five trading days immediately preceding the date of conversion.
The debentures contained a feature that provided for conversion into Common
Stock at a price below the current market at the time of issue. The value of
this beneficial conversion feature, totaling approximately $628,000, was
capitalized in other assets with a corresponding increase to additional paid-in
capital. Placement fees of $149,000 incurred upon sale of the debentures were
also capitalized. The value of the conversion feature and the placement fees
were amortized to interest expense over the original life of the debenture.
Any unamortized amount was expensed upon conversion of the debenture. At
December 31, 1997, the unamortized deferred interest charge and unamortized
placement fees of $148,000 were included in other assets. The last portion of
the debentures were converted into Common Stock during the first quarter of
1998.
NOTE 5--LEASES
The Company leased certain facilities under an operating lease expiring April
30, 1999. Total lease and rent payments amounted to approximately $46,000,
$105,600, and $139,000, for the twelve month periods ended December 31, 1999
and 1998 and the ten month period ending December 31, 1997, respectively.
NOTE 6--EMPLOYEE BENEFITS
On July 1, 1997, the Company established an employee savings plan that
qualifies under Section 401(k). All employees of the Company may participate
after completion of one year of service by deferring from 1 percent to 16
percent of their eligible compensation. There is no provision for Company
contributions to the Plan.
NOTE 7--SHAREHOLDERS' EQUITY
In December 1994, the Company discontinued an engineering and marketing
arrangement with B/E Aerospace, Inc. ("BEA"). As part of the termination, the
Company issued to BEA a promissory note in the original principal amount of
$2.5 million at 12% per annum. On February 28, 1997, an agreement was reached
with BEA to exchange the note in the amount of $2,737,000, including accrued
and unpaid interest, for Class A Preference Shares at $1,000 per share. The
exchange for 2,737 Class A Preference Shares was completed in June, 1997.
During 1998, the Company and BEA agreed that the Company would redeem the Class
A Preference Shares in installments beginning June 30, 1998. As of August 31,
1998, the Company had redeemed 500 shares at their redemption price of $1,000
per share. The Company was unable to redeem additional shares as there were no
authorized common shares available to be issued. The Class A Preference Shares
are convertible at any time into a number of shares of Common Stock, determined
by dividing $1,000 per share of Class A Preference Shares, plus any accrued and
unpaid dividends thereon by: (i) prior to February 28, 1999, a conversion price
equal to 70% of the average mean of the closing bid and ask prices of the
Common Stock for the 20 trading days prior to the conversion (the "Market
Price"); (ii) after February 28, 1999 and prior to August 31, 1999, a
conversion price equal to 65% of the Market Price; and (iii) after August 31,
1999, a conversion price equal to 60% of the Market Price. Dividends on the
Class A Preference Shares are cumulative and payable quarterly at an annual
dividend rate of 9%. The Company, at its option, may redeem the Class A
Preference Shares, in whole or in part, at any time and from time to time, at a
redemption price of $1,000 per share plus any accrued and unpaid dividends
thereon. The Company is not required to redeem the Class A Preference Shares.
Dividends on the Class A Preference Shares were $228,305 in 1998 and $201,330
in 1999 of which $50,756 for the fourth quarter of 1998 and $201,330 of 1999
remained unpaid and in arrears at year end. The Class A Preference Shares do
not have any voting rights. As of December 31, 1999, 2,237 Class A Preference
Shares remained outstanding. If the Class A Preference Shares are converted
into Common Stock, Harrah's has the right to receive additional shares of
Common Stock at $0.01 per share. The actual number of shares of Common Stock
issuable upon conversion may be higher or lower and is based on a discount to
the 20 day average of the mean closing bid and ask price of the Company's
Common Stock and is inversely proportional to the market price of the Company's
Common Stock i.e. if the average share price decreases, the number of shares of
Common Stock issuable increases.
Since the Preference Shares were convertible into Common Stock at less than the
market value at the time of issue, a beneficial conversion feature existed
requiring that the Preference Shares be valued at the market value of the
underlying Common Stock. Since the resulting valuation of the Preference
Shares exceeded the balance of the note, an extraordinary expense of
approximately $1,824,000 was incurred during the ten months ended December 31,
1997 for early extinguishment of the note.
