<PAGE>
As filed with the Securities and Exchange Commission on September 12, 1997
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
OR
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22622
INTERACTIVE ENTERTAINMENT LIMITED
(FORMERLY SKY GAMES INTERNATIONAL LTD.)
(Exact name of Registrant as specified in its charter)
Bermuda
(Jurisdiction of incorporation or organization)
845 Crossover Lane, Suite D-215
Memphis, Tennessee 38117
(Address of principal executive offices)
Securities to be registered pursuant to Section 12(b) of the Act.
None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Stock, U.S. $.01 par value (formerly Cdn. $.01 par value)
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
13,314,020
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 which financial statement item the registrant has elected
to follow.
Item 17 Item 18 X
--- ---
1
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Form 20-F
ITEM Page No.
- ---- --------
<S> <C>
PART I
------
ITEM 1 DESCRIPTION OF BUSINESS 3
ITEM 2 DESCRIPTION OF PROPERTY 9
ITEM 3 LEGAL PROCEEDINGS 10
ITEM 4 CONTROL OF REGISTRANT 10
ITEM 5 NATURE OF TRADING MARKET 11
ITEM 6 EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS 11
ITEM 7 TAXATION 11
ITEM 8 SELECTED FINANCIAL DATA 14
ITEM 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 16
ITEM 10 DIRECTORS AND OFFICERS OF REGISTRANT 19
ITEM 11 COMPENSATION OF DIRECTORS AND OFFICERS 21
ITEM 12 OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR
SUBSIDIARIES 21
ITEM 13 INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS 22
ITEM 14 DESCRIPTION OF SECURITIES TO BE REGISTERED 22
PART III
--------
ITEM 15 DEFAULTS UPON SENIOR SECURITIES 22
ITEM 16 CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES 22
PART IV
-------
ITEM 17 FINANCIAL STATEMENTS 24
ITEM 18 FINANCIAL STATEMENTS 24
ITEM 19 FINANCIAL STATEMENTS AND EXHIBITS 24
</TABLE>
2
<PAGE>
PART I
------
ITEM 1 DESCRIPTION OF BUSINESS
Unless otherwise noted, all dollar amounts are quoted in U.S. dollars.
The Company
Corporate History and Development. Interactive Entertainment Limited
(formerly Sky Games International Ltd., the "Company") 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. 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 ("IEL"), which was followed
immediately by an amalgamation of the Company 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, Sky Games International, Corp. ("SGIC"), and Creator Island
Equities Inc., and for periods prior to June 17, 1997, also SGIH and IEL,
which was the Company's principal operating subsidiary from December 30, 1994,
through such Amalgamations. Also included is IEL (Singapore) Pte. Ltd., a
wholly-owned subsidiary of IEL. However, until the Amalgamations, the management
of the business of IEL had been substantially delegated to a third party manager
and, as a result, the management and affairs of IEL were subject to numerous
contractual requirements and limitations. See "Interactive Entertainment
Limited".
The initial purpose of the Company was natural resource exploration
and development; however, since January 1991 the Company has concentrated its
efforts on acquiring, developing and commercializing a gaming technology 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. See
"Sky Games System Acquisition". In late 1994, the Company formed IEL as a joint
venture with subsidiaries of Harrah's Entertainment, Inc., ("Harrah's"), which
resulted in the transfer to IEL of the Company's inflight gaming business and
the execution of a management agreement with Harrah's with respect to IEL and
other related relationships. Pursuant to such management agreement, 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 IEL under the
management of this subsidiary of Harrah's. See "Interactive Entertainment
Limited".
Business Overview. The Sky Games(TM) 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 product design in its current form
has only recently been possible since audio-video interactive inflight
entertainment hardware ("IFE") systems have only recently been commercially
introduced. The IEL system is being integrated with the IFE systems offered by
Matsushita Avionics Systems Corporation and is also
3
<PAGE>
intended to interface with systems manufactured by other leading manufacturers
including, among others, B/E Aerospace, Inc.("BEA") and Hughes-Avicom.
The Company believes that an opportunity exists to introduce casino
games on international air flights, based on the following factors: (i) many
commercial international air routes involve long flights which create the
opportunity for the entertainment of passengers; (ii) many airlines have
indicated that they view IFE systems as a source of additional revenue; (iii) in
certain parts of the world and in certain markets, gaming is increasing in
popularity and public acceptance; and (iv) as with all casino style gaming, the
odds are in favor of the "house" when played over a period of time. The Company
has conducted limited field surveys in conjunction with affiliates of Harrah's
to measure passenger reaction to inflight gaming in general and to gather
statistical information related to game preferences, projected passenger
participation, betting limits and acceptance of the Company's software design.
These surveys support the Company's belief regarding inflight gaming.
The Company has made proposals to and held discussions with major
airlines in Europe and Asia, and in April of 1996, the Company announced the
signing of a three-year contract, subject to a two-year extension term, for the
provision of gaming services to Singapore Airlines. The term would commence with
Singapore Airlines' acceptance, for use on its aircraft, of the Company's gaming
software. However, the agreement with Singapore Airlines is subject to a trial
period and to termination by either party upon the occurrence of specified
events. Consequently, the agreement may not be in effect through the entirety of
its initial term or any extension term. The agreement with Singapore Airlines
consists of a license of the Sky Games(TM) system to the airline and a services
agreement under which the Company will manage certain aspects of the airline's
inflight gaming operations. While the Company intends that future contracts will
have a similar structure, the Company recognizes that different arrangements may
be required to work with different airlines. Fees payable by the airline are a
percentage of the net revenues generated from inflight gaming activities. If
results from the Singapore Airlines contract are successful, the Company
believes additional contracts can be reached with additional carriers.
The commencement of gaming operations on an airline will require the
successful installation on the airline's aircraft of an IFE system. The Company
currently does not provide, install or service IFE systems. The Company
understands that in the past several airlines have experienced difficulties with
the installation and testing of IFE systems, but based on discussions among the
Company, these airlines and the IFE system providers, the Company believes that
these difficulties will be overcome in the normal course.
The Product
The IEL system is a closed-loop (i.e., self-contained) computerized
gaming system that enables airline passengers to play popular casino games at
their seats. Airlines can add gaming to aircraft fitted with compatible IFE
equipment with only nominal retrofitting cost and little or no aircraft
downtime.
The IEL software was designed and written in layers. This layered
approach effectively insulates the top-level applications (gaming software) from
the specifics of the underlying hardware. The first level of software is
composed of device and system drivers. Where the hardware is unique to the
specific system, the drivers are provided by the hardware supplier. As
additional layers of software are added, the interface becomes less hardware
specific. The goal is to reach a level of abstraction sufficiently removed from
the hardware details so that the application software need have little, or
4
<PAGE>
perhaps no, direct knowledge of the hardware that is supporting the operating
environment. This top-level interface is the Application Programming Interface
("API"). The IEL software is written to the Microsoft Windows API. The service
integrator will provide an API or APIs that will extend the Windows API by
providing access to IFE specific functions. Any Intel based platform that can
support Microsoft Windows will provide the necessary operating environment for
the gaming software.
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.
In addition, the Company has applied for registration of the Sky Casinos
International logo and the slogan "We Make Time Fly" and the mark "Sea Games
International." At this time the Company has not applied for any patents. Upon
completion of successful testing results, an assessment will be made of the
Company's gaming systems and designs and patent applications may be filed where
appropriate. The Company's proprietary software is copyrighted and contains
security features designed to "lock" the software if it is tampered with.
In order to operate the Sky Games system in commercial settings, the
Company must provide additional hardware and software systems necessary to
properly record and account for gaming activities by patrons. The Company has
designed accounting and financial control systems for the management of inflight
gaming operations, which will rely in part on systems developed by and owned by,
or licensed to, Harrah's and its affiliates and sub-licensed to the Company. It
is contemplated that inflight gaming transactions will be conducted through
major credit cards. The major credit card companies have developed rules for the
use of their cards in connection with inflight gaming wherein, presently, the
maximum purchase of gaming credits on a credit card is U.S. $350 and winnings
are capped at U.S. $3,500.
The Industry
A recent 20-year assessment of air travel demand and airplane supply
requirements by Boeing forecast passenger traffic growth of 4.9% annually. The
report noted that, to meet that growth, airlines are expected to add over 16,000
airplanes worth more than $1.1 trillion to their fleets. Other industry sources
estimate that approximately half of new aircraft deliveries are expected to be
wide body, long-haul aircraft that will represent a substantial market for IFE
systems and inflight gaming. See "Regulatory/Legal".
Another significant trend in the airline industry is the growth in the
outsourcing of traditional in-house functions. The Company believes this is
driven by the need to cut costs and reduce fixed overhead and is a recognition
of the complexity and sophistication of IFE systems and entertainment options.
Industry statistics indicate that gaming, in general, is gaining
increased market acceptance in many regions of the world and that U.S. casino
revenue increased from U.S. $8.9 billion in 1991 to U.S. $22.8 billion in 1996.
North Americans account for only a portion of the worldwide gaming industry.
Casino gambling, for example, also exists in Australia, the Bahamas, Canada,
Denmark, Chile, Germany, Great Britain, Malaysia, Monaco, the Netherlands,
Puerto Rico, South Africa, Switzerland, Turkey and Uruguay. The U.S. Department
of Transportation estimated in March, 1996, that the potential inflight gaming
revenue for non-U.S. airlines is approximately $480 million per year.
5
<PAGE>
Competition
The Company understands that several companies are working on inflight
gaming systems, including InterGame and Interactive Flight Technologies, Inc.
("IFT"). Both of these companies have announced agreements with airlines to
conduct inflight tests of their gaming systems, and IFT launched inflight gaming
with Swiss Air in January, 1997. In addition, IFT offers a limited IFE system
integrated with its gaming system. These companies may have significantly
greater financial and technical resources than the Company and there can be no
assurance that the Company will be able to compete effectively with such
companies. The Company believes that in the event inflight gaming and related
activities become more established, additional competitors with alternate
approaches are likely to enter the business. Other inflight offerings, such as
shopping and movies, could also be considered as indirect competition.
Competition in the development of products for the inflight
entertainment industry is strong; however, the Company believes that few
products currently are being developed that provide the airlines with a means to
generate sources of revenue comparable to inflight gaming.
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 airlines' current
business strategy.
The Company's primary target market is Asian and Pacific Rim airlines
whose passengers, with certain exceptions, generally have a broad cultural
acceptance of gaming. The Company believes that the Latin American and European
markets may also hold potential.
The Company believes that the principal benefits of its product to the
airlines will be passenger satisfaction and airline participation in a potential
revenue stream. 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 Company believes that new methods of
increasing revenues while providing a high level of service will be seriously
considered by airlines; however, there can be no assurance that IFE systems or
inflight gaming will be among the alternatives considered by airlines. Although
the system is designed for gaming using money, the Company believes that the
system could be adapted to "pay-for-play" mode in those circumstances where
gambling for money is not legal and that a system utilizing frequent flyer
credits and other rewards can be integrated as part of the gaming program.
The Company expects to derive its income from its share of gambling
earnings and does not anticipate selling its gaming products to generate
revenue. Airlines will receive a percentage of net revenue generated by Sky
Games on their respective flights. Passenger payouts and certain direct
operating costs will be deducted from revenue and the "win" split on a
negotiated basis. Airlines currently have similar revenue-sharing arrangement
with other product/service providers, such as inflight communication companies
(e.g. GTE Airfone). The Company expects to provide certain training, banking,
accounting and administrative functions. The airline will provide the aircraft,
the equipment, the passengers and inflight personnel.
6
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Manufacturing
As a software producer and operator, the Company has no manufacturing
capability. The Company's software is being designed to interface with in-cabin
hardware, including onboard computers, file servers, distribution and
communication systems, manufactured by various suppliers for the airlines.
Employees
As of the end of the fiscal year, the Company maintained a staff of
three in its Vancouver office and one employee at the office of its Singapore
subsidiary. Additional services were provided through a management agreement
with Harrah's and the use of contract labor. Subsequent to the end of the fiscal
year, and in conjunction with the amalgamation of IEL into SGIH and SGIH into
the Company, the Company hired eight former Harrah's employees who had
previously been assigned to work with IEL under the management agreement. The
Company is in the process of consolidating its operations in the Memphis,
Tennessee offices of IEL.
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. The
holders of the Performance Shares have 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 First Tennessee Bank which has
irrevocably agreed not to vote such shares. See "Events Subsequent to February
28, 1997".
Interactive Entertainment Limited
Effective as of December 30, 1994, the Company, through SGIH, and
Harrah's Interactive Investment Company ("HIIC") completed the formation of IEL
as a joint venture corporation incorporated as an exempted company under the
Bermuda Act. At the same time, (i) 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 IEL. IEL was 100% owner of IEL (Singapore) Pte. Ltd. IEL (Singapore)
Pte. Ltd. has one employee and represents IEL in the conduct of its operations
in Singapore. The following is a summary of the principal terms of the
agreements entered into in connection with the formation of IEL and these other
related transactions. In connection with the Amalgamations, the contractual
agreements with the affiliates of Harrah's were terminated. See "Business
Overview" and "Events Subsequent to February 28, 1997".
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Shareholders Agreement. The ownership interests of the Company and
HIIC in IEL were 80% and 20%, respectively, at February 28, 1997. The Company
and HIIC had funded a total of $5 million to IEL through February 28, 1997.
Additional capital, if not available from third parties, was to be provided by
the Company and HIIC in proportion to their shareholdings. The Executive
Committee of 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. See "Events Subsequent to February 28,
1997".
Management Agreement. The Manager had been granted and had assumed
broad responsibility for managing the business of IEL, including completing the
development of and improving the Sky Games (TM) 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, as
defined, with a maximum fee of 7.5% of gross revenues and a minimum monthly fee
of $10,000. 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 Manager could declare a default under the Management Agreement if
IEL, SGIH, any of SGIH's affiliates or any of their officers, directors or
employees committed any act that the Manager determined could have affected any
gaming license or approval (whether or not any regulatory action is commenced or
threatened) held by the Manager, any of its affiliates, IEL, SGIH or any of
SGIH's affiliates.
As of the end of the fiscal year, management of the Company had been
substantially delegated to the Manager. Subsequent to year end, the
Amalgamations were consummated and, in conjunction with the Amalgamations, the
Management Agreement was terminated effective June 17, 1997, 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. See "Events Subsequent to February 28, 1997".
Trademark License Agreement. The Company had exclusively licensed 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 in traditional casino venues owned, operated or managed by Harrah's. The
license is royalty-free, worldwide and non-terminable.
Assignment Agreement. SGIC assigned to the Company all right, title
and interest in and to the Sky Games software, all related technology assets and
all related trademarks, trade names and other trade rights. The Company is
obligated to pay royalties to SGIC equal to 1 1/2% of the gross revenues derived
by the Company and its wholly owned subsidiaries from the exploitation of the
assigned rights through December 31, 2001.
Termination of Existing Rights. In connection with the Assignment
Agreement and related transactions, the Company and SGIC 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
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March 30, 1997. The unpaid balance of the note, including accrued interest, was
exchanged for Class A Preference Shares in the Company effective as of February
28, subject to shareholder approval which was obtained on June 16, 1997. See
"Events Subsequent to February 28, 1997".
Regulatory/Legal
The legal issues surrounding inflight gaming are complex and virtually
without precedent. Gaming, while over-flying sovereign air space, may violate
the laws of the country overflown. The Company, in conjunction with Singapore
Airlines, has sought and obtained an exemption from the Gaming Houses Act of
Singapore. This exemption permits gaming outside of Singapore sovereign airspace
on international flights operated by Singapore Airlines to or from Singapore.
The Company, has not yet sought legal opinions with respect to the legality of
gaming in various other jurisdictions which may regulate its business. The
Company plans to deal with these legal matters on a jurisdiction by jurisdiction
and route by route basis. The Company has no assurance at this time that legal
complications involving gaming will be overcome and such restrictions, if
material, will have a substantial impact on the Company's ability to move
forward with its current product and business plan. Additionally, the Company
may be subject to various regulations pertaining to transfer of monies and
monetary products.
Current U.S. law prohibits the installation, transportation or
operation of gaming devices on board any aircraft operated to or from the United
States. In addition, states may prohibit the transportation and use of gaming
devices on flights operating between two points in a single state. The Company's
marketing plan has anticipated that the U.S. market would be the most difficult
to enter. The Company cannot predict whether inflight gaming on flights
operating to or from the U.S. will be permitted under U.S. law at any time in
the future.
Further, all inflight entertainment systems into which the Sky Games
product would be installed would require aviation regulatory agency approvals of
authorities responsible for enforcing passenger and flight safety regulations,
including the FAA in the U.S., should that jurisdiction permit inflight gaming
in the future. The responsibility for meeting such regulations and obtaining
such approvals will rest with the system provider. It is unlikely that the Sky
Games product itself will be subject to such regulatory approval.
The Company intends to have all gaming software and programs tested
and certified by an independent laboratory to ensure the randomness and fairness
of the games.
ITEM 2 DESCRIPTION OF PROPERTY
The Company leases 1,000 square feet for its representative office in
Vancouver, British Columbia, which facilities are leased through February 1,
2000. The Company has vacated the 1,400 square feet it previously occupied in
Las Vegas, Nevada, under a three year lease which expired in July 1997. The
Company leases approximately 9,400 square feet of office space at approximately
$11,000 per month for its Memphis, Tennessee headquarters under a sub-lease from
Harrah's that expires in April, 1999.