On December 17, 1997, the Company issued 1,000 shares of Series A Convertible
Preference Shares of the Company's Class B Preferred Stock for a total
consideration of $1,000.000. The Class B Series A Preference Shares are
convertible into a number of shares of Common Stock, determined by dividing the
stated value of $1,000 per share by the lesser of: $3.2038 (the "Fixed
Conversion Price") and a price (the "Floating Conversion Price") calculated as
85% of the average of the three lowest closing bid prices for the Common Stock
during the thirty trading days occurring immediately prior to, but not
including, the conversion date. Dividends are cumulative and may be paid, at
the option of the Company and with prior notice, in additional shares of Common
Stock at an annual dividend rate of 8%. Warrants for the purchase of 61,718
shares of Common Stock were issued in connection with the issuance of the
Series A Class B Convertible Preference Shares. The warrants expired on
December 17, 1999. The Company exercised an option of selling a second tranche
with 123,432 warrants for an aggregate purchase price of $2,000,000 on July 24,
1998. As of December 31, 1999, 680 shares of the Class B Series A Preference
Shares had been submitted for conversion into 25,600,012 shares of Common
Stock. All Common Stock issuable upon the conversions has been issued except
for 3,492,426 shares which the Company lacks the authority to issue. Such
issuance would cause the Company to exceed its maximum authorized capital. In
January, 1999, two holders of the Class B Series A Preference Shares agreed to
amend the conversion terms so that the Floating Conversion Price will not be
less than $0.25 per share. As of December 31, 1999, a total of 1,720 shares of
the Class B Series A Preference Shares were outstanding. As of March 31, 2000,
1,000 Class B Series A Preference Shares, convertible at $0.25 per share, had
been submitted for conversion into 4,480,000 shares of Common Stock. As of
March 31, 2000, 600 of the Class B Series A Preference Shares were submitted
for conversion into 22,588,233 shares of Common Stock. The Company lacks the
authority to issue these shares since issuance would cause the Company to
exceed its maximum authorized capital. The remaining 120 Class B Series A
Preference Shares are convertible into 480,000 shares of Common Stock at $0.25
per share. As of March 31, 2000, these shares have not been submitted for
conversion.
On February 20, 1998, the Company sold 300 shares of Series B Class B
Convertible Preferred Stock at $1,000 per share. The Series B Class B
Convertible Preferred Shares have the same dividend and conversion features as
the Series A Class B Convertible Preferred Shares. The investor also received
a warrant to purchase 18,515 shares of Common Stock at a price of $3.2038 for
18 months. As of December 31, 1999, 38 shares of the Series B Class B shares
had been converted into 663,274 shares of Common Stock and 262 shares remained
outstanding. As of March 31, 2000, the 262 outstanding Series B Class B
Preference Shares had been submitted for conversion into 9,863,529 shares of
Common Stock.
During the ten months ended December 31, 1997, the Company changed the par
value of the Common Stock from C$.01 (Canadian dollars) to $.01 (United States
dollars). The change in par value did not affect any of the existing rights of
shareholders and has been recorded as an adjustment to additional paid-in
capital and Common Stock.
As of December 31, 1998, potential issuance of Common Stock pursuant to stock
option plans and warrants totaled 3,742,761 shares. As of June 10, 1999, an
additional 34,787,832 shares would be required for the convertible preferred
stock and preemptive rights agreements.
NOTE 8--STOCK OPTIONS
The Company follows APB No. 25 in accounting for its employee stock options.
Under APB No. 25, no compensation expense is recognized because the exercise
price of the Company's incentive employee stock options is equal to or greater
than the market price of the underlying stock on the date of grant.
Prior to February 28, 1995, the Directors of the Company issued stock options
to employees and directors under individual agreements between the Company and
the individuals. Exercise prices and terms were determined by the Board of
Directors. At December 31, 1999, no stock options issued prior to February 28,
1995 are outstanding.
During the year ended February 29, 1996, the Company established and the
Company's shareholders subsequently approved the 1996 Stock Program for the
then upper management, directors and major shareholders of the Company. Under
this plan, the Company could grant options to purchase up to 1,500,000 shares
of Common Stock at prices not less than the fair market value of the stock on
the day of grant. The 1,130,000 options issued under the 1996 Stock Program
are exercisable upon the grant date and expire during 2001 through 2002. No
further grants under the 1996 Stock Program will be made by the Company.
On December 6, 1996, the Company adopted a Directors Stock Ownership Plan
covering 500,000 shares of Common Stock pursuant to which all directors holding
office at December 10th of each year will automatically be granted options for
10,000 shares of Common Stock at the trading price on such day. On October 17,
1997, the Board of Directors of the Company approved an amendment changing the
grant date from December 10 to the date of the first meeting of the Board of
Directors following the Company's Annual General Meeting of shareholders. The
300,000 options granted under this plan are exercisable upon the grant date and
expire ten years after the grant date.