The Company owns approximately 73.5 acres of land on Bowen Island
which is located nine miles from the City of Vancouver. The Company's original
strategy in acquiring the land, which was purchased in two separate acquisitions
in 1988 and 1991 for a total consideration of $341,517 Cdn., was to hold the
property for appreciation and possible residential development. In the interim,
the
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Company derived some revenues from the harvesting of commercial timber and
operation of a nursery on a 12 acre portion of the land zoned for agriculture.
During 1993 and 1994 the Company built access roads on the land and built
culverts and drainage facilities in anticipation of eventual development.
In 1994, the Islands Trust, a governmental body of the government of
British Columbia, announced a review of the Official Community Plan ("OCP") for
Bowen Island. This process effectively froze any development applications
pending completion of the review process. Under the revised OCP, large portions
of Bowen Island, including the Company's property, have now been designated
watershed protection areas and are subject to stringent new development
guidelines under a Development Permit Classification. As a consequence, efforts
are underway to sell or otherwise dispose of the property.
ITEM 3 LEGAL PROCEEDINGS
The Company is not a defendant in any proceedings which the directors
consider will have a material effect on the Company's financial position and
results of operations.
ITEM 4 CONTROL OF REGISTRANT
The following table sets forth information as of August 26, 1997 with
respect to (1) each person known to the Company to be the owner of more than ten
percent of the Company's Common Stock and (2) the total amount of Common Stock
owned by the officers and directors as a group. See "Options to Purchase
Securities from Registrant or Subsidiaries." As far as is known to the Company,
it is not directly or indirectly owned or controlled by another corporation or
by any parent.
<TABLE>
<CAPTION>
Number of Shares Percent of
Identity of Person of Common Stock Class Owned (1)
- ----------------- ----------------- ---------------
<S> <C> <C>
Harrah's Interactive Investment
Company 6,886,915 37.8%
All officers and directors as a group
(11 persons) 2,010,004 (2) 11.1%
- -----------
</TABLE>
(1) Based on 18,236,590 shares outstanding as of August 26, 1997. Excludes
3,525,000 Performance Shares which are held in escrow and which are subject to
agreements to tender to the Company when and if released from escrow. The
Company has agreed to cancel the Performance Shares upon release from escrow.
(2) Does not include 2,000,000 shares of Common Stock owned of record by SGII
or 1,000,000 shares owned of record by Anthony P. Clements, a director of the
Company, which are subject to an irrevocable proxy in favor of First Tennessee
Bank and an agreement by First Tennessee Bank not to vote such shares under any
circumstances. James P. Grymyr, a director of the Company, owns 87% of SGII.
Such shares are held in escrow by Montreal Trust Company and are subject to an
agreement by the holders of such shares to tender the shares for cancellation
upon release from escrow. Does not include 333,333 shares which are held in
trust for Porcelain Investments Ltd. (250,000) and Pebble Mill Investments Ltd.
(83,333) for which Mr. Clements is neither trustee nor beneficiary, and as to
which Mr. Clements disclaims beneficial ownership. Includes options on 990,000
shares which are currently exercisable and which are held either directly or
indirectly by officers and directors.
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ITEM 5 NATURE OF TRADING MARKET
Since July 8, 1997, the Company's common shares have been traded on
the Nasdaq Small Cap Market under the symbol "IELSF." From March 1, 1994 until
July 8, 1997, the Company's shares traded under the symbol "SKYGF". Prior to
March 1, 1994, there was no trading market for the securities of the Company in
the United States. Until voluntarily de-listed by the Company on December 30,
1994, the Company's common shares were traded on the Vancouver Stock Exchange
under the symbol "CEV."
The table below sets forth, for each full quarterly period within the
Company's two most recent fiscal years, the reported high and low closing prices
of the common shares in the Nasdaq Small Cap Market.
<TABLE>
<CAPTION>
Nasdaq Small Cap Market
Fiscal 1996 Fiscal 1997
----------- -----------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 6.63 4.50 6.50 2.50
Second Quarter 6.13 3.88 6.38 2.38
Third Quarter 5.00 2.75 4.75 3.25
Fourth Quarter 3.63 1.75 5.13 2.88
</TABLE>
At May 28, 1997, there were 207 holders of record of the Company's
common shares. Of these holders, 172 had registered addresses in the United
States and held a total of 8,688,131 common shares or approximately 65.3% of the
total of 13,304,405 common shares outstanding on that date. Since certain of the
common shares were held by brokers or other nominees, the number of record
holders in the U.S. may not be representative of the number of beneficial
holders or of where the beneficial holders are resident.
There have been no dividends paid to stockholders since the inception
of the Company on January 28, 1981. The Company currently intends to retain any
earnings it may achieve for use in its business, and therefore does not
anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be made by the Board of Directors in
light of the earnings, financial position, capital requirements, credit
agreements and such other factors as the Board of Directors deems relevant.
ITEM 6 EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS
An exempted company is classified as non-resident in Bermuda for
exchange control purposes by the Bermuda Monetary Authority ("BMA").
Accordingly, the Company may convert currency (other than Bermudian currency)
held for its account to any other currency without restriction.
Persons, firms or companies regarded as residents of Bermuda for
exchange control purposes require specific consent under the Exchange Control
Act 1972 of Bermuda, and regulations thereunder, to purchase or sell shares or
warrants of the Company which are regarded as foreign currency securities by the
BMA. Before the Company can issue any further shares or warrants, the Company
must first obtain the prior written consent of the BMA.
ITEM 7 TAXATION
The following paragraphs set forth, in general terms, certain United
States and Bermudian income tax considerations in connection with the ownership
of common shares of the Company. The tax considerations relevant to the
ownership of common shares of the Company are complex, and the tax consequences
of such ownership may vary depending on the individual circumstances of the
shareholder. Accordingly, each shareholder and prospective shareholder is urged
to consult his own tax advisor with specific reference to the tax consequences
of share ownership in his
11
<PAGE>
own situation. In addition, there may be relevant state, provincial or local
income tax considerations which are not discussed.
United States Federal Income Tax Considerations
Passive Foreign Investment Company. Because substantially all of the
Company's recent income has consisted of interest, the Company believes that it
presently constitutes a passive foreign investment company (a "PFIC") within the
meaning of (S) 1295 of the Internal Revenue Code of 1986, as amended. A foreign
corporation is a PFIC if 75% or more of its gross income for the taxable year is
from passive sources such as interest and dividends, or if the average
percentage of its assets during the year that produce passive income is at least
50%.
Certain adverse tax consequences apply to U.S. persons who are
shareholders of a PFIC. Specifically, U.S. shareholders of a PFIC are subject to
maximum rates of tax plus an interest charge on "excess distributions," which
includes gain on the sale of PFIC shares as well as certain distributions. The
interest charge is based upon the value of the deemed tax deferral, and on the
assumption that the excess distribution was earned pro rata over the
shareholder's holding period. In addition, a U.S. shareholder who uses PFIC
stock as security for a loan is treated as having disposed of the stock; a
transfer of the PFIC stock may fail to qualify for nonrecognition treatment that
would otherwise be available; special foreign tax credit limitations will apply
to a U.S. shareholder with respect to earnings of the PFIC; a U.S. shareholder
will not be entitled to a basis step-up in the basis of PFIC stock at death; and
the Company will continue to be treated as a PFIC throughout a U.S.
shareholder's holding period, even if it no longer satisfies the income or asset
tests for a PFIC described above.
The foregoing adverse tax consequences, other than the loss of the
step-up in basis at death, generally will not apply if (i) the U.S. shareholder
has elected to treat the PFIC as a qualified electing fund ("QEF") for each
taxable year in the shareholder's holding period beginning after December 31,
1986 for which the Company was a PFIC, and (ii) the Company complies with
reporting requirements to be prescribed by the IRS. In general U.S. shareholders
of a QEF are taxable currently on their pro rata share of the QEF's ordinary
income and net capital gain, unless they elect to defer payments of tax on
amounts included in income for which no distribution has been received, subject
to an interest charge on the tax deferral.
THE QEF ELECTION FOR A TAXABLE YEAR MUST BE FILED BY THE DUE DATE
(PLUS EXTENSIONS) FOR FILING THE U.S. SHAREHOLDER'S INCOME TAX RETURN FOR THE
YEAR. A U.S. shareholder makes the election by filing a "Shareholder Election
Statement," a "PFIC Annual Information Statement" and Form 8621 with its tax
return. A copy of the Shareholder Election Statement must also be filed with the
IRS Center in Philadelphia.
If the Company has been a PFIC for a taxable year beginning after
December 31, 1986 which includes any portion of a U.S. shareholder's holding
period, the U.S. shareholder may still make a QEF election for the Company and,
if so, may also elect to recognize any gain inherent in the shareholder's PFIC
stock, as of at the beginning of the first year in which the Company becomes a
QEF, as an excess distribution. A U.S. shareholder who makes this gain-
recognition election will thereafter not be subject to the tax regime for excess
distributions described above.
For so long as the Company remains a PFIC, the Company intends to
comply with the reporting requirements that will be prescribed in Treasury
Regulations, and to make available to its U.S. shareholders upon request a PFIC
Annual Information Statement to enable them to make QEF elections.
12
<PAGE>
Gain on Disposition; Distributions. Under certain limited
circumstances, non-U.S. shareholders will be subject to U.S. federal income
taxation at graduated rates upon gain or dividends, if any, with respect to
their common shares, if such gain or income is treated as effectively connected
with the conduct of the recipient's U.S. trade or business. Dividends, if any,
paid to U.S. persons will be generally subject to U.S. federal ordinary income
taxation, except for dividends of earnings that were previously taxed under the
QEF rules discussed above. Dividends will not be eligible for the deduction for
dividends received by corporations (unless such corporation owns by vote and
value at least 10% of the stock of the Company, in which case a portion of such
dividends may be eligible for such deduction). U.S. persons will be entitled,
subject to various limitations including the so-called "basket limitations," to
a credit for Canadian federal income tax withheld from such dividends.
Foreign Personal Holding Company and Controlled Foreign Company. The
Company would be a foreign personal holding company ("FPHC") for a taxable year
if more than 50% of its total combined voting power or the total value of its
stock were owned, actually or constructively, by five or fewer U.S. individuals
and 60% or more of its gross income were derived from passive sources such as
interest or dividends. The Company would be a controlled foreign corporation
("CFC") if more than 50% of the voting power or value of its stock were owned,
directly or indirectly, by U.S. persons each of whom own 10% or more of the
voting power of the Company's stock. The Company does not believe that it is an
FPHC or a CFC. If the Company were, or were to become, an FPHC or a CFC, some or
all U.S. shareholders would be required to include in their taxable income
certain undistributed amounts of the Company's income.
Reporting. Any U.S. person who owns 5% or more in value of the stock
of the Company may be required to file IRS Form 5471 with respect to the Company
and its non-U.S. subsidiaries and to report certain acquisitions or dispositions
of the stock of the Company. Annual filings of Form 5471 would be required from
any U.S. person owning 50% or more of the stock of the Company or, if the
Company were an FPHC or a CFC, from certain U.S. persons owning 10% or more of
the stock of the Company. U.S. shareholders of the Company while it is a PFIC
must filed Form 8621 with the IRS.
Bermudian Income Tax Considerations
Under present Bermuda law, no withholding tax on dividends or other
distributions, nor any Bermuda tax computed on profits or income or on any
capital asset, gain or appreciation will be payable by the Company on its
operations, nor is there any Bermuda tax in the nature of estate duty or
inheritance tax applicable to shares, debentures or other obligations of the
Company. Furthermore, upon continuance of the Company in Bermuda, the Minister
of Finance (Bermuda) gave the usual assurance under the Exempted Undertakings
Tax Protection Act 1966 of Bermuda that no such taxes shall be so applicable
until March 28, 2016, although this assurance will not prevent the imposition of
any Bermuda tax payable in relation to any land in Bermuda leased or let to the
Company or to persons ordinarily resident in Bermuda.
The Company is required to pay an annual Government fee (the
"Government Fee"), which is determined on a sliding scale by reference to a
company's authorized share capital and share premium account, with the minimum
fee being BD $1,680 and the maximum BD $25,000 (the Bermuda dollar is treated at
par with the U.S. dollar). The Government Fee is payable at the end of January
in every year and is based on the authorized share capital and share premium
account as they stood at August 31 in the preceding year.
13
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ITEM 8 SELECTED FINANCIAL DATA
The following selected financial data set forth below for, and as of
each of the five years ended at February 28, 1997, have been derived from the
Consolidated Financial Statements of the Company that have been audited by the
Company's current and former independent accountants. The financial data set
forth below should be read in conjunction with the Consolidated Financial
Statements, related notes and other financial information included elsewhere
within this annual report and with ITEM 9 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Exchange Rates
The following table sets forth, for the periods and dates indicated,
the average, high, low and end-of-period Noon Buying Rates for Canadian dollars
in Canadian dollars per U.S. dollar. The "Noon Buying Rate" means the noon
buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank in New York. On
August 26, 1997, the Noon Buying Rate was $1.3929 Canadian dollar per U.S.
dollar.
<TABLE>
<CAPTION>
Year Ended February 28 or 29 Average* High Low Period End
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1991 1.1457 1.1546 1.1623 1.1495
1992 1.2083 1.1825 1.1902 1.1725
1993 1.3217 1.2898 1.3484 1.2400
1994 1.4018 1.3659 1.4090 1.3085
1995 1.3937 1.3799 1.4238 1.3410
1996 1.3755 1.3455 1.4074 1.3722
1997 1.3607 1.3775 1.3310 1.3617
- -----------
</TABLE>
* The average of the exchange rates on the last day of each full calendar
month during the period.
The Consolidated Financial Statements have been prepared in U.S.
dollars and in accordance with generally accepted accounting principles ("GAAP")
in Canada, which differ in certain significant respects from U.S. GAAP.
Reconciliation to U.S. GAAP is set forth in Note 14 to the Consolidated
Financial Statements. The accounting principles used conform in all material
respects with accounting principles generally accepted in the United States.
There is also a U.S. GAAP table following the Canadian GAAP table.
14
<PAGE>
<TABLE>
<CAPTION>
Canadian GAAP
Years Ended February 28 or 29
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(U.S. Dollars) (Canadian Dollars)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Interest income 63,738 118,163 111,566 99,939 82,665
Lumber -- -- -- 88,834 --
Other -- -- 7,174 5,256 1,974
Expenses
Administration 3,277,601 3,125,022 2,845,128 2,203,728 683,468
Contract Buyout/Asset Write-down 1,796,554 -- 2,500,000 -- --
Net loss 4,637,588 3,006,859 5,226,388 2,009,699 598,829
Net loss per share 0.366 0.262 0.489 0.198 0.101
Weighted average number of shares
of common stock outstanding 12,568,687 11,467,332 10,626,624 10,149,949 5,929,944
Balance Sheet Data:
Working capital (172,131) (279,597) (521,575) 3,014,848 2,033,175
Deferred exploration, development
and administrative costs -- -- -- 105,697 105,697
Mineral claims -- -- 1 13,100 13,100
Total assets 3,524,576 4,318,210 4,058,871 6,177,289 4,183,619
Long-term debt -- 2,346,028 2,550,000 -- --
Total shareholders' equity 2,267,379 403,100 (238,180) 6,064,815 4,119,413
U.S. GAAP
Years Ended February 28 or 29
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(U.S. Dollars) (Canadian Dollars)
Statement of Operations Data:
Revenues
Interest income 63,738 118,163 111,566 99,939 82,665
Lumber -- -- -- 88,834 --
Other -- -- 7,174 5,256 1,974
Expenses
Administration 3,277,601 3,582,297 3,302,403 2,203,728 797,260
Contract Buyout/Asset Write-down 1,796,554 -- 2,500,000 -- --
Net loss 4,637,588 3,464,134 5,683,663 2,009,699 712,621
Net loss per share 0.507 0.436 0.794 0.311 0.134
Weighted average number of shares
of common stock outstanding 12,568,687 7,942,332 7,160,279 6,465,854 5,306,056
Balance Sheet Data:
Working capital (172,131) (279,597) (521,575) 3,014,848 2,033,175
Deferred exploration, development
and administrative costs -- -- -- 105,697 105,697
Mineral claims -- -- 1 13,100 13,100
Total assets 3,524,576 3,860,935 3,601,596 5,538,497 3,544,827
Long-term debt -- 2,346,028 2,550,000 -- --
Total shareholders' equity 2,267,379 (54,175) (695,455) 5,426,023 3,480,621
</TABLE>
15
<PAGE>
ITEM 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(all figures in U.S. dollars unless otherwise noted)
General. The Company announced its first contract with Singapore
Airlines ("SIA") in April of 1996. Negotiations are under way with a number of
other carriers, and based on a successful launch with SIA, the Company expects
it will secure additional airline contracts.
No revenues have been realized from the Sky Games technology to date.
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 demonstrated revenue generation. Accordingly,
the Company is committed to building its core business by focusing initially on
the airline market but also investigating the potential of other venues such as
cruise ships, ferry boats, trains and hotel rooms.
The Company is taking steps to dispose of non-core assets, including
73 acres of free and clear property held for development on Bowen Island in
Vancouver, Canada as well as other miscellaneous assets unrelated to the IFE
business.