Effective June 16, 1997, the Company established a Management Incentive Plan
(the "MIP") by authorizing the issuance of options for 4,070,105 shares of
Common Stock. The Compensation Committee of the Board of Directors has the
authority to determine the allocation and vesting requirements for such options
issued under the MIP. The exercise price of stock options granted under the
MIP is the market price of the Common Stock on the date of the grant. A total
of 1,200,000 of the 2,195,340 options outstanding under the plan will vest
specifically on the earlier of sustaining certain stock price levels or ten
years from the date of the grant. Approximately 1.4 million non-vested options
held by employees were canceled during 1998 following termination of employees.
A summary of the Company's stock option activity and related information
follows:
Twelve Months Ended Twelve Months Ended Ten Months Ended
December 31, 1999 December 31, 1998 December 31, 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
# Options Price # Options Price # Options Price
Outstanding at
beginning of
period 2,960,341 $ 2.81 3,817,950 $ 3.11 1,190,000 $ 3.06
Granted 664,999 0.47 2,434,150 1.52 2,627,950 3.14
Exercised - - - - - -
Expired - - (3,291,759) 2.21 - -
Outstanding at
end of period 3,625,340 $ 2.38 2,960,341 $ 2.81 3,817,950 $ 3.11
Options exercisable
at end of period 2,425,340 $ 2.07 1,760,341 $ 2.68 1,190,000 $ 3.06
Weighted average fair
value of options
granted during
the period $[1 .52] $ 1.52 $ 1.99
Exercise prices for stock options outstanding at December 31, 1999, ranged from
$0.14 to $4.13. The weighted average remaining life of the outstanding stock
options is approximately 6 years.
Pro forma information regarding net loss and loss per share is required by
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123) and has been determined as if the Company had
accounted for its employee stock options under the fair value method. The fair
value for these options at the date of grant was estimated using a Black-
Scholes option pricing model with the following weighted average assumptions
for the years ended December 31, 1999 and 1998 and the ten months ended
December 31, 1997, respectively: volatility factor of the expected market value
of the Company's Common Stock of 2.808, 0.715 and 0.715; weighted average
expected life of the options of 5 years for each period; risk-free interest
rate of 5.75% for each period; and no dividend payments.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
Twelve Months Ended Ten Months Ended Ten Months Ended
December 31, 1999 December 31, 1998 December 31, 1997
Net loss $ 1,305,800 $29,055,997 $18,135,675
SFAS No. 123 compensation
Expense - 3,332,306 438,574
SFAS No. 123 pro forma net
loss $ 1,305,800 $32,388,303 $18,574,249
=========== =========== =========
Basic and diluted pro
forma loss
per share $ 0.03 $ 1.54 $ 1.21
=========== =========== =========
Because SFAS No. 123 applies only to stock-based compensation awards for the
fiscal year ended February 29, 1996 and future years, the pro forma disclosures
under SFAS No. 123 are not likely to be indicative of future disclosures until
the disclosures reflect all outstanding, nonvested awards.
NOTE 9--STOCK WARRANTS
As of December 31, 1999, the Company had outstanding stock warrants for 584,925
shares of its Common Stock as follows:
Exercise
Number of Warrants Price Expiration Date
18,515 $3.20 February 20, 2000
243,205 $2.62 April 21, 2000
243,205 $2.62 June 5, 2000
4,900 $4.00 June 30, 2002
17,500 $4.80 June 30, 2002
57,600 $4.80 August 31, 2002
NOTE 10--INCOME TAXES
As a Bermuda exempted company, the Company is not currently subject to income
tax filing requirements in Bermuda. The Company operates in the U.S. as a
branch of a foreign corporation. As a foreign corporation with a U.S. trade or
business, the Company will be subject to tax in the U.S. on the income earned
that is effectively connected with that trade or business. Tax carryforward in
taxable jurisdictions have not been determined. Deferred tax assets, if any,
would be fully reserved. Other than the tax associated with the U.S. earned
interest income, there are no income tax provisions, benefits, liabilities or
assets reflected in the accompanying financial statements.
NOTE 11--WRITE-DOWN OF ASSETS
The following assets were written down to a nominal or current value in the
period due to impairment in the assets value: (See Note 2, Impairment of Long-
Lived Assets).