Results of Operations
In the year ended February 28, 1997, the Company applied its efforts
and resources to developing and improving its gaming software and airline
business potential through the operations of the Memphis, Tennessee offices of
IEL. The Company continued to fund its substantial financial commitment to its
software and business development programs by raising equity capital through
private placements.
Operating costs for fiscal 1997 were moderately larger than those of
the prior year, being approximately $3,277,000 compared to $3,123,000. The
increased operating expenses in fiscal 1997 discussed below are directly related
to the specific efforts of the Company in perfecting its Sky Games technology
and its intensive marketing and product awareness activity with the
international airlines industry.
Revenue for 1997 consisted solely of interest income of approximately
$64,000 compared to $118,000 for 1996.
Consulting and contract labor costs for 1997 were approximately
$1,108,000 compared to approximately $628,000 in 1996. Included were IEL costs
of approximately $870,000 for 1997 and $434,000 for 1996. The increase is due to
an increase in staffing needs that was fulfilled through the use of contract
labor.
Travel, advertising and product promotional costs increased to
approximately $626,000 from $459,000 in 1996 due to increased marketing of the
Company's product.
Office and administration costs decreased to approximately $444,000
from $543,000 in fiscal 1996 due to the closure of corporate offices in Las
Vegas, Nevada and Los Angeles, California in late 1995.
16
<PAGE>
Professional fees, including legal and audit costs, were approximately
$316,000 for 1997 compared to approximately $300,000 in the prior year.
Interest and bank charges declined to approximately $300,000 in 1997
from $606,000 in 1996 due to the Company's efforts at securing equity capital
and reducing reliance on debt instruments to fund operations.
Management fees increased slightly to $211,000 in 1997 from $171,000
the prior year. Management fees include $120,000 paid to Harrah's in each year.
Investor relations and corporate costs were $120,000 in 1997 compared
to $93,000 in 1996, an increase of $27,000.
Amortization costs increased from $49,000 to $88,000 due to the
purchase of additional equipment, primarily computer hardware.
There were no finance fees in 1997 compared to $171,424 for 1996
representing additional corporate loan financing for the Company's financial
commitments to IEL.
Liquidity and Capital Resources
To date, the Company has financed its operations, as well as its
commitments to the IEL joint venture, through the proceeds of private equity
offerings, exercises of share purchase warrants, exercises of options, short
term corporate loan financings and interest on cash deposits.
At February 28, 1997, the Company had a negative working capital
position of $172,131. This compares with a negative working capital balance of
$279,597 at February 29, 1996.
Prior to the acquisition of the Sky Games software technology, the
Company loaned funds to SGII for use as working capital related to the
development of the gaming technology. This loan in the amount of $549,651 was
written off in 1997.
Accounting Principles
The Company's financial statements are reported on a Canadian
generally accepted accounting principles basis. The Company's auditors state
that no items in the financial statement would change materially, other than
methodology for reporting earnings (loss) per share, if reporting were changed
to U.S. GAAP.
Lease Commitments
The Company has entered into two lease agreements for office and
development space as follows: (i) an office facility lease in Las Vegas, Nevada,
which expired in July 1997, and (ii) an office facility lease in Vancouver,
Canada, which expires in February 2000, with minimum payments under the lease
agreement of $1,916.02 Cdn. per month. In June, 1997, the Company entered into a
sub-lease agreement with Harrah's to lease approximately 9,400 square fee of
office space in Memphis, Tennessee for the Company's headquarters at
approximately $11,000 per month through April, 1999.
17
<PAGE>
Events Subsequent to February 28, 1997
The Company retained London Select Enterprises, Ltd. to make a private
placement of up to $3.5 million of 8% convertible debentures due March 31, 1999
pursuant to Regulation S, promulgated under the Securities Act of 1933, as
amended. As of August 26, 1997, sales had been closed on $1,863,250 of the
debentures. As of August 26, 1997, debentures with a principal amount of
$763,250 had been converted into 385,655 shares of Common Stock.
On June 16, 1997, the Company held a Special General Meeting of
shareholders at which the shareholders approved certain amendments to the Bye-
Laws of the Company changing the name of the Company to Interactive
Entertainment Limited, increasing the authorized share capital of the Company to
create 3,000 Class A Convertible Redeemable Preference Shares and 5,000,000
Class B Redeemable Preference Shares, and changing the par value of the
Company's Common Stock from Cdn. $.01 to U.S. $.01. Immediately following the
Special General Meeting, and pursuant to a Plan and Agreement of Merger and
Amalgamation dated May 13, 1997, IEL was amalgamated into SGIH (the "Subsidiary
Amalgamation") and then into Sky Games International (the "Parent
Amalgamation"). Prior to the Amalgamations, Harrah's owned 20% of the capital
stock of IEL and did not own any capital stock or other securities of Sky Games
International and had no representatives on the Board of Directors of the
Company, (the "Board"). As a result of the Amalgamations, the outstanding shares
of IEL common stock held by Harrah's were converted into 5,879,040 shares of
Common Stock of the Company. See the Company's Form 6-K dated May 16, 1997,
incorporated herein by reference, for information regarding the Parent
Amalgamation and the Subsidiary Amalgamation.
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. 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 computed on a
fully-diluted basis.
Upon consummation of the Parent Amalgamation, Sky Games changed its
name to Interactive Entertainment Limited and appointed Gordon Stevenson as
President and Chief Executive Officer. The Company is in the process of
consolidating certain operations formerly performed at its Vancouver, British
Columbia office into its Memphis, Tennessee headquarters.
On June 17, 1997, and in conjunction with the Amalgamations, the
Company entered into a Continuing Services Agreement with Harrah's under which
Harrah's will provide certain telecommunications, computer systems support and
consulting services to the Company.
On June 17, 1997, and in conjunction with the Amalgamations, the
Company entered into a Software License Agreement with Harrah's (the "License
Agreement"). The License Agreement is a 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.
On June 17, 1997, and in conjunction with the Amalgamations, the
Company entered into a Termination Agreement and Release (the "Termination
Agreement") among SGI Holding Corporation Limited ("SGIHC"), Sky Games
International Corp. ("SGIC"), Harrah's Interactive Entertainment Company
("HIEC"), Harrah's Interactive Investment Company, and the Company's operating
subsidiary, then known as IEL. The Termination Agreement provides for
termination of a management agreement between IEL and HIEC; termination of a
shareholders agreement among the Company, HIIC and IEL; termination of a cross-
license agreement among the Company, SGIHC, SGIC, HIIC and IEL; and termination
of a trademark license among the Company, SGIC, SGIHC and IEL.
As of April 30, 1997, the Company issued to Dr. Rex E. Fortescue,
formerly a director of the Company, and Anthony P. Clements, a director of the
Company, 175,000 and 333,000 shares of Common Stock, respectively, as
consideration for agreements to tender 525,000 and 1,000,000 of the Performance
Shares, respectively, which are held in escrow pursuant to a performance earn-
out, when and if such shares are released from escrow.
As of April 30, 1997, the Company forgave the outstanding balance of a
note made by SGII, a company controlled by James P. Grymyr, a director of the
Company, and his wife to the Company in the approximate amount of $549,651, and
issued to SGII 80,590 shares of Common Stock as consideration for SGII's
agreement to tender 2,000,000 shares of Common Stock owned by SGII which are
held in escrow pursuant to a performance earn-out, when and if such shares are
released from escrow.
As of April 30, 1997, the Company and Mr. Grymyr entered into a
consulting agreement whereby Mr. Grymyr would provide certain consulting
services to the Company. Under the terms of the
18
<PAGE>
agreement, as consideration for his past and future consulting services, the
Company has issued 586,077 shares of Common Stock to Mr. Grymyr. The agreement
will terminate April 30, 1998 unless terminated earlier by the Company.
On May 13, 1997, the Company entered into a Funding Agreement with
Harrah's under which Harrah's provided a loan of $1,000,000. On June 17, 1997,
the loan plus accrued interest was converted into 1,007,875 shares of Common
Stock. In addition, pursuant to the Funding Agreement, for 90 days following
June 17, 1997, the Company had the right to request Harrah's to purchase, under
certain conditions, up to 650,000 shares of Common Stock at a price of $1.00 per
share to provide working capital for the Company. However, the Company has
notified Harrah's that it will not exercise its rights with respect to the
650,000 shares. The above shares received by Harrah's plus the shares received
as a result of the Amalgamations make Harrah's the largest shareholder of the
Company with approximately 37.8% of the outstanding shares as of August 26,
1997.
In December 1994, the Company discontinued an engineering and
marketing arrangement with 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. The note to BEA, in the approximate amount of $2.7 million as of
January 31, 1997 (including accrued and unpaid interest), was converted into
2,737 Class A Preference Shares.
Subsequent to the end of the year, the Company entered into a
Shareholder Rights Agreement with Harrah's providing for certain rights
contingent upon the share ownership of Harrah's. See "Changes in Securities and
Changes in Security for Registered Securities".
ITEM 10 DIRECTORS AND OFFICERS OF REGISTRANT
Charles L. Atwood has been a director of the Company since June 17,
1997. Mr. Atwood is vice president and treasurer for Harrah's Entertainment Inc.
Mr. Atwood joined Holiday Inns, Inc. in 1979, where he worked on the
acquisition of Harrah's by Holiday Inns, Inc. He moved to Investor Relations in
1980 and handled this function throughout the transitions of the Company from
Holiday Inns to Holiday Corporation, the sale of the Holiday Inn brand, the
spin-off of the Promus Companies, and the spin-off of the Company's hotel brands
to Promus Hotel Corporation. Harrah's Entertainment was created as a result of
the last spin-off. Mr. Atwood is also a director of Perkins Family Restaurants
L.P., a public company.
John M. Boushy has been a director of the Company since June 17, 1997.
He also served as a director of IEL from December, 1994 until June 17, 1997. He
was President of IEL from December, 1994 until November, 1996. Mr. Boushy joined
Harrah's Entertainment in 1979, and he is currently senior vice president of
information technology and marketing services.
Malcolm P. Burke has been a director of the Company since November of
1990. Mr. Burke was also a director of IEL from December of 1994 through June
17, 1997, and IEL (Singapore) Pte. Ltd., the Company's Singapore subsidiary,
from December of 1995 through June of 1997. Mr. Burke served as CEO of the
Company from November 30, 1992 until September 30, 1996 and served as president
of the Company from November 29, 1990 until June 17, 1997. Mr. Burke also served
as an officer and director of the Company's operating subsidiary prior to the
Amalgamations on June 17, 1997. Mr. Burke was previously associated with Royal
LePage Ltd. as a stockholder and investment broker. Mr. Burke is a director of
JPY Holdings LTD., a public company traded on the Vancouver Stock Exchange.
Anthony P. Clements has been a director of the Company since March of
1992. He was also a director of IEL from August 10, 1995 to June 17, 1997. Mr.
Clements is an investment banker with T. Hoare & Co., based in London, England,
where he has worked since 1994. From 1987 to 1994, Mr. Clements was an
investment banker for Rickets & Co., also based in London. Mr. Clements has also
managed the North American portfolio of Postel Investment Management (pension
fund managers for both the Post Office and British Telecom) from 1973 until
1987, and has worked in areas of corporate finance since 1987.
19
<PAGE>
Deborah Fortescue-Merrin has been a director of the Company since
October, 1995. She was also a director of IEL from February 14, 1996 to June 17,
1997. Ms. Merrin has been Vice-President of J. Perot Financial Corporation, a
Private Investment Management Company located in Vancouver, British Columbia,
since 1992. Previous to joining J. Perot Financial, Mrs. Merrin was a securities
broker with Yorkton Securities from 1991 to 1992 and with Haywood Securities
from 1986 to 1991 where she specialized in special situations concerning medical
issues.
Laurence S. Geller has been a director of the Company since September
30, 1996. Mr. Geller has also served as the Company's Chairman since September
30, 1996 and as the Company's CEO from September 30, 1996 to June 17, 1997. He
was a director of IEL from November 4, 1996 to June 17, 1997. Mr. Geller
currently is President and CEO of Strategic Hotel Capital Incorporated, a
Chicago based hospitality finance and investment firm. Mr. Geller is also CEO of
Geller & Co., a Chicago based hospitality, finance and consulting firm, which
Mr. Geller formed in 1989. Prior to forming Geller & Co., Mr. Geller was chief
operating officer of Hyatt Development Corporation.
Phillip Gordon has been a director of the Company since December 6,
1996. Mr. Gordon is a partner in the Chicago law firm of Altheimer & Gray, where
he has practiced law for 25 years. Altheimer & Gray has acted as lead corporate
and securities counsel to the Company since March, 1996. Mr. Gordon is admitted
to practice law in New York and Illinois.
James P. Grymyr has been a director of the Company since February of
1993. He has also served as President and as a director of Sky Games
International Corporation, a subsidiary of the Company, since February of 1993.
He has a background in the development of electronic games and game marketing.
Mr. Grymyr was previously the President of an electronic game developer and
manufacturer based in Las Vegas. He has created and manufactured electronic
games for amusement parks and arcades including Circus Circus. His background
includes years spent in advertising and management training industries. Mr.
Grymyr holds a B.A. in Journalism from the University of Minnesota.
Michael A. Irwin, has served as director of finance and administration
for IEL since August, 1995. Mr. Irwin has been chief accounting officer and
assistant secretary of the Company since June 17, 1997. Prior to joining IEL,
Mr. Irwin served in various accounting, finance and human resource management
capacities with Holiday Inns, Inc. from 1975 through 1991. Mr. Irwin was
Administrator of the Group Annuity Participant Protection Association from 1992
to 1996.
David Lamm joined the Company as chief financial officer, treasurer
and secretary on July 14, 1997. Prior to joining the Company, Mr. Lamm was vice
president of finance at McKesson Corporation's Information Technologies and
Capital Investments Divisions from March, 1995 to July, 1997. Prior to McKesson,
Mr. Lamm served as chief financial officer and treasurer at 3Net Systems, a
publicly traded software development company specializing in client/server
applications for the healthcare industry from October, 1993 to February, 1995.
Previously, Mr. Lamm served as vice president of finance for the Travel Services
Division of AMR Information Services, Inc. a wholly-owned subsidiary of AMR
Corp., parent company of American Airlines
Patrick J. Lawless served as chief financial officer and secretary of
the Company from February of 1996 until June 17, 1997. Mr. Lawless was a self
employed Chartered Accountant from 1992 to 1996 and performed work for various
private corporations.
20
<PAGE>
Gordon Stevenson has been CEO and president of the Company since June
17, 1997. Mr. Stevenson served as managing director of IEL from June 9, 1995
until November 4, 1996 when he became president. Mr. Stevenson was also a
director of IEL from August 10, 1995 to June 17, 1997. From 1991 to 1993, Mr.
Stevenson was president of Intrico, a joint venture between Marriott, Hilton,
AMR Corporation and Budget Car Rental. Between 1993 and June 9, 1995, Mr.
Stevenson operated his own management consulting group, assisting international
travel and leisure companies with strategic business planning. Prior to his work
at Intrico, Mr. Stevenson served as vice president of sales and marketing for
Hyatt International Corporation and director of sales and marketing for Europe
and the Middle East for Holiday Inns.
The Company is unaware of any family relationship between any director
or executive officer and any other director or executive officer.
ITEM 11 COMPENSATION OF DIRECTORS AND OFFICERS
For the year ended February 28, 1997, the aggregate compensation paid
or accrued by the Company and its subsidiary SGIC to all directors and officers
as a group (nine persons) for services in all capacities was $335,000. See
"Interest of Management in Certain Transactions."
ITEM 12 OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The following table shows, as of February 28, 1997, all outstanding
options to purchase shares of the Company's Common Stock, including the options
held by certain executive officers of the Company as set forth in the next table
below. As used herein, "options" includes all options, warrants or rights to
purchase such Common Stock.
<TABLE>
<CAPTION>
Number of Shares Exercise Price (U.S. $) Expiration Date
---------------- ----------------------- ---------------
<S> <C> <C>
1,110,000(1) $3.00 Feb 28, 2001
60,000(2) $4.125 Dec 10, 2006
308,528(3) $3.00 Jul 31, 1997
100,000(3) $3.00 Apr 30, 1999
</TABLE>
- --------------
(1) Options on the Company's Common Stock granted under the 1996 Stock Program.
(2) Options on the Company's Common Stock granted under the Directors Option
Plan.
(3) Warrants.
Effective December 6, 1996, the Company established, in concept, a Management
Incentive Plan by authorizing the issuance of options for 4,070,105 shares of
Common Stock. As of June 30, 1997, options allocated under the plan totaled
1,200,000 shares, all of which will vest specifically on sustaining certain
stock price levels. Effective December 6, 1996, the Company established a
Directors Option 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.
21
<PAGE>
The following table shows all options and warrants to purchase Common
Stock as of February 28, 1997 for the primary executive officers of the Company
and for the directors and officers as a group.
<TABLE>
<CAPTION>
Optionee/Warrant Holder Number of Shares Exercise Price Expiration Date
- ------------------------- ---------------- -------------- ---------------
<S> <C> <C> <C>
Sopo Investments Ltd. (1) 300,000 $3.00 Feb 28, 2001
Geller & Co. (2) 200,000 $3.00 Feb 28, 2001
Malcolm P. Burke (3) 10,000 $4.125 Dec 10, 2006
Laurence Geller (3) 10,000 $4.125 Dec 10, 2006
All Officers & Directors 930,000 $3.00 Feb 28, 2001
All Officers & Directors 60,000 $4.125 Dec 10, 2006
</TABLE>
(1) All of the outstanding equity is owned by Malcolm P. Burke.
(2) Laurence Geller is a principal of Geller and Co.
(3) Options issued under the Director Option Plan.
ITEM 13 INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
See the Company's Form 6-K dated May 16, 1997, incorporated herein by
reference, for information regarding the interests of management in certain
transactions.
The Company paid $335,000 (1996 - $226,460) in consulting and
management fees to officers and to companies with common directors.
Included in accounts payable is approximately $586,000 due to Harrah's
Interactive Entertainment. This amount has been paid subsequent to the year end.
ITEM 14 DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable
PART III
--------
ITEM 15 DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 16 CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES
On June 17, 1997, in connection with the Amalgamations, the Company
entered into a Shareholder Rights Agreement (the "Shareholder Rights Agreement")
with HIIC. Pursuant to the Shareholder Rights Agreement, the Company has agreed
that for so long as Harrah's owns 20% or more of the outstanding voting shares
on a fully-diluted basis, any of the following actions by the Company require
the approval of the majority of the Board and the Harrah's appointees to the
Board: (i) the sale of all or any material portion of the assets of the Company
together with its subsidiaries; (ii) the incurrence, renewal, prepayment or
amendment of the terms of indebtedness of the Company together with its
subsidiaries in excess of $5 million in any one fiscal year; (iii) the Company
or any of its subsidiaries entering into any material joint venture or
partnership arrangement outside of its previously approved scope of business;
(iv) any material acquisition of assets by the Company or any of its
subsidiaries,
22
<PAGE>
including by lease or otherwise (other than by merger, consolidation or
amalgamation) other than pursuant to a previously approved budget or plan, or
the acquisition by the Company or any of its subsidiaries of the stock of
another entity, in each case involving an acquisition valued at $5 million or
more; (v) any material change in the nature of the business conducted by the
Company or any of its subsidiaries; (vi) any material amendments to the
Management Incentive Plan for 12 months following the Amalgamations; (vii) any
material changes in accounting policies; (viii) the adoption of any stock option
plans for greater than 5% of the then outstanding Common Stock of the Company on
a fully-diluted basis, other than the Management Incentive Plan, in any one
fiscal year; and (ix) the creation or adoption of any shareholder rights plan.
For so long as Harrah's owns 10% or more of the outstanding voting shares on a
fully-diluted basis, as to (x) any change in or conduct of the Company's
business or proposed business, or (y) any action or inaction of or by the
Company or any of its subsidiaries which Harrah's determines in its reasonable
business judgment would result in, in the case of either (x) or (y), any actual
or threatened disciplinary action or any actual or threatened regulatory
sanctions with respect to or affecting the loss of, or the inability to obtain
or failure to secure the reinstatement of, any registration, certification,
license or other regulatory approval held by Harrah's in any jurisdiction in
which Harrah's is actively conducting business or has received final approval or
authorization to proceed, even on a preliminary basis, from its respective board
of directors (or any appropriate committee established by such board of
directors) of plans to conduct business (each such change, conduct, action or
inaction a "Disqualifying Action"); provided, the reasonable business judgment
to be exercised by Harrah's in determining whether a Disqualifying Action has
occurred or would result need not involve any consideration of the effect of the
Disqualifying Action alone or together with its subsidiaries because the purpose
of the protections afforded by the determination of a Disqualifying action is
for the benefit of the separate businesses and investments of Harrah's.
On June 17, 1997, and in connection with the Amalgamations, the
Company entered into a Registration and Preemptive Rights Agreement with
Harrah's (the "Registration Rights Agreement"). Under the Registration Rights
Agreement, Harrah's has two demand registration rights to cause the Company to
register the Common Stock owned by Harrah's. Prior to June 30, 1998, no such
demand registration can be brought for a number of shares in excess of one
million shares unless the Company receives the opinion of its investment banker
that the trading price of the Common Stock would not fall by more than 25% for
more than 15 consecutive trading days as a result of such sale, in which case a
demand could be brought with respect to up to such number of shares of Common
Stock as would not cause the market price to fall below such level. Each such
offering is required to be underwritten on a firm commitment basis by an
underwriter chosen by the Company. Pursuant to the Registration Rights
Agreement, (until the earlier of when Harrah's owns less than 5% of the
outstanding voting shares of the Company on a fully-diluted basis), Harrah's has
customary piggy-back rights to include their shares of Common Stock in
registered offerings by the Company. Pursuant to the Registration Rights
Agreement, Harrah's has the right to purchase securities offered by the Company
for as long as Harrah's owns 20% or more of the outstanding Common Stock on a
fully-diluted basis at the same price and terms such securities are otherwise
being offered. Harrah's also has the right for as long as Harrah's owns 20% or
more of the outstanding voting shares, on a fully-diluted basis, to participate
on a proportionate basis in any non-pro rata stock repurchases or redemptions
conducted by the Company. Additionally, at any time that Harrah's owns less
than 10% of the outstanding voting shares, on a fully-diluted basis, the Company
has the right to cause Harrah's to sell their voting shares pursuant to a
registered sale, and Harrah's has the right to cause the Company to file a
registration statement to sell their voting shares in the event of any change in
or conduct of the business or proposed business of the Company or any of its
subsidiaries or any other action or inaction of the Company or any of its
subsidiaries which would jeopardize Harrah's gaming related licenses or if the
Company does not redeem a "Disqualified Holder" (as defined
23
<PAGE>
in and pursuant to the Company's Bye-Laws) of its securities, in each case at
the Company's expense without being subject to the limitations on demand rights
set forth above.
See the Company's Form 6-K dated May 16, 1997, incorporated herein by
reference, for information regarding changes in securities.
Forward-looking statements
Information included in this report may constitute forward-looking
statements that involve a number of risks and uncertainties. From time to time,
information provided by the Company or statements made by its employees may
contain other forward-looking statements. Factors that could cause actual
results to differ materially from the forward-looking statements include but are
not limited to: general economic conditions including their impact on
international air travel; technical aspects of integrating the Company's
software with third party hardware, networks and operating systems and other
third party software; changes in legal and cultural trends affecting the
legality and acceptance of inflight gaming; the timely development and
introduction of competitive products; entry of new competitors into the inflight
entertainment industry. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publicly update or revise any forward-
looking statement, whether as a result of new information, future events or
otherwise.
PART IV
-------
ITEM 17 FINANCIAL STATEMENTS
The Company has responded to Item 18 in lieu of responding to this
item.
ITEM 18 FINANCIAL STATEMENTS
The registrant's statements and schedules are contained on pages F-1
through F-20.
ITEM 19 FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
(a) Financial Statements
<S> <C>
Index to Consolidated Financial Statements and Supplementary
Data F-1
Fiscal Year Ended February 28, 1997
Independent Auditors' Report F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Deficit F-4
Consolidated Statement of Operations F-5
Consolidated Statement of Changes in Financial Position F-6
Notes to Consolidated the Financial Statements F-7
Consolidated Capital Assets and Accumulated Amortization F-20
Segmented Information by Industry F-23
</TABLE>
24
<PAGE>
(b) Exhibits
Exhibit
Number Description of Exhibits
- ------ ----------------------------------------------
1.1. Articles of Incorporation and Bylaws of the Company (Yukon Territory).
1.2+ Articles of Continuance and Bye Laws (Bermuda)
3.1. Asset Purchase Agreement, as amended, dated November 7, 1991, among
Sky Games International, Inc. ("SGII"), the Company and Sky Games
International, Corp. (formerly Forty-Four Inc.) ("SGIC") and
amendments thereto.
3.2. Escrow Agreement dated May 27, 1992, as amended, among Montreal Trust
Company of Canada, the Company and certain shareholders.
3.4. Indemnification Agreement dated February 19, 1993, between SGII and
SGIC.
3.5. Cooperation Agreement dated May 20, 1993, by and among BE Aerospace,
Inc. ("BEA"), the Company and SGII.
3.6. Lease dated November 3, 1992, between Leifer Trust and the Company.
3.7. Lease dated March 17, 1992, between Murray & Company Limited and the
Company.
3.8# Termination Agreement and Mutual Release, dated as of December 30,
1994, among the Company, BEA and SGIC.
3.9+** Services Agreement, Dated as of November 7, 1995, between IEL and
Singapore Airlines Limited.
3.10+** Software License and Software Services Agreement, dated as of November
7, 1995, between IEL and Singapore Airlines Limited.
3.11 Sublease Agreement dated as of June 5, 1997, between IEL and Harrah's
Operating Company, Inc.
3.12 Redemption Agreement, dated as of February 25, 1997, between the
Company and Anthony Clements and Rex Fortescue.
3.13 Redemption and Cancellation Agreement, dated as of April 30, 1997,
between the Company and Sky Games International, Inc.
3.14 Consulting Agreement, dated as of April 30, 1997, between the Company
and James P. Grymyr.
3.15 Shareholder Rights Agreement, dated June 17, 1997, between the Company
and Harrah's Interactive Investment Company.
25
<PAGE>
3.16** Software License Agreement, dated June 17, 1997, between the Company
and Harrah's Interactive Investment Company. (20 pages omitted.)
3.17 Continuing Services Agreement, dated June 17, 1997, between the
Company and Harrah's Interactive Entertainment Company.
3.18++ 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.
3.19++ Registration and Preemptive Rights Agreement, Dated June 17, 1997,
between the Company and Harrah's Interactive Investment Company.
3.20++ Registration Rights Agreement, dated June 17, 1997, between the
Company and B/E Aerospace, Inc.
3.21 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.
6.1 Consent of Buckley Dodds
.Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form 20-F (File No. 0-22622) as filed with the
Securities and Exchange Commission on October 12, 1993.
+Incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 20-F (File No. 0-22622) as filed with the Securities and
Exchange Commission on October 30, 1995.
#Incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 20-F (File No. 0-22622) as filed with the Securities and
Exchange Commission on September 16, 1996.
++Incorporated by reference to the exhibits to the Company's Form 8-K as filed
with the Securities and Exchange Commission on June 26, 1997.
**Confidential treatment has been requested.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, as amended, the registrant certifies that it meets all of the
requirements for filing Form 20-F and has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 12, 1997 INTERACTIVE ENTERTAINMENT LIMITED
(FORMERLY SKY GAMES INTERNATIONAL LTD.)
By: /s/ Gordon Stevenson
------------------------------------
Gordon Stevenson, President and CEO
27
<PAGE>
SKY GAMES INTERNATIONAL LTD.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
PAGE
AUDITORS' REPORT
CONSOLIDATED BALANCE SHEET 1
CONSOLIDATED STATEMENT OF DEFICIT 2
CONSOLIDATED STATEMENT OF OPERATIONS 3
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION 4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5-17
CONSOLIDATED CAPITAL ASSETS AND ACCUMULATED AMORTIZATION SCHEDULE 1
SEGMENTED INFORMATION BY INDUSTRY SCHEDULE 2
F-1
<PAGE>
[LETTERHEAD OF BUCKLEY DODDS]
AUDITORS' REPORT
To the Shareholders of Sky Games International Ltd.:
We have audited the consolidated balance sheets of Sky Games International Ltd.
as at February 28, 1997 and February 29, 1996, and the consolidated statements
of operations, deficit and changes in financial position for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at February 28, 1997
and February 29, 1996 and the results of its operations and the changes in its
financial position for the years then ended in accordance with Canadian
generally accepted accounting principles.
Vancouver, B.C.
April 28, 1997, except as to Note 11 (b) which is /s/ Buckley Dodds
as of May 14, 1997 Chartered Accountant
F-2
<PAGE>
SKY GAMES INTERNATIONAL LTD. 1.
CONSOLIDATED BALANCE SHEET
AS AT FEBRUARY 28, 1997 WITH COMPARATIVE FIGURES AT FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
ASSETS
1997 1996
<S> <C> <C>
CURRENT
Cash $ 626,074 $ 725,222
Accounts receivable 76,000 92,915
Prepaid expenses 61,975 3,729
Notes receivable (Note 3) 43,768 217,542
----------- ------------
807,817 1,039,408
COMPUTER GAMING TECHNOLOGY (Note 2b) - 457,275
DUE FROM AFFILIATED COMPANY (Note 4) - 560,753
SOFTWARE DEVELOPMENT (Note 2f) 1,357,869 393,895
CAPITAL ASSETS (Schedule 1) 1,358,890 1,866,879
----------- ------------
$ 3,524,576 $ 4,318,210
=========== ============
LIABILITIES
CURRENT
Payables and accruals $ 979,948 $ 822,852
Loans payable (Note 5) - 496,153
----------- ------------
979,948 1,319,005
NOTE PAYABLE (Note 6) - 2,346,028
----------- ------------
NON-CONTROLLING INTEREST (Note 277,249 250,077
----------- ------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 7) 106,752 97,451
CONTRIBUTED SURPLUS (Note 7) 15,324,379 11,431,813
PREFERRED SHARES ALLOTTED (Not 2,600,000 -
DEFICIT (15,763,752) (11,126,164)
----------- ------------
APPROVED BY THE DIRECTORS: 2,267,379 403,100
----------- ------------
/s/ Malcolm P. Burke $ 3,524,576 $ 4,318,210
- ------------------------------ =========== ============
Director
/s/ Deborah Fortescue-Merrin
- ---------------------------------
Director
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
SKY GAMES INTERNATIONAL LTD. 2.
CONSOLIDATED STATEMENT OF DEFICIT
FOR THE YEAR ENDED FEBRUARY 28, 1997 WITH COMPARATIVE FIGURES
FOR THE YEAR ENDED FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
BALANCE, beginning of year $11,126,164 $ 8,119,305
NET LOSS FOR THE YEAR 4,637,588 3,006,859
----------- ------------
BALANCE, end of year $15,763,752 $11,126,164
=========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
SKY GAMES INTERNATIONAL LTD. 3.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1997 WITH COMPARATIVE FIGURES
FOR THE YEAR ENDED FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
EXPENSES
Consulting and contract labour $ 1,108,492 $ 627,926
Travel, and advertising and promotion 625,945 459,497
Office and administration 443,908 542,715
Professional fees 315,929 300,153
Interest and bank charges 300,388 605,929
Management fees 211,000 171,307
Investors relations and corporate awareness 120,082 92,748
Amortization 87,976 48,903
Exchange loss 20,793 22,190
Filing and listing fees 20,301 44,170
Repairs and maintenance 18,236 4,358
Transfer agent 4,551 23,741
Finance fees - 171,424
Miscellaneous - 8,095
----------- -----------
3,277,601 3,123,156
----------- -----------
LOSS FROM OPERATIONS (3,277,601) (3,123,156)
----------- -----------
OTHERS
Interest income 63,738 118,163
Write-down of assets (Note 12) (1,796,554) (315,456)
----------- -----------
(1,732,816) (197,293)
----------- -----------
NET LOSS BEFORE NON-CONTROLLING INTEREST (5,010,417) (3,320,449)
NON-CONTROLLING INTEREST IN SUBSIDIARY 372,829 313,590
----------- -----------
NET LOSS FOR THE YEAR $(4,637,588) $(3,006,859)
=========== ===========
LOSS PER SHARE $0.366 $0.262
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
SKY GAMES INTERNATIONAL LTD. 4.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR ENDED FEBRUARY 28, 1997 WITH COMPARATIVE FIGURES
FOR THE YEAR ENDED FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES
Net loss for the year $(4,637,588) $(3,006,859)
Items not involving cash:
Amortization 87,976 48,903
Write-down of assets 1,796,554 315,456
Non-controlling interest (372,829) (313,590)
----------- -----------
3,125,887 (2,956,090)
Changes in non-cash working capital items
Accounts receivable 16,915 (78,882)
Prepaid expenses (58,246) 32,292
Payables and accruals 157,096 124,119
----------- -----------
(3,010,122) (2,878,561)
----------- -----------
FINANCING ACTIVITIES
Issue of common shares 3,901,867 3,648,139
Preferred shares allotted (Note 6) 2,600,000 -
Advances to affiliated company 11,103 (40,107)
Loans payable (496,153) (475,860)
Notes payable (2,346,028) (203,972)
Non-controlling interest 400,000 500,000
----------- -----------
4,070,789 3,428,200
----------- -----------
INVESTING ACTIVITIES
Purchase of capital assets (231,812) (9,278)
Notes receivable 35,971 14,967
Software development (963,974) (393,895)
----------- -----------
(1,159,815) (388,206)
----------- -----------
INCREASE(DECREASE) IN CASH (99,148) 161,433
CASH, BEGINNING OF YEAR 725,222 563,789
----------- -----------
CASH, END OF YEAR $ 626,074 $ 725,222
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
SKY GAMES INTERNATIONAL LTD. 5.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 1 BUSINESS DESCRIPTION
The Company is engaged in the business of developing implementing and
operating a computerized remote gaming device for use on international
air flights.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Consolidation
These consolidated financial statements include the accounts of Sky
Games International Ltd. (a Bermuda exempted company) and its
wholly-owned subsidiaries: Sky Games International, Corp. (a Nevada
corporation), Creator Island Equities Inc., SGI Holdings Corporation
Limited (a Bermuda exempted company) and its 80 percent owned
subsidiary Interactive Entertainment Limited (a Bermuda exempted
company).
b) Computer Gaming Technology
Computer Gaming Technology consists of the technology, proprietary
rights and prototypes of the casino gaming systems known as the "Sky
Games". These costs were written off in the year as in the opinion
of management the technology has been replaced by the Software
Development technology in the year.