Twelve Months Ended Twelve Months Ended Ten Months Ended
December 31, 1999 December 31, 1998 December 31, 1997
Land -- $ -- $ 449,267
Furniture, fixtures
and Equipment $ 70,312 134,189 18,045
Other assets -- -- 209,587
Software under
Development -- 1,362,934 --
Singapore Airlines
Agreement -- 1,856,000 --
Goodwill -- 13,157,184 --
$ 70,312 $16,510,507 $ 676,899
========= ========== ========
NOTE 12--RELATED PARTY TRANSACTIONS
Pursuant to the Management Agreement, Harrah's managed Old IEL. The Management
Agreement provided for Harrah's to receive a management fee equal to the
greater of $10,000 per whole fiscal month, as defined, or a percentage of gross
revenues, as defined. The Management Agreement was terminated June 17, 1997,
in conjunction with the Amalgamation. Management fees totaled $0, $0, and
$36,000 for the twelve month periods ending December 31, 1999 and 1998 and the
ten month period ending December 31, 1997, respectively.
Under the terms of the Management Agreement, the Company transferred cash to
Harrah's for payments made on the Company's behalf to support its operations,
including accounts payable, payroll and capital expenditures. The net
transfers for the twelve month periods ending December 31, 1999 and 1998 and
the ten month period ending December 31, 1997 totaled $0, $0, and $143,000,
respectively.
The Company was charged a fee by Harrah's for administrative services
(including legal, accounting, information technology and office occupancy).
This arrangement ended with termination of the Management Agreement. The
Company was charged approximately $0, $0, and $150,000, during the twelve month
periods ended December 31, 1999 and 1998 and the ten month period ended
December 31, 1997, respectively.
On June 17, 1997, the Company entered into a Continuing Services Agreement with
Harrah's under which Harrah's provided certain telecommunications, computer
systems support and consulting services to the Company. The Company incurred a
cost of approximately $124,000 and $101,000 during the twelve month period
ended December 31, 1998 and the ten month period ending December 31, 1997,
respectively.
Effective June 5, 1997, the Company entered into a lease (the "Sublease
Agreement") with Harrah's for the office space occupied by the Company. The
Sublease Agreement is for a period of 23 months at a monthly cost of
approximately $11,000. Payments under this Sublease Agreement aggregate to
approximately $132,000 in 1998 and $44,000 in 1999.
During 1996, the Company entered into a sublicense agreement with Harrah's,
which provides the Company with rights to use an immediate authorization
credit/debit system that Harrah's is developing. The Company reimbursed
Harrah's for a portion of the development costs which totaled $70,000 and
$180,000 for the ten months ended December 31, 1997 and the year ended February
28, 1997, respectively.
On June 17, 1997, in conjunction with the Amalgamation, the Company entered
into a Software License Agreement with Harrah's (the "License Agreement"). The
License Agreement is a non-exclusive, fully-paid, perpetual, world-wide license
to Harrah's and its affiliates to use the Company's gaming technology in non-
competitive uses in traditional casino venues owned, operated or managed by
Harrah's affiliates. The License Agreement includes source codes for all
software, but neither party to the License Agreement has any obligations to
share or provide any improvements or modifications with the other party. There
was no additional consideration paid by Harrah's for the License Agreement.
The Company paid approximately $291,000 during the ten months ended December
31, 1997 to directors and companies with common directors for management and
consulting services and for reimbursement of expenses.
On April 30, 1997, the Company entered into a Consulting Agreement with James
P. Grymyr, then a director of the Company, whereby Mr. Grymyr would provide
consulting services to the Company as requested by the Company from time to
time. Under the terms of the Consulting Agreement, the Company has issued to
Mr. Grymyr 586,077 shares of Common Stock as consideration for all such
consulting services both past and future. The Company expects any future
consulting services to be minimal. The value of the stock (approximately $2.4
million) is included in the Statements of Operations for the ten months ended
December 31, 1997, as consulting and contract labor.