F-7
<PAGE>
SKY GAMES INTERNATIONAL LTD. 6.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
c) Capital Assets
Capital assets are recorded at cost and are amortized in the
following manner:
Computer Equipment 30% Declining Balance
Construction Equipment 30% Declining Balance
Vehicles 30% Declining Balance
Office Equipment 20% Declining Balance
Computer Software 10% Declining Balance
Green House 10% Declining Balance
Irrigation System 10% Declining Balance
Shop Improvements 5 Years Straight Line
In the year of acquisition amortization is calculated at one-half of
the above-noted rates.
Gaming technology parts are to be used for the assembly of "Sky
Games" demonstration units. The units will be amortized over their
useful estimated life upon commencement of commercial use. The parts
were written down to current market value at February 28, 1997.
d) Foreign Currency Translation
Canadian 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. The resulting gains or losses are expensed.
F-8
<PAGE>
SKY GAMES INTERNATIONAL LTD. 7.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
e) Loss Per Share
Basic loss per share has been computed based on the weighted average
number of common shares outstanding.
f) Software Development
Software Development costs are charged to research and development
until such time as the software reaches a stage where technological
feasibility has been established. Software production costs for the
year in Interactive Entertainment Limited have been capitalized.
After software production is completed and the software is placed in
service, the costs will be amortized on the straight line method
over the remaining economic life of the asset.
g) Measurement Uncertainty
The Write Down of Assets (note 12) is based on estimates of the
current market value of certain capital assets and notes receivable.
By their nature, these estimates are subject to measurement
uncertainty and the effect on the financial statements in such
estimates could be significant.
NOTE 3 NOTES RECEIVABLE
Notes receivable are represented by the following:
1997 1996
a) A promissory note with interest at
10% per annum is due on December 31,
1996. The Company has the option to
to convert the note into a 20% equity
position. A Lola Indy Lite race car
is pledged as Collateral for this
loan, however as the Indy Lite
format changed in the year the
company has written off the note
receivable in the year. - 127,200
F-9
<PAGE>
SKY GAMES INTERNATIONAL LTD. 8.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 3 NOTES RECEIVABLE (Continued)
1997 1996
b) A 10% promissory note due on Decem-
ber 31, 1996. The note may be repaid
by an offset against advertising
over the 3 year period of the note.
$49,756 was offset against the note
to advertising for the year ended
February 28, 1997,(1996: $49,879) - 49,756
c) An unsecured promissory note with in-
terest at 15% per annum due from
Painted Hills Partners Limited Part-
nership. This note was due on Sept-
ember 1, 1991 and has been extended.
The note and all outstanding interest
payments will be repaid upon the sale
of the property held by the partner-
ship. 43,768 40,586
----------- -----------
$ 43,768 $ 217,542
=========== ===========
NOTE 4 DUE FROM AFFILIATED COMPANY
The amount due from affiliated company is an unsecured promissory note
due from a company with a common director bearing interest at 6% per
annum and it was payable on or before February 19, 1996 which was
extended to August 31, 1997 and provided for quarterly payments of
$7,200 commencing March 1, 1996. Management is currently negotiating
with the affiliated company to redeem and cancel certain escrow shares
held by the affiliated company (subject to regulatory approval or
release of share from escrow) and terminate a management agreement (see
Note 10(a). As a result, management deems it likely that this loan
receivable will be expensed as part of the terms of the negotiation and
as a result the note receivable has been written off in the year.
F-10
<PAGE>
SKY GAMES INTERNATIONAL LTD. 9.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 5 LOANS PAYABLE
Loans payable are represented by the following:
1997 1996
A demand loan payable with interest
calculated at 12% per annum. $ - $ 57,011
A loan payable with interest cal-
culated at 12% per annum, payable
monthly and was due December 31, 1996. - 439,142
--------- ----------
$ - $ 496,153
========= ==========
NOTE 6 PREFERRED SHARES ALLOTTED
The Company bought out its engineering and marketing contract with BE
Aerospace, Inc. by issuing a senior convertible note due March 30, 1997
payable to BE Aerospace, Inc. with interest calculated at 12% per annum.
The note was convertible to common shares of the Company at the option
of BE Aerospace Inc. (BEA). At February 28, 1997 the Company entered
into an agreement with BEA to convert the senior convertible note in the
amount of $2,600,000, including accrued interest, into Convertible
Redeemable Preferred Shares subject to the creation of 3,000 Convertible
Redeemable Preferred Shares. As a result the amount has been disclosed
as Preference Shares allotted in shareholders' equity.
The preferred shares will have a value of $1,000 per share, are non-
voting and will have an annual dividend rate of 9%. The dividend is
payable quarterly and is cumulative.
BEA may convert the Preferred shares in whole or in part into common
stock of SGI at a conversion price of 70% of the average share price
prior to February 28, 1999, 65% of the average share price after
February 28, 1999 to August 31, 1999 and 60% thereafter. SGI is
obligated to issue sufficient shares on conversion to ensure the
outstanding balance of $2,600,000 is paid in common shares at the
prevailing market price.
SGI at its option may redeem the Preferred stock at a redemption price
of $1000 per share plus any accrued and unpaid dividends.
F-11
<PAGE>
SKY GAMES INTERNATIONAL LTD. 10.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 7 SHARE CAPITAL
Share capital is represented by the following:
Authorized: 50,000,000 Common Shares of no par value $0.01 per share
<TABLE>
<CAPTION>
Issued for: 1997 1996
<S> <C> <C> <C> <C>
NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE
Share Capital
Balance, beginning
Of year 12,046,434 $ 97,451 10,815,624 $ 88,193
Issued for
Warrants 893,086 6,547 - -
Issued for
Stock options 37,500 276 103,500 792
Issued for private
Placements 175,000 1,287 994,310 7,472
Issued for debt
Conversion 162,000 1,191 125,000 945
Issued for finders
Fee - - 8,000 49
---------- ---------- ---------- -----------
Balance,
end of year 13,314,020 $ 106,750 12,046,434 $ 97,451
========== ========== ========== ===========
1997 1996
Contributed Surplus, beginning of year $11,431,813 $ 7,792,932
Issued for warrants 2,784,961 -
Issued for stock options 63,833 193,459
Issued for private placements 479,963 2,975,431
Issued for debt conversion 563,809 499,160
Issued for finders fee - 43,956
----------- -----------
15,324,379 11,504,938
Less: private placement issue costs - (73,125)
----------- -----------
Contributed Surplus, end of year $15,324,379 $11,431,813
=========== ===========
</TABLE>
F-12
<PAGE>
SKY GAMES INTERNATIONAL LTD. 11.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1997 AND FEBRUARY 28, 1996
(U.S. Dollars)
NOTE 7 SHARE CAPITAL (Continued)
The continuance of the Company in Bermuda required that the authorized
and outstanding share capital of the Company be restructured and
reorganized in order to conform to the laws of Bermuda. As a result, par
value of $0.01 (Cdn) per share has been placed on the shares which
results in contributions over that amount to be classified as contributed
surplus.
At February 28, 1997 the following stock options to directors and
employees were outstanding:
NUMBER OF EXERCISE
SHARES PRICE EXPIRY DATE
1,190,000 U.S.$3.00 February 29, 2001
There are 3,525,000 common shares held in escrow. A total of 3,000,000
common shares were issued pursuant to the terms of the asset agreement
in connection with the acquisition with Sky Games International, Inc.
(Note 4} during the 1993 fiscal year. The remaining 525,000 common
shares were previously issued as principal's shares. All of the escrow
shares may be earned out on a pro rata basis of one share for each $1.78
U.S. of cumulative cash flow generated by Sky Games International, Corp.
At February 28, 1997, the following warrants were outstanding:
<TABLE>
<CAPTION>
NUMBER
OF WARRANTS EXERCISE PRICE EXPIRY DATE
<S> <C> <C> <C>
308,528 US $3.00 July 31, 1997
100,000 US $3.00 April 30,1999
</TABLE>
The Company was obligated to issue the 100,000 warrants at an exercise
price of US $3.00 for services rendered for the year ended February 29,
1996.
F-13
<PAGE>
SKY GAMES INTERNATIONAL LTD. 12.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 8 SIGNIFICANT EVENTS
a) The Company formed Interactive Entertainment Limited ("IEL"), a
Bermuda exempted company, on November 7, 1994 for the purpose of
entering into an arrangement with Harrah's Interactive Investment
Company ("Harrah's) to complete and develop a video system for
gaming activities. SGI Holding Corporation Limited ("SGIH") was
formed on the same day for the purpose of holding the Company's
interest. SGIH is a wholly owned subsidiary of the Company and SGIH
holds 80% of the issued and outstanding share capital of IEL.
Subsequent to the year end the Company proposes to purchase the
remaining 20% ownership of IEL and amalgamate the companies (Note
11a).
Harrah's and IEL are also parties to a Cross-License Agreement dated
December 30, 1994 with the Company. Pursuant to the Cross-License
Agreement (i)Sky Games granted IEL a license to software comprising
or related to the interactive video gaming entertainment system,(ii)
IEL granted Sky Games a license to improvements to said software,
and (iii)Sky Games and IEL granted licenses to Harrah's for software
and improvements, pursuant to which Sky Games granted a license to
IEL in certain trademarks, tradenames, service marks and service
names.
b) On December 30, 1994, IEL and Harrah's Interactive Entertainment, a
Nevada corporation, entered into a Management Agreement for an
initial period of 2 years with four separate successive extension
terms of two years each. Monthly fees to be paid to Harrah's is
equal to the greater of i) $10,000 per month, or ii) 6% to 7.5%
depending on revenue. Harrah's has the sole and exclusive right to
direct the management and operation of IEL's business. The
agreement shall automatically extend for each of the Extension
Term(s) unless Harrah's provides IEL with at least 120 days written
note of Harrah's intention not to extend the agreement prior to the
expiration of the initial or any extension term. A marketing
contribution fee of 1/2% of gross revenues is also required.
Subsequent to the year end the management agreement will terminate
on the proposed amalgamation of IEL into SGIH (Note 11a).
F-14
<PAGE>
SKY GAMES INTERNATIONAL LTD. 13.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 8 SIGNIFICANT EVENTS (Continued)
c) On December 30, 1994, SGI Holding Corporation Limited, IEL and
Harrah's entered into a Shareholder Agreement which among other
things, (i) imposes obligations on Shareholders in connection with
election of the Board of IEL, (ii) restricts transfer of the common
stock or other securities of IEL, (iii)provides Harrah's with
certain approval rights in connection with the securities, debt and
structure of IEL, (iv) defines the scope of IEL's business, (v) sets
forth a covenant of the Shareholders not to compete, (vi) sets forth
rules regarding capital contribution requirements and payment of
dividends, (vii) creates options to purchase shares held by SGI and
Harrah's in certain circumstances, (viii) creates a put right in
favor of Harrah's in certain circumstances, (ix) prohibits certain
actions of the Shareholders pursuant to a standstill provision, (x)
creates certain rights of first refusal upon a proposed transfer,
(xi) sets forth certain permitted transfers, and (xii) sets forth
provisions governing assignment of options or rights if first
refusal to IEL. Subsequent to the year end the Shareholder Agreement
will terminate on the proposed amalgamation of IEL into SGIC (note
11a).
NOTE 9 INCOME TAXES
As Bermuda exempted companies, Sky Games International Ltd. and
Interactive Entertainment Limited are not currently subject to income
tax filing requirements in Bermuda. Accordingly, there are no income
tax provisions, benefits, liabilities or assets reflected in the
accompanying statements. After operations begin, income earned by the
Companies may be subject to income tax in the country in which such
income is generated.
NOTE 10 RELATED PARTY TRANSACTIONS
a) During the year, the Company paid $335.000 (1995 - $226,460)for
consulting and management fees to officers and to companies with
common directors.
b) Included in accounts payable is $586,560 (1996: $181,583) due to
Harrah's by Interactive Entertainment Limited.
F-15
<PAGE>
SKY GAMES INTERNATIONAL LTD. 14.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 11 SUBSEQUENT EVENTS
a) Subsequent to the year end management has proposed an Agreement and
Plan of Amalgamation (the "Amalgamation Agreement") by and among the
Company, Harrah's Interactive Investment Company, a Nevada
Corporation ("HIIC"), SGI Holdings Corporation Limited, a Bermuda
exempted Company ("SGIHC") and Interactive Entertainment Limited, a
Bermuda exempted company ("IEL") pursuant to which, among other
things: (i) IEL will amalgamate with and into SGIHC (the "Subsidiary
amalgamation"); and (ii) the Company will convert HIIC's 1,00,000
shares of the common stock of IEL into 5,879,040 shares of common
stock, par value $.01 per share, of the Company (the "Conversion
Shares"), subject to adjustment. Additionally, it is contemplated
by the Amalgamation Agreement that, immediately after the Subsidiary
Amalgamations, SGIHC will amalgamate with and into the Company (the
"Parent Amalgamation").
As a result, management proposes to take certain other actions
required in connection with the Amalgamations including: (i)
entering into a Shareholder Rights Agreement with HIIC ; (ii)
entering into a Registration and Preemption Rights and Repurchase
Agreement with HIIC; (iii) entering into a Continuing Services
Agreement with Harrah's; (iv) entering into a License Agreement with
Harrah's; (v) amending the Bye -Laws of the Company to effect
certain covenants in the Amalgamation Agreement and to improve
management controls and shareholder protections; (vi) changing the
name of the Company to "Interactive Entertainment Limited"; (vii)
changing the par value of the authorized share capital of the
Company to U.S. $.01 each from Cdn. $.01 each; (vii) authorizing an
increase in the authorized share capital of the Company by the
creation of 3,000 Convertible Redeemable Preference Shares; and
(viii) authorizing an increase in the authorized share capital of
the Company by the creation of 5,000,000 Redeemable Preference
Shares.
The Amalgamation Agreement and the actions proposed by management in
connection with the Amalgamation are subject to shareholder and
regulatory approval.
b) Subsequent to the year end the company entered into a Private
Placement Agreement with London Select Enterprises, Ltd. pursuant to
which they would agree to place on a "best efforts" basis up to
$3,500,000,00. of 8% two year convertible debentures on behalf of
the Company, and an additional $2,000,000,00. of Convertible
Debentures on the same terms completed by August 1, 1997. Up to May
14, 1997 $763,250 has been received by the Company from the
placement of convertible debentures.
F-16
<PAGE>
SKY GAMES INTERNATIONAL LTD. 15.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 1997 AND FEBRUARY 28, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
NOTE 12 WRITE DOWN OF ASSETS
<S> <C>
</TABLE>
The following assets were written down to a nominal or current value
in the year due to impairment in the assets value:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer gaming technology (Note 2b) 457,275 -
Notes receivable (Note 3) 135,803 315,456
Due from affiliated company (Note 4) 549,651 -
Capital assets (Schedule 1)
- Land 442,238 -
- Gaming technology 209,587 -
---------- --------
$1,796,554 $315,456
========== ========
</TABLE>
NOTE 13 COMPARATIVE FIGURES
Certain of the 1996 comparative figures have been reclassified to
conform with the presentation adopted in 1997.
NOTE 14 DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
a) Earnings Per Share
Primary earnings (loss) per common share calculated in accordance
with U.S. generally accepted accounting principles excluded shares
held in escrow pending the satisfaction of conditions other than
through the mere passage of time (i.e., "contingent" shares).
Accordingly, primary earnings (loss) per common share in accordance
with U.S. generally accepted accounting principles differs from
basic earnings (loss) per common share under Canadian generally
accepted accounting principles.
F-17
<PAGE>
SKY GAMES INTERNATIONAL LTD. 16.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1997
(U.S. Dollars)
NOTE 14 DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (Continued)
b) The Company includes in its costs basis of the computer gaming
technology acquired all costs relating to the purchase such as
shares issued, professional fees, finders fees , and research and
development expenditures funded. Under U.S. generally accepted
accounting principles, only the costs to the transferors are
recorded with any excess of their costs recorded as a preferential
distribution. As the computer gaming technology was written off in
the year (Note 2b), the effect on the statement of deficit at
February 28, 1997 has been eliminated.
I) The following is the net loss per share for the purposes of U.S.
generally accepted accounting principles.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Loss per share according to
generally accepted accounting
principles in the U.S. $ 0.507 $ 0.379
============ ============
</TABLE>
II) The following is a reconciliation of the statement of deficit under
Canadian accepted accounting principles to U.S. generally accepted
accounting principles.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deficit as shown in the
financial statements $(15,763,752) $(11,126,164)
============ ============
Description of items having
the effect of increasing
reported deficit:
1) Increase in net loss
resulting from the
acquisitions of computer
gaming technology. - (93,276)
2) Preferential distribution
resulting from the acquisition
of computer gaming technology - (363,999)
Deficit according to generally
accepted accounting principles
in the U.S. $(15,763,752 $(11,583,439)
============ ============
</TABLE>
F-18
<PAGE>
SKY GAMES INTERNATIONAL LTD. 17.
NOTES TO THE CONSOLIDATED STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 14 DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (Continued)
III) The following is a reconciliation of the balance sheet under Canadian
generally accepted accounting principles.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer gaming technology as shown
in the financial statements $ - $ 457,275
Description of items having the
effect of decreasing reported
computer gaming technology:
1) Consulting, finders fees,and
R&D expenditures charged to
expenses as shown in Item II - (93,276)
2) Preferential distribution as
as shown in Item II - (363,999)
---------- ------------
Computer gaming technology according
To generally accepted accounting
principles in the U.S. $ - $ -
========== ============
</TABLE>
F-19
<PAGE>
SKY GAMES INTERNATIONAL LTD. SCHEDULE 1
CONSOLIDATED CAPITAL ASSETS AND ACCUMULATED AMORTIZATION
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
ACCUMULATED 1997 1996
COST AMORTIZA- NET BOOK NET BOOK
TION VALUE VALUE
<S> <C> <C> <C> <C>
LAND
Opening Balance $1,282,666 $ - $1,282,666 $1,282,666
Additions 4,318 - 4,318 -
Recovery of GST (44,746) - (44,746) (44,746)
Write down of value (442,238) - (442,238) -
---------- -------- ---------- ----------
Closing Balance 800,000 - 800,000 1,237,920
---------- -------- ---------- ----------
CONSTRUCTION EQUIPMENT
Opening Balance 151,837 104,170 47,667 68,095
Provision - 14,300 (14,300) (20,428)
---------- -------- ---------- ----------
Closing Balance 151,837 118,470 33,367 47,667
---------- -------- ---------- ----------
IRRIGATION SYSTEM
Opening Balance 19,831 5,817 14,014 15,574
Provision - 1,401 (1,401) (1,560)
---------- -------- ---------- ----------
Closing Balance 19,831 7,218 12,613 14,014
---------- -------- ---------- ----------
OFFICE EQUIPMENT
Opening Balance 81,943 14,895 67,048 20,927
Additions 232,439 - 232,439 54,024
---------- -------- ---------- ----------
314,382 14,895 299,487 74,951
Provision - 46,929 (46,929) (7,903)
---------- -------- ---------- ----------
Closing Balance 314,382 61,824 252,558 67,048
---------- -------- ---------- ----------
</TABLE>
.../Continued
See accompanying notes to the consolidated financial statements.
F-20
<PAGE>
SKY GAMES INTERNATIONAL LTD.
CONSOLIDATED CAPITAL ASSETS AND ACCUMULATED AMORTIZATION (Continued)
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
ACCUMULATED 1997 1996
COST AMORTIZA- NET BOOK NET BOOK
TION VALUE VALUE
<S> <C> <C> <C> <C>
VEHICLES
Opening Balance $ 60,833 $35,919 $24,914 $ 35,590
Provision - 7,474 (7,474) (10,676)
-------- ------- ------- --------
Closing Balance 60,833 43,393 17,440 24,914
-------- ------- ------- --------
GREEN HOUSES
Opening Balance 20,450 4,529 15,921 17,689
Provision - 1,591 (1,591) (1,768)
-------- ------- ------- --------
Closing Balance 20,450 6,120 14,330 15,921
-------- ------- ------- --------
NURSERY EQUIPMENT
Opening Balance 10,109 4,057 6,052 7,564
Provision - 1,106 (1,106) (1,512)
-------- ------- ------- --------
10,109 5,163 4,946 6,052
Disposals (10,109) (5,163) (4,946) -
-------- ------- ------- --------
Closing Balance - - - 6,052
-------- ------- ------- --------
SHOP IMPROVEMENTS
Opening Balance 17,592 10,559 7,033 11,433
Provision - 7,033 (7,033) (4,400)
-------- ------- ------- --------
Closing Balance 17,592 17,592 - 7,033
-------- ------- ------- --------
</TABLE>
.../Continued
See accompanying notes to the consolidated financial statements.
F-21
<PAGE>
SKY GAMES INTERNATIONAL LTD.
CONSOLIDATED CAPITAL ASSETS AND ACCUMULATED AMORTIZATION (Continued)
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
1997 1996
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
<S> <C> <C> <C> <C>
COMPUTER
Opening Balance 49,084 21,947 27,137 38,763
Provision - 8,141 (8,141) (11,626)
---------- --------- ---------- ----------
Closing Balance 49,084 30,088 18,996 27,137
---------- --------- ---------- ----------
GAMING TECHNOLOGY PARTS
Opening Balance 419,173 - 419,173 419,713
Write down of value (209,587) - (209,587) -
---------- --------- ---------- ----------
Closing Balance 209,586 - 209,586 419,173
---------- --------- ---------- ----------
TOTALS TO FEBRUARY, 1997 $1,643,595 $ 284,705 $1,358,890 $1,866,879
========== ========= ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-22
<PAGE>
SKY GAMES INTERNATIONAL LTD. SCHEDULE 2
SEGMENTED INFORMATION BY INDUSTRY
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
1997
Gaming Nursery
Technology Land Operation Consolidated
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Segment operating loss $1,864,145 $ 503,437 $ - $2,367,582
---------- ---------- --------- ----------
General corporate expense 2,342,447
Interest expense 300,388
----------
5,010,417
Non-controlling interest 372,829
----------
Net loss $4,637,588
==========
Amortization $ 55,070 $ 32,906 $ - $ 87,976
---------- ---------- --------- ----------
Capital expenditures $ 232,439 $ 4,318 $ - $ 236,757
---------- ---------- --------- ----------
Identifiable assets $ 481,140 $ 877,750 $ - $1,358,890
---------- ---------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
1996
Gaming Nursery
Technology Land Operation Consolidated
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Segment operating loss $1,616,680 $ 47,504 $ 34,968 $1,699,152
---------- ---------- --------- ----------
General corporate expense 1,018,448
Interest expense 602,849
----------
3,320,449
Non-controlling interest 313,590
----------
Net loss $3,006,859
==========
Amortization $ 19,529 $ 35,504 $ 4,818 $ 59,851
---------- ---------- --------- ----------
Capital expenditures $ 54,024 $ - $ - $ 54,024
---------- ---------- --------- ----------
Identifiable assets $1,364,528 $1,147,534 $ 205,987 $2,718,049
---------- ---------- --------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-23
<PAGE>
EXHIBIT 3.11
SUBLEASE AGREEMENT
This Sublease Agreement entered into as of this 5th day of June, 1997 by
and between Harrah's Operating Company, Inc., a Delaware corporation
("Harrah's") and Interactive Entertainment Limited, a Bermuda exempted company
("IEL").
WITNESSETH:
WHEREAS, Harrah's has leased from Weston management Company as Manager for
Hampton Inns, Inc. (the "Landlord") certain premises known as Suite 215, 845
Crossover Lane, Memphis, Tennessee consisting of 9,408 square feet (the "Demised
Premises") pursuant to that certain Standard Commercial Lease dated April 18,
1994 as amended (the "Lease");
WHEREAS, IEL desires to sublease from Harrah's the Demised Premises, and
Harrah's is willing to enter into this Sublease upon the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual premises herein contained,
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. Demise and Use. Subject to all of the provisions of this
Sublease, Harrah's demises and sublets to IEL and IEL takes and hires from
Harrah's the Demised Premises, to be used by IEL solely for general office use.
Up to three offices and one clerical work area in the Demised Premises may be
shared by IEL with Harrah's or its sublessee (the "Cotenant") without any
physical division. For any month in which a Cotenant occupies any of the
Demised Premises, rent and expenses relating to the Demised Premises shall be
shared pro rata by IEL and the Cotenant based on the relative number of IEL
employees and Cotenant employees occupying the Demised Premises (the "Allocation
Percentage") calculated, in IEL's case, by dividing the number of IEL employees
occupying the Demised Premises by the total number of persons occupying the
Demised Premises, and in the Cotenant's case, by dividing the number of Cotenant
employees occupying the Demised Premises by the total number of persons
occupying the Demised Premises.
2. The Lease. The parties agree that their rights and duties regarding
the Demised Premises are subordinate to the Lease. Except as modified, amended
or supplemented by the Sublease, as against IEL, Harrah's shall have the rights
and duties of the Landlord as provided in the Lease, and as against Harrah's,
IEL shall have the rights and duties of Harrah's as provided in the Lease, as if
Harrah's had been the lessor under the Lease and IEL the lessee under the Lease,
except that with respect to services, repairs,
1
<PAGE>
reimbursements or other obligation required of the Landlord under the Lease,
Harrah's sole obligation with respect thereto shall be to request the same and
to use its best efforts to obtain same from the Landlord. A true and correct
copy of the Lease is attached hereto as Exhibit A and is incorporated herein by
reference. The parties agree that if there are any inconsistencies between the
terms and conditions of the Lease and the terms and conditions herein contained,
this Sublease will be the controlling document as regards matters solely between
IEL and Harrah's and otherwise the Lease shall be the controlling document.
3. Term. The initial term of this Sublease shall commence on June 6,
1997 and shall extend approximately twenty-three (23) months beyond the date of
commencement or until April 30, 1999, unless earlier terminated or canceled
pursuant to the terms of this Sublease.
4. Purchase and Sale of Leasehold Improvements, Furniture, Fixtures and
Equipment. Harrah's hereby agrees to sell and IEL hereby agrees to purchase for
a total purchase price of $5,967.51, payable in cash on the date of delivery,
the Leasehold Improvements, furniture, furnishings, fixtures and equipment
installed by Harrah's in the Demised Premises and more particularly described in
Exhibit B attached hereto and incorporate herein by reference (such improvements
referred to herein as the "Demised Premised Improvements"). Harrah's shall
execute and deliver to IEL a bill of sale conveying all of Harrah's right, title
and interest in and to the Demised Premises Improvements subject to the
interests of the Landlord under the Lease and of Harrah's under this Sublease.
The Demised Premises Improvements are sold "AS IS", "WHERE IS", AND WITH NO
WARRANTIES, EXPRESS OR IMPLIED, AS TO CONDITION, STATE OF REPAIR, FITNESS,
FITNESS FOR A PARTICULAR PURPOSE OR MERCHANTABILITY. Harrah's will assign to
IEL existing warranties from manufacturers or suppliers covering the Demised
Premises Improvements, if any. IEL shall provide and install office furniture
and equipment at its own expense.
5. Rent.
a. Monthly Rent. Subject to the provisions of this Paragraph 5, IEL shall
pay Harrah's on the first day of each and every month of the term the sum of
$10,976.00 without demand, demand having been expressly waived. IEL shall pay,
as additional rent, all other sums due to the Landlord under the Lease. For any
month during the term in which a Cotenant occupies any of the Demised Premises,
the amount of monthly rent and expenses payable by IEL shall be reduced in
accordance with the Allocation Percentage. If a Cotenant occupies any of the
Demised Premises for a partial month, the amount of the rent reduction shall be
prorated on a daily basis based on the actual number of days in that month.
b. Common Use Items. For any month in which a Cotenant occupies the
Demised Premises, the amount of monthly rent payable by IEL pursuant to
Paragraph 5a shall be reduced in accordance with the Allocation Percentage on
account of the Cotenant's use of the items described in Exhibit C attached
hereto and incorporated
2
<PAGE>
herein by reference. If a Cotenant occupies the Demised Premises for a partial
month, the amount of the rent reduction shall be prorated on a daily basis based
on the actual number of days in that month.
6. Indemnification and Insurance.
a. Indemnification. IEL agrees to protect, defend, reimburse, indemnify
and hold Harrah's and the Landlord, their respective agents, employees and
elected officers and each of them, free and harmless at all times from and
against any and all claims, liability, expenses, losses, costs, fines and
damages (including attorney fees) and causes of action of every kind and
character by reason of any damage to property or the environment, or bodily
injury (including death) incurred or sustained by any person, arising out of or
incident to or in connection with IEL's performance under this Sublease, IEL's
acts, omissions or operations hereunder, or in any way related to or arising out
of IEL's use and occupation of the Demised Premises; provided, however, IEL
shall not be responsible to Harrah's or the Landlord for damages resulting out
of bodily injury or damages to property which IEL can establish as being
attributable to either the sole negligence or willful act or omission of
Harrah's or the Landlord, and their respective agents, employees or officers
acting within the scope of their respective employments. This clause shall
survive the termination of this Sublease.
b. Insurance. IEL at its sole expense shall obtain and maintain in force
during the term of this Sublease the insurance required by the Lease. With
respect to insurance required under Exhibit B, Item 4, IEL shall cause the
Landlord and Harrah's to be named as additional insureds. With respect to
property insurance maintained by IEL, such policy(ies) shall contain a loss
payable endorsement in favor of the Landlord, Harrah's and IEL, as their
interests may appear.
7. Observance and Performance of the Terms and Conditions of the Lease.
IEL shall, at its own cost and expense, observe and perform all the obligations
of Harrah's under the Lease, and IEL shall not do, or permit suffer to be done
any act which is prohibited by the Lease, or which would in any way contravene
or violate any term, convenant or condition of the Lease or would constitute a
default thereunder; and IEL will indemnify Harrah's and hold it harmless from
and against any such default; provided, however, that wherever there are time
limits contained in the Lease pertaining to an event of default, the Lease shall
be deemed amended for the purpose of this Sublease to provide for time limits of
five (5) days less than those provided for in the Lease.
8. Remedies of Harrah's. In the event of any default by IEL under this
Sublease, including, without limitation, any failure of IEL to observe or
perform any of the terms, convenants and conditions on its part to be observed
or performed under the Lease, Harrah's shall have all of the rights and remedies
against IEL that the Landlord has against Harrah's under the Lease or otherwise
by law; provided, however, that IEL shall have fifteen (15) days to cure a
default other than rent, and five (5) days after written notice to cure a
default in paying rent, fees or other sums due. No such right or
3
<PAGE>
remedy shall be exclusive of any other right or remedy, but all such rights and
remedies shall be deemed to be cumulative. Harrah's shall have the right, but
not the obligation, to remedy any default by IEL under the terms of this
Sublease (or under the Lease), at the sole cost and expense of IEL; and such
cost and expense shall be recoverable by Harrah's from IEL, as additional rent,
and shall be due and payable on the first day of the month next following the
month in which such costs and expenses are incurred by Harrah's, plus interest
at the legal rate from the time such costs and expenses were incurred to the
date of the payment thereof by IEL to Harrah's. Harrah's remedying of any such
default shall not be deemed to cure the default, and Harrah's shall thereafter
remain entitled to all the rights and remedies provided for in this Sublease or
in the Lease in the event of such default.
9. Notices. Any notice, demands, requests or other communications under
this Sublease shall be in writing and shall become effective when delivered by
hand or received by overnight courier, telex, telecopy, telegram or registered
first class mail, postage prepaid, addressed as follows:
To Harrah's: Harrah's Operating Company, Inc.
Attn: Corporate Secretary
1023 Cherry Road
Memphis, Tennessee 38117
To IEL: Interactive Entertainment Limited
Attn: Michael A. Irwin
845 Crossover Lane, Suite 215
Memphis, TN 38117
with a copy to: Andrew W. McCune
Altheimer & Gray
10 South Wacker Drive
Chicago, IL 60606-7482
10. Successors and Assigns. Notwithstanding anything to the contrary
contained herein or in the Lease, IEL may assign this Sublease without Harrah's
consent to IEL's successor in interest under that certain Plan of Merger and
Amalgamation dated as of May 13, 1997, among IEL, SGI holding Corporation
Limited and Sky Games International Limited, provided that said assignee assumes
in full the obligations of IEL under this Sublease.
11. Termination of Lease and Sublease. Should the Lease terminated during
the term hereof for any reason, this Sublease shall terminate on the date of
such termination of the Lease, with the same force and effect as if such
termination date has been specified in this Sublease as the date of termination
hereof.
4
<PAGE>
12. Prior Consent of Landlord. Anything to the contrary contained in this
Sublease or the Lease notwithstanding, this Sublease is subject to the prior
written consent of the Landlord and shall not become effective until Harrah's
has received written consent in form and content satisfactory to Harrah's from
the Landlord, with copy to IEL. Such approval shall not release Harrah's from
its primary liability to the Landlord for fulfilling all obligations, terms and
conditions of the Lease.
IN WITNESS WHEREOF, the parties hereto have duly executed this Sublease as
of the day and year first above written.
ATTEST: HARRAH'S OPERATING COMPANY, INC.
By: /s/ Neil F. Barnhart
- ----------------------- -----------------------------
Secretary
Title: Vice President
--------------------------
ATTEST: INTERACTIVE ENTERTAINMENT LIMITED
/s/ Michael A. Irwin By: /s/ Gordon Stevenson
- ----------------------- -----------------------------
Assistant Secretary
Title: President and CEO
--------------------------
5
<PAGE>
Exhibit "A"
STANDARD COMMERCIAL LEASE
ARTICLE 1.00 BASIC LEASE TERMS
1.01 Parties. This lease agreement ("Lease") is entered into by and
between the following Lessor and Lessee:
<TABLE>
<CAPTION>
<S> <C>
Waston Management Company as Manager for Metropolitan Life Insurance Company ("Lessor")
- ----------------------------------------------------------------------------------------
Embassy Suites, Inc., a Delaware Corporation ("Lessee")
- ----------------------------------------------------------------------------------------
1.02 Leased Premises. In consideration of the rents, terms, provisions
and covenants of this Lease, Lessor hereby leases, lets and demises to Lessee
the following described premises ("leased premises") as shown on the floor plan,
Waston Job Number 93278, which upon completion of the final floor plan will be
attached hereto and made a part hereof as Exhibit "A".
9,408 (Approximate sq. ft.) 93278 (Job no.)
- ------------------------------- -------------------------------------
Audubon Woods Business Campus, Building "D" (Name of building or project)
- ---------------------------------------------------------------------
845 Crossover Lane, Suite 215 (Street address/suite number)
- ---------------------------------------------------------------------
Memphis, Tennessee 38117 (City, State, and Zip Code)
- ----------------------------------------------------------------------
1.03 Term. Subject to and upon the conditions set forth herein, the term
of this Lease shall commence on
( May 1, 1994 the "commencement date"); and shall terminate 60 months
--------------------- ------
thereafter.
1.04 Base Rent and Security Deposit. Base rent is $ 10,976.00 per month.
-----------
Security deposit is $ -0- .
-----------------
1.05 Addresses.
Lessor's Address: Lessee's Address:
6075 Poplar Avenue, Suite 322 1023 Cherry Road
- ----------------------------------------- -----------------------------------------
Memphis, Tennessee 38119 Memphis, TN 38117
- ----------------------------------------- -----------------------------------------
- ----------------------------------------- -----------------------------------------
1.06 Permitted Use. General office use
-----------------------------------------------------------------------
</TABLE>
ARTICLE 2.00 RENT
2.01 Base Rent. Lessee agrees to pay monthly as base rent during the term
of this Lease the sum of money set forth in section 1.04 of this Lease, which
amount shall be payable to Lessor at the address shown above. One monthly
installment shall be due and payable on the date of execution of this Lease by
Lessee for the first month's rent and a like monthly installment shall be due
and payable on or before the first day of each calendar month succeeding the
commencement date or completion date during the term of this Lease; provided, if
the commencement date or the completion date should be a date other than the
first day of a calendar month, the monthly rental set forth above shall be
prorated to the end of that calendar month, and all succeeding installments of
rent shall be payable on or before the first day of each succeeding calendar
month during the term of this Lease. Lessee shall pay, as addditional rent, all
other sums due under this Lease.
2.02 Operating Expenses. In the event Lessor's operating expenses for the
building and/or project of which the leased premises are a part shall, in any
calendar year during the term of this Lease, exceed the actual operating
expenses of the building during the calendar year 1996; Lessee agrees to pay as
additional rent Lessee's pro rata share of such excess operating expenses.
Lessor may invoice Lessee monthly for Lessee's pro rata share of the estimated
operating expenses for each calendar year, which amount shall be adjusted each
year based upon anticipated operating expenses. Within nine months following
the close of each calendar year, Lessor shall provide Lessee an accounting
showing in reasonable detail all computations of additional rent due under this
section. In the event the accounting shows that the total of the monthly
payments made by Lessee exceeds the amount of additional rent due by Lessee
under this section, the accounting shall be accompanied by a refund. In the
event the accounting shows that the total of the monthly payments made by Lessee
is less than the amount of additional rent due by Lessee under this section, the
accounting shall be accompanied by an invoice for the additional rent.
Notwithstanding any other provision in this Lease, during the year which the
Lease terminates, Lessor, prior to the termination date, shall have the option
to invoice Lessee for Lessee's pro rata share of the excess operating expenses
based upon the previous year's operation expenses. If this Lease shall terminate
on a day other than the last day of a calendar year, the amount of any
additional rent payable by Lessee applicable to the year in which such
termination shall occur shall be prorated on the ratio that the number of days
from the commencement of the calendar year to and including the termination date
bears to 365. Lessee shall have the right, at its own expense and within a
reasonable time, to audit Lessor's books relevant to the additional rent payable
under this section. Lessee agrees to pay any additional rent due under this
section within ten days following receipt of the invoice or accounting showing
additional rent due. See Item #2 of Exhibit "B" attached hereto and made a part
hereof.
2.03 Definition of Operating Expenses. The term "operating expenses"
includes all expenses incurred by Lessor with respect to the maintenance and
operation of the building of which the leased premises are a part, including,
but not limited to, the following: maintenance, repair and replacement costs;
electricity, fuel, water, sewer, gas and other utility charges; security, window
washing and janitorial services; trash and snow removal; landscaping and pest
control; management fees, wages and benefits payable to employees of Lessor
whose duties are directly connected with the operation and maintenance of the
building; all services, supplies, repairs, replacements or other expenses for
maintaining and operating the building or project including parking and common
areas; the cost, including interest, amortized over its useful life, of any
capital improvement made to the building by Lessor after the date of this Lease
which is required under any governmental law or regulation that was not
applicable to the building at the time it was constructed; the cost, including
interest, amortized over its useful life, of installation of any device or other
equipment which improves the operating efficiency of any system within the
leased premises and thereby reduces operating expenses; all other expenses which
would generally be regarded as operating and maintenance expenses which would
reasonably be amortized over a period not to exceed five years; all real
property taxes and installments of special assessments, including dues and
assessments by means of deed restrictions and/or owners' associations which
accrue against the building of which the leased premises are a part during the
term of this Lease; and all insurance premiums Lessor is required to pay or
deems necessary to pay, including public liability insurance, with respect to
the building. The term operating expenses does not include the following;
repairs, restoration or other work occasioned by fire, wind, the elements or
other casualty; income and franchise taxes of Lessor, expenses incurred in
leasing to or procuring of lessees, leasing commissions, advertising expenses
and expenses for the renovating of space for new lessees; interest or principal
payments on any mortgage or other indebtedness of Lessor; compensation paid to
any employee of Lessor above the grade of property manager; any depreciation
allowance or expense; or operating expenses which are the responsibility of
Lessee.
2.04 Late Payment Charge. Other remedies for nonpayment of rent
notwithstanding, if the monthly rental payment is not received by Lessor on or
before the tenth day of the month for which the rent is due, or if any other
payment due Lessor by Lessee is not received by Lessor on or before the tenth
day of the month next following the month in which Lessee was invoiced, a late
payment charge of five percent of such past due amount shall become due and
payable in addition to such amounts owed under this Lease.
2.05 Increase in Insurance Premiums. If an increase in any insurance
premiums paid by Lessor for the building is caused by Lessee's use of the leased
premises in a manner other than as set forth in section 1.06, or if Lessee
vacates the leased premises and causes an increase in such premiums, then Lessee
shall pay as additional rent the amount of such increase to Lessor.
<PAGE>
2.07 Holding Over. In the event that Lessee does not vacate the leased
premises upon the expiration or termination of this Lease, Lessee shall be a
tenant at will for the holdover period and all of the terms and provisions of
this Lease shall be applicable during that period, except that Lessee shall pay
Lessor as base rental for the period of such holdover an amount equal to 1.5
times the base rent which would have been payable by Lessee had the holdover
period been a part of the original term of this Lease. Lessee agrees to vacate
and deliver the leased premises to Lessor upon Lessee's receipt of notice from
Lessor to vacate. The rental payable during the holdover period shall be payable
to Lessor on demand. No holding over by Lessee, whether with or without the
consent of Lessor, shall operate to extend the term of this Lease. See Item #5
of Exhibit "B" attached hereto and made a part hereof.
ARTICLE 3.00 OCCUPANCY AND USE
3.01 Use. Lessee warrants and represents to Lessor that the leased
premises shall be used and occupied only for the purpose as set forth in section
1.06. Lessee shall occupy the leased premises, conduct its business and control
its agents, employees, invitees and visitors in such a manner as is lawful,
reputable and will not create a nuisance. Lessee shall not permit any operation
which emits any odor or matter which intrudes into other portions of the
building, use any apparatus or machine which makes undue noise or causes
vibration in any portion of the building or otherwise interfere with, annoy or
disturb any other lessee in its normal business operations or Lessor in its
management of the building, Lessee shall neither permit any waste on the leased
premises nor allow the leased premises to be used in any way which would, in the
opinion of Lessor, be extra hazardous on account of fire or which would in any
way increase or render void the fire insurance on the building.
3.02 Signs. No sign of any type or description shall be erected, placed
or painted in or about the leased premises or project except those signs
submitted to Lessor in writing and approved by Lessor in writing, and which
signs are in conformance with Lessor's sign criteria established for the
project.
3.03 Compliance with Laws, Rules and Regulations. Lessee, at Lessee's
sole cost and expense, shall comply with all laws, ordinances, orders, rules and
regulations of state, federal, municipal or other agencies or bodies having
jurisdiction over the use, condition or occupancy of the leased premises. Lessee
will comply with the rules and regulations of the building adopted by Lessor
which are set forth on a schedule attached to this Lease. Lessor shall have the
right at all times to change and amend the rules and regulations in any
reasonable manner as may be deemed advisable for the safety, care, cleanliness,
preservation of good order and operation or use of the building or the leased
premises. All changes and amendments to the rules and regulations of the
building will be sent by Lessor to Lessee in writing and shall thereafter be
carried out and observed by Lessee.
3.04 Warranty of Possession. Lessor warrants that it has the right and
authority to execute this Lease, and Lessee, upon payment of the required rents
and subject to the terms, conditions, covenants and agreements contained in this
Lease, shall have possession of the leased premises during the full term of this
Lease as well as any extension or renewal thereof. Lessor shall not be
responsible for the acts or omissions of any other lessee or third party which
are beyond Lessor's reasonable control, that may interfere with Lessee's use and
enjoyment of the leased premises.
3.05 Inspection. Lessor or its authorized agents shall at any and all
reasonable times have the right to enter the leased premises to inspect the
same, to supply janitorial service or any other service to be provided by
Lessor, to show the leased premises to prospective purchasers or lessees, and to
alter, improve or repair the leased premises or any other portion of the
building as may reasonably be necessary. Lessee hereby waives any claim for
damages for injury or inconvenience to or interference with Lessee's business,
any loss of occupancy or use of the leased premises, and any other loss
occasioned thereby. Lessor shall at all times have and retain a key with which
to unlock all of the doors in, upon and about the leased premises. Lessee shall
not change Lessor's lock system or in any other manner prohibit Lessor from
entering the leased premises. Lessor shall have the right to use any and all
means which Lessor may deem proper to open any door in an emergency without
liability therefor.
ARTICLE 4.00 UTILITIES AND SERVICE
4.01 Building Services. Lessor shall provide water and electricity for
Lessee during the terms of this Lease. Lessee shall pay all telephone charges.
Lessor shall furnish Lessee hot and cold water at those points of supply
provided for general use of other lessees in the building, central heating and
air conditioning in season (at times Lessor normally provides these services to
other lessees in the building, and at temperatures and in amounts as are
considered by Lessor to be standard or in compliance with any governmental
regulations, such service on Saturday afternoons, Sundays, evenings and holidays
to be furnished only upon the request of Lessee, who shall bear the entire
cost). Lessor shall also provide routine maintenance, painting and electric
lighting service for all public areas and special service areas of the building
in the manner and to the extent deemed by Lessor to be standard. Lessor may, in
its sole discretion, provide additional services not enumerated herein.
Temporary failure by Lessor to any extent to provide these defined services or
any other services not enumerated, or any cessation thereof, shall not render
Lessor liable in any respect for damages to either person or property, be
construed as an eviction of Lessee, work an abatement of rent or relieve Lessee
from fulfillment of any covenant in this Lease. Should any of the equipment or
machinery break down, or for any cause cease to function properly, Lessor shall
use reasonable diligence to repair the same promptly, but Lessee shall have no
claim for rebate of rent on account of any interruption in service occasioned
from the repairs. See Item #6 of Exhibit "B" attached hereto and made a part
hereof. Lessor reserves the right from time to time to make changes in the
utilities and services provided by Lessor to the building.
4.02 Theft or Burglary. Lessor shall not be liable to Lessee for losses
to Lessee's property or personal injury caused by criminal acts or entry by
unauthorized persons into the leased premises or the building, except as may be
caused by Lessor's gross negligence of willful misconduct.
4.03 Janitorial Service. Lessor shall furnish janitorial services to the
leased premises and public areas of the building five times per week during the
term of this Lease, excluding holidays. Lessor shall not provide janitorial
service to kitchens or storage areas included in the leased premises.
4.04 Excessive Utility Consumption. Lessee shall pay all utility costs
occasioned by electrodata processing machines, telephone equipment, computers
and other equipment of high electrical consumption, including without
limitation, the cost of installing, servicing and maintaining any special or
additional inside or outside wiring or lines, meters or submeters, transformers,
poles, air conditioning costs, or the cost of any other equipment necessary to
increase the amount or type of electricity or power available to the leased
premises.
4.05 Window Coverings. Lessor shall furnish and install window coverings
on all exterior windows to maintain a uniform exterior appearance. Lessee shall
not remove or replace these window coverings or install any other window
covering which would affect the exterior appearance of the building. Lessee may
install lined or unlined over draperies on the interior sides of the Lessor
furnished window coverings for interior appearance or to reduce light
transmission, provided such over draperies do not affect the exterior appearance
of the building or affect the operation of the building's heating, ventilating
and air conditioning systems.
4.06 Charge for Service. All costs of Lessor for providing the services
set forth in article 4.00 (except those charges paid by Lessee pursuant to
section 4.04) shall be subject to the additional rent provisions in section
2.02.
ARTICLE 5.00 REPAIRS AND MAINTENANCE
5.01 Lessor Repairs. Lessor shall not be required to make any
improvements, replacements or repairs of any kind or character to the leased
premises or the project during the term of this Lease except as are set forth in
this section. Lessor shall maintain only the roof, foundation, parking and
common areas, the structural soundness of the exterior walls, doors, corridors,
windows and other structures or equipment serving the leased premises. Lessor's
cost of maintaining and repairing the items set forth in this section are
subject to the additional rent provisions in
-2-
<PAGE>
section 2.02. Lessor shall not be liable to Lessee, except as expressly provided
in this Lease, for any damage or inconvenience, and Lessee shall not be entitled
to any abatement or reduction of rent by reason of any repairs, alterations or
additions made by Lessor under this Lease.
5.02 Lessee Repairs. Lessee shall, at its own cost and expense, repair or
replace any damage or injury to all or any part of the leased premises caused
by any act or omission of Lessee or Lessee's agents, employees, invitees,
licensees or visitors; provided, however, if Lessee fails to make the repairs or
replacements promptly, Lessor may, at its option, make the repairs or
replacements, and the costs of such repairs or replacements shall be charged to
Lessee as additional rent and shall become payable by Lessee with the payment of
the rent next due hereunder.
5.03 Request for Repairs. All requests for repairs or maintenance that are
the responsibility of Lessor pursuant to any provision of this Lease must be
made in writing to Lessor at the address in section 1.05.
5.04 Lessee Damages. Lessee shall not allow any damage to be committed on
any portion of the leased premises or building, and at the termination of this
Lease, by lapse of time or otherwise, Lessee shall return the leased premises to
Lessor in as good condition as existed at the commencement date of this Lease,
ordinary wear and tear excepted. The reasonable cost and expense of any repairs
necessary to restore the condition of the leased premises shall be borne by
Lessee.
ARTICLE 6.00 ALTERATIONS AND IMPROVEMENTS
6.01 Lessor Improvements. If construction to the leased premises is to be
performed by Lessor prior to or during Lessee's occupancy, Lessor will complete
the construction of the improvements to the leased premises in accordance with
plans and specifications agreed to by Lessor and Lessee, which plans and
specifications are made a part of this Lease by reference. Within seven days of
receipt of plans and specifications, Lessee shall execute a copy of the plans
and specifications and, if applicable, change orders setting forth the amount of
any costs to be borne by Lessee. In the event Lessee fails to execute the plans
and specifications and change order within the seven day period, Lessor may, at
its sole option, declare this Lease cancelled or notify Lessee that the base
rent shall commence on the completion date even though the improvements to be
constructed by Lessor may not be complete. Any changes or modifications to the
approved plans and specifications shall be made and accepted by written change
order or agreement signed by Lessor and Lessee and shall constitute an
amendment to this Lease.
6.02 Lessee Improvements. Lessee shall not make or allow to be made any
alterations or physical additions in or to the leased premises without first
obtaining the written consent of Lessor, which consent may in the sole and
absolute discretion of Lessor be denied. Any alterations, physical additions or
improvements to the leased premises made by Lessee shall at once become the
property of Lessor and shall be surrendered to Lessor upon the termination of
this Lease; provided, however, Lessor, at its option, may require Lessee to
remove any physical additions and/or repair any alterations made without
Lessor's consent in order to restore the leased premises to the
condition existing at the time Lessee took possession, all costs of removal
and/or alterations to be borne by Lessee. This clause shall not apply to
moveable equipment or furniture owned by Lessee, which may be removed by Lessee
at the end of the term of this Lease if Lessee is not then in default and if
such equipment and furniture are not then subject to any other rights, liens and
interests of Lessor.
6.03 Mechanics Lien. Lessee will not permit any mechanic's or
materialman's lien(s) or other lien to be placed upon the leased premises or the
building and nothing in this Lease shall be deemed or construed in any way as
constituting the consent or request of Lessor, express or implied, by inference
or otherwise, to any person for the performance of any labor or the furnishing
of any materials to the leased premises, or any part thereof, nor as giving
Lessee any right, power, or authority to contract for or permit the rendering of
any services or the furnishing of any materials that would give rise to any
mechanic's, materialman's or other lien against the leased premises. In the
event any such lien is attached to the leased premises, then, in addition to any
other right or remedy of Lessor, Lessor may, but shall not be obligated to,
obtain the release of or otherwise discharge the same. Any amount paid by Lessor
for any of the aforesaid purposes shall be paid by Lessee to Lessor on demand as
additional rent.
ARTICLE 7.00 CASUALTY AND INSURANCE
7.01 Substantial Destruction. If the leased premises should be totally
destroyed by fire or other casualty, or if the leased premises should be damaged
so that rebuilding cannot reasonably be completed within sixty working days
after the date of written notification by Lessee to Lessor of the destruction,
this Lease shall terminate and the rent shall be abated for the unexpired
portion of the Lease, effective as of the date of the written notification.
7.02 Partial Destruction. If the leased premises should be partially
damaged by fire or other casualty, and rebuilding or repairs can reasonably be
completed within sixty working days from the date of written notification by
Lessee to Lessor of the destruction, this Lease shall not terminate, and Lessor
shall at its sole risk and expense proceed with reasonable diligence to rebuild
or repair the building or other improvements to substantially the same condition
in which they existed prior to the damage. If the leased premises are to be
rebuilt or repaired and are untenantable in whole or in part following the
damage, and the damage or destruction was not caused or contributed to by act or
negligence of Lessee, its agents, employees, invitees or those for whom Lessee
is responsible, the rent payable under this Lease during the period for which
the leased premises are untenantable shall be adjusted to such an extent as may
be fair and reasonable under the circumstances. In the event that Lessor fails
to complete the necessary repairs or rebuilding within sixty working days from
the date of written notification by Lessee to Lessor of the destruction, Lessee
may at its option terminate this Lease by delivering written notice of
termination to Lessor, whereupon all rights and obligations under this Lease
shall cease to exist.
7.03 Property Insurance. Lessor shall at all times during the term of this
Lease maintain a policy or policies of insurance with the premiums paid in
advance, issued by and binding upon some solvent insurance company, insuring the
building against all risk of direct physical loss in an amount equal to at least
ninety percent of the full replacement cost of the building structure and its
improvements as of the date of the loss; provided, Lessor shall not be obligated
in any way or manner to insure any personal property (including, but not limited
to, any furniture, machinery, goods or supplies) of Lessee upon or within the
leased premises, any fixtures installed or paid for by Lessee upon or within the
leased premises, or any improvements which Lessee may construct on the leased
premises. Lessee shall have no right in or claim to the proceeds of any policy
of insurance maintained by Lessor even though the cost of such insurance is
borne by Lessee as set forth in Article 2.00.
7.04 Waiver of Subrogation. Anything in this Lease to the contrary
notwithstanding, Lessor and Lessee hereby waive and release each other of and
from any and all right of recovery, claim, action or cause of action, against
each other, their agents, officers and employees, for any loss or damage that
may occur to the leased premises, improvements to the building of which the
leased premises are a part, or personal property within the building, by reason
of fire or the elements, regardless of cause or origin, including negligence of
Lessor or Lessee and their agents, officers and employees. Lessor and Lessee
agree immediately to give their respective insurance companies which have issued
policies of insurance covering all risk of direct physical loss, written notice
of the terms of the mutual waivers contained in this section, and to have the
insurance policies properly endorsed, if necessary, to prevent the invalidation
of the insurance coverages by reason of the mutual waivers.
7.05 Hold Harmless. Lessor shall not be liable to Lessee's employees,
agents, invitees, licensees or visitors, or to any other person, for an injury
to person or damage to property on or about the leased premises caused by any
act or omission of Lessee, its agents, servants or employees, or of any other
person entering upon the leased premises under express or implied invitation by
Lessee, or caused by the improvements located on the leased premises becoming
out of repair, the failure or cessation of any service provided by Lessor
(including security service and devices), or caused by leakage of gas, oil,
water or steam or by electricity emanating from the leased premises. Lessee
agrees to indemnify and hold harmless Lessor of and from any loss, attorney's
fees, expenses or claims arising out of any such damage or injury. See item #7
of Exhibit "B" attached hereto and made a part hereof.
ARTICLE 8.00 CONDEMNATION
8.01 Substantial Taking. If all or a substantial part of the leased
premises are taken for any public or quasi-public use under any governmental
law, ordinance or regulation, or by right of eminent domain or by purchase in
lieu thereof, and the taking would prevent or materially interfere with the use
of the leased premises for the purpose for which it is then being used, this
Lease shall terminate and the rent shall be abated during the unexpired portion
of this Lease effective on the date physical possession is taken by the
condemning authority. Lessee shall have no claim to the condemnation award or
proceeds in lieu thereof.
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<PAGE>
8.02 Partial Taking. If a portion of the leased premises shall be taken
for any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
this Lease is not terminated as provided in section 8.01 above, Lessor shall at
Lessor's sole risk and expense, restore and reconstruct the building and other
improvements on the leased premises to the extent necessary to make it
reasonably tenantable. The rent payable under this Lease during the unexpired
portion of the term shall be adjusted to such an extent as may be fair and
reasonable under the circumstances. Lessee shall have no claim to the
condemnation award or proceeds in lieu thereof.
ARTICLE 9.00 ASSIGNMENT OR SUBLEASE
9.01 Lessor Assignment. Lessor shall have the right to sell, transfer or
assign, in whole or in part, its rights and obligations under this Lease and in
the building. Any such sale, transfer or assignment shall operate to release
Lessor from any and all liabilities under this Lease arising after the date of
such sale, assignment or transfer.
9.02 Lessee Assignment. Lessee shall not assign, in whole or in part, this
Lease, or allow it to be assigned, in whole or in part, by operation of law or
otherwise (including without limitation by transfer of a majority interest of
stock, merger or dissolution, which transfer of majority interest of stock,
merger or dissolution shall be deemed an assignment or mortgage or pledge the
same, or sublet the leased premises, in whole or in part, without the prior
written consent of Lessor, which consent shall not be unreasonably withheld, and
in no event shall any such assignment or sublease ever release Lessee or any
guarantor from any obligation or liability hereunder. No assignee or sublessee
of the leased premises or any portion thereof may assign or sublet the leased
premises or any portion thereof.
9.03 Conditions of Assignment. If Lessee desires to assign or sublet all
or any part of the leased premises, it shall so notify Lessor at least thirty
days in advance of the date on which Lessee desires to make such assignment or
sublease. Lessee shall provide Lessor with a copy of the proposed assignment or
sublease and such information as Lessor might request concerning the proposed
sublessee or assignee to allow Lessor to make informed judgments as to the
financial condition, reputation, operations and general desirability of the
proposed sublessee or assignee. Within fifteen days after Lessor's receipt of
Lessee's proposed assignment or sublease and all required information concerning
the proposed sublessee or assignee, Lessor shall have the following options: (1)
cancel this Lease as to the leased premises or portion thereof proposed to be
assigned or sublet; (2) consent to the proposed assignment or sublease, and, if
the rent due and payable by any assignee or sublessee under any such permitted
assignment or sublease (or a combination of the rent payable under such
assignment or sublease plus any bonus or any other consideration or any payment
incident thereto) exceeds the rent payable under this Lease for such space,
Lessee shall pay to Lessor all such excess rent and other excess consideration
within ten days following receipt thereof by Lessee; or (3) refuse, in its sole
and absolute discretion and judgment, to consent to the proposed assignment or
sublease, which refusal shall be deemed to have been exercised unless Lessor
gives Lessee written notice providing otherwise. Upon the occurrence of an event
of default, if all or any part of the leased premises are then assigned or
sublet, Lessor, in addition to any other remedies provided by this Lease or
provided by law, may, at its option, collect directly from the assignee or
sublessee all rents becoming due to Lessee by reason of the assignment or
sublease, and Lessor shall have a security interest in all properties on the
leased premises to secure payment of such sums. Any collection directly by
Lessor from the assignee or sublessee shall not be construed to constitute a
novation or a release of Lessee or any guarantor from the further performance of
its obligations under this Lease. See Item #3 of Exhibit "B" attached hereto
and made a part hereof.
9.04 Subordination. Lessee accepts this Lease subject and subordinate to
any recorded mortgage or deed of trust lien presently existing or hereafter
created upon the building or project and to all existing recorded restrictions,
covenants, easements and agreements with respect to the building or project.
Lessor is hereby irrevocably vested with full power and authority to subordinate
Lessee's interest under this Lease to any first mortgage or deed of trust lien
hereafter placed on the leased premises, and Lessee agrees upon demand to
execute additional instruments subordinating this Lease as Lessor may require.
If the interests of Lessor under this Lease shall be transferred by reason of
foreclosure or other proceedings for enforcement of any first mortgage or deed
of trust lien on the leased premises, Lessee shall be bound to the transferee
(sometimes called the "Purchaser") at the option of the Purchaser, under the
terms, covenants and conditions of this Lease for the balance of the term
remaining, including any extensions or renewals, with the same force and effect
as if the Purchaser were Lessor under this Lease, and, if requested by the
Purchaser, Lessee agrees to attorn to the Purchaser, including the first
mortgagee under any such mortgage if it be the Purchaser, as its Lessor.
See Item #8 of Exhibit "B" attached hereto and made a part hereof.
9.05 Estoppel Certificates. Lessee agrees to furnish, from time to time,
within 15 days after receipt of a request from Lessor or Lessor's mortgagee, a
statement certifying, if applicable, the following: Lessee is in possession of
the leased premises; the leased premises are acceptable; the Lease is in full
force and effect; the Lease is unmodified; Lessee claims no present charge,
lien, or claim of offset against rent; the rent is paid for the current month,
but is not prepaid for more than one month and will not be prepaid for more than
one month in advance; Lessee has no knowledge of an existing default by reason
of some act or omission by Lessor; and such other matters as may be reasonably
required by Lessor or Lessor's mortgagee. Lessee's failure to deliver such
statement, in addition to being a default under this Lease, shall be deemed to
establish conclusively that this Lease is in full force and effect except as
declared by Lessor, that Lessor is not in default of any of its obligations
under this Lease to Lessee's knowledge, and that Lessor has not received more
than one month's rent in advance.
ARTICLE 10.00 LIENS
10.01 Landlord's Lien. As security for payment of rent, damages and all
other payments required to be made by this Lease, Lessee hereby grants to
Lessor a lien upon all property of Lessee now or subsequently located upon the
leased premises. If Lessee abandons or vacates any substantial portion of the
leased premises or is in default in the payment of any rentals, damages or other
payments required to be made by this Lease or is in default of any other
provision of this Lease, Lessor may enter upon the leased premises, by picking
or changing locks if necessary, and take possession of all or any part of the
personal property, and may sell all or any part of the personal property at a
public or private sale, in one or successive sales, with or without notice, to
the highest bidder for cash, and, on behalf of Lessee, sell and convey all or
part of the personal property to the highest bidder, delivering to the highest
bidder all of Lessee's title and interest in the personal property sold. The
proceeds of the sale of the personal property shall be applied by Lessor toward
the reasonable costs and expenses of the sale, including attorney's fees, and
then toward the payment of all sums then due by Lessee to Lessor under the terms
of this Lease. Any excess remaining shall be paid to Lessee or any other person
entitled thereto by law.
10.02 Uniform Commercial Code. This Lease is intended as and constitutes a
security agreement within the meaning of the Uniform Commercial Code of the
state in which the leased premises are situated. Lessor, in addition to the
rights prescribed in this Lease, shall have all of the rights, titles, liens and
interests in and to Lessee's property, now or hereafter located upon the leased
premises, which may be granted a secured party, as that term is defined, under
the Uniform Commercial Code to secure to Lessor payment of all sums due and the
full performance of all Lessee's covenants under this Lease.
ARTICLE 11.00 DEFAULT AND REMEDIES
11.01 Default by Lessee. The following shall be deemed to be events of
default by Lessee under this Lease; (1) Lessee shall fail to pay when due any
installment of rent or any other payment required pursuant to this Lease and
such failure is not cured within ten days after written notice to Lessee; (2)
Lessee shall abandon any substantial portion of the leased premises; (3) Lessee
shall fail to comply with any term, provision or covenant of this Lease, other
than the payment of rent, and the failure is not cured within 20 days after
written notice to Lessee; (4) Lessee shall file a petition or be adjudged
bankrupt or insolvent under any applicable federal or state bankruptcy or
insolvency law or admit that it cannot meet its financial obligations as they
become due; or a receiver or trustee shall be appointed for all or substantially
all of the assets of Lessee; or Lessee shall make a transfer in fraud of
creditors or shall make an assignment for the benefit of creditors; or (5)
Lessee shall do or permit to be done any act which results in a lien being filed
against the leased premises or the building and/or project of which the leased
premises are a part.
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<PAGE>
11.02 Remedies for Lessee's Default. Upon the occurrence of any event of
default set forth in this Lease, Lessor shall have the option to pursue any one
or more of the remedies set forth herein without any notice or demand. (1)
Lessor may enter upon and take possession of the leased premises, by picking or
changing locks if necessary, and lock out, expel or remove Lessee and any other
person who may be occupying all or any part of the leased premises without being
liable for any claim for damages, and relet the leased premises on behalf of
Lessee and receive the rent directly by reason of the reletting. Lessee agrees
to pay Lessor on demand any deficiency that may arise by reason of any reletting
of the leased premises; further, Lessee agrees to reimburse Lessor for any
expenditures made by it in order to relet the leased premises, including, but
not limited to, remodeling and repair costs. (2) Lessor may enter upon the
leased premises, by picking or changing locks if necessary, without being liable
for any claim for damages, and do whatever Lessee is obligated to do under the
terms of this Lease. Lessee agrees to reimburse Lessor on demand for any
expenses which Lessor may incur in effecting compliance with Lessee's
obligations under this Lease; further, Lessee agrees that Lessor shall not be
liable for any damages resulting to Lessee from effecting compliance with
Lessee's obligations under this Lease caused by the negligence of Lessor or
otherwise. (3) Lessor may terminate this Lease, in which event Lessee shall
immediately surrender the leased premises to Lessor, and if Lessee fails to
surrender the leased premises, Lessor may, without prejudice to any other remedy
which it may have for possession or arrearages in rent, enter upon and take
possession of the leased premises, by picking or changing locks if necessary,
and lock out, expel or remove Lessee and any other person who may be occupying
all or any part of the leased premises without being liable for any claim for
damages. Lessee agrees to pay on demand the amount of all loss and damage which
Lessor may suffer by reason of the termination of this Lease under this
section, whether through inability to relet the leased premises on satisfactory
terms or otherwise. Notwithstanding any other remedy set forth in this Lease, in
the event Lessor has made rent concessions of any type or character, or waived
any base rent, and Lessee fails to take possession of the leased premises on the
commencement or completion date or otherwise defaults at any time during the
term of this Lease, the rent concessions, including any waived base rent, shall
be cancelled and the amount of the base rent or other rent concessions shall be
due and payable immediately as if no rent concessions or waiver of any base rent
had ever been granted. A rent concession or waiver of the base rent shall not
relieve Lessee of any obligation to pay any other charge due and payable under
this Lease including without limitation any sum due under section 2.02.
Notwithstanding anything contained in this Lease to the contrary, this Lease may
be terminated by Lessor only by mailing or delivering written notice of such
termination to Lessee, and no other act or omission of Lessor shall be construed
as a termination of this Lease.
ARTICLE 12.00 RELOCATION
ARTICLE 13.00 DEFINITIONS
13.01 Abandon. "Abandon" means the vacating of all or a substantial
portion of the leased premises by Lessee, whether or not Lessee is in default of
the rental payments due under this Lease.
13.02 Act of God or Force Majeure. An "act of God" or "force majeure" is
defined for purposes of this Lease as strikes, lockouts, sitdowns, material or
labor restrictions by any governmental authority, unusual transportation delays,
riots, floods, washouts, explosions, earthquakes, fire, storms, weather
(including wet grounds or inclement weather which prevents construction), acts
of the public enemy, wars, insurrections and any other cause not reasonably
within the control of Lessor and which by the exercise of due diligence Lessor
is unable, wholly or in part, to prevent or overcome.
13.03 Building or Project. "Building" or "project" as used in this Lease
means the building and/or project described in section 1.02, including the
leased premises and the land upon which the building or project is situated.
13.04 Commencement Date. "Commencement date" shall be the date set forth
in section 1.03. The commencement date shall constitute the commencement of the
term of this Lease for all purposes, whether or not Lessee has actually taken
possession.
13.05 Completion Date. "Completion date" shall be the date on which the
improvements erected and to be erected upon the leased premises shall have been
completed in accordance with the plans and specifications described in article
6.00. The completion date shall constitute the commencement of the term of this
Lease for all purposes, whether or not Lessee has actually taken possession.
Lessor shall use its best efforts to establish the completion date as the date
set forth in section 1.03. In the event that the improvements have not in fact
been completed as of that date, Lessee shall notify Lessor in writing of its
objections. Lessor shall have a reasonable time after delivery of the notice in
which to take such corrective action as may be necessary and shall notify Lessee
in writing as soon as it deems such corrective action has been completed and the
improvements are ready for occupancy. Upon completion of construction, Lessee
shall deliver to Lessor a letter accepting the leased premises as suitable for
the purposes for which they are let and the date of such letter shall constitute
the commencement