Geller & Co., of which Laurence Geller is Chairman, performed consulting
services for the Company pursuant to a retainer agreement that commenced in
February, 1996 and terminated August 14, 1997. Geller & Co. was paid a monthly
retainer of $5,000. Pursuant to Geller & Co.'s retainer, a grant of options
for 200,000 shares of Common Stock with an exercise price of $3.00 and a term
of ten years was also made to Geller & Co. On May 29, 1997, the Company
granted an additional 1,000,000 options with the same terms above to Geller &
Co. for Laurence Geller's services as Chairman of the Board. In addition,
Geller & Co. received 200,000 shares of Common Stock that vest upon the closing
of a major financing. The Board has determined that the Amalgamation which
occurred June 17, 1997 constituted a major financing, and, consequently, the
200,000 share success fee has vested and an expense of $650,000 was
recognized. This amount is included on the Consolidated Statement of
Operations as general and administrative expense. Mr. Geller was Chairman
of the Board of Directors of the Company from September 30, 1996 until
February 23, 1999. The annual compensation of the Chairman of the Board was
set at $100,000 and is not payable until the Company generates sufficient
cash flow from operations. The amount payable of $133,000. has been accrued
as a liability in the accounts, however management is disputing the payment
of this amount.
NOTE 13--AGREEMENT REGARDING REDEMPTION OF PERFORMANCE SHARES
When the Company acquired the rights to the inflight gaming software from Sky
Games International, Inc. ("SGII") on November 7, 1991, a portion of the
consideration was 3,000,000 shares of Common Stock which, according to then
applicable requirements, were placed in escrow, to be released on the basis of
one share for each U.S. $1.78 of net cash flow generated from the assets over a
ten-year period (the "Performance Shares"). The Performance Shares were issued
at a deemed price of $.1155 per share with 2,000,000 shares issued to SGII (87%
of the outstanding stock of which was owned by James P. Grymyr, formerly a
director of the Company, and his wife) and 1,000,000 shares were issued to
Anthony Clements, a director of the Company. An additional 525,000 shares,
which were issued to Dr. Rex E. Fortescue, formerly a director of the Company,
are held in the escrow on the same terms and are also included as Performance
Shares. Each of Messrs. Clements and Fortescue, as of April 30, 1997, have
agreed to allow the Company to redeem and cancel the Performance Shares when
and if they are released from escrow for any reason whatsoever (the "Redemption
Agreement"). As consideration for such agreement to tender the Performance
Shares for cancellation by the Company in the event they are ever released from
the escrow, the Company has issued to Messrs. Clements and Fortescue, 333,333
and 175,000 shares of Common Stock, respectively. SGII, as of April 30, 1997,
has also agreed that it will tender the 2,000,000 Performance Shares which it
holds for cancellation by the Company when and if such Performance Shares are
released from escrow for any reason whatsoever. As consideration of such
agreement, in February, 1997, the Company expensed the outstanding balance of a
note made by SGII to the Company in the approximate amount of $550,000 and has
issued to SGII 80,590 shares of Common Stock (the "Redemption and Cancellation
Agreement"). In the event the Performance Shares are not released prior to six
months after the end of the Company's financial year ending in the year 2002,
the Performance Shares will automatically be canceled in accordance with the
terms of the escrow agreement. The value of the 588,923 shares of Common Stock
issued as consideration for the agreement was determined to be approximately
$1,840,000 based on the closing price of the Company's Common Stock on the date
the 588,923 shares were issued. This amount was included as additional
purchase price for the acquisition of Harrah's 20% ownership interest in Old
IEL.
As part of the agreements to allow the redemption and cancellation of the
Performance Shares, the holders of the Performance Shares have issued an
irrevocable proxy to a bank which has agreed not to vote the Performance Shares
at any General Meeting of Shareholders or otherwise. The irrevocable proxy and
the agreement not to vote the Performance Shares will terminate upon the
cancellation of the Performance Shares. The escrow agent is prohibited from
canceling the Performance Shares under the escrow agreement.
The Performance Shares have no rights and, therefore, are excluded from per
share calculations for all periods presented. Effective April 30, 1997, the
Performance Shares were no longer considered outstanding for financial
statement purpos
NOTE 14--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Financial results by quarter are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
Twelve months ended December 31, 1999
Loss before
extraordinary item $ 207,270 $ 271,080 $ 227,000 $ 320,235
Extraordinary item - - - 83,936
Net loss $ 207,270 $ 271,080 $ 227,000 $ 236,299
Basic and diluted loss per share
Loss per share before
extraordinary item $ 0.007 $ 0.008 $ 0.007 $ 0.069
Extraordinary gain
per share 0.000 0.000 0.000 0.002
Loss per share $ 0.007 $ 0.008 $ 0.007 $ 0.067
Twelve months ended December 31, 1998
Net loss $3,380,246 $ 3,351,232 $ 3,333,166 $18,991,353
Basic and diluted loss
per share $ 0.17 $ 0.17 $ 0.17 $ 0.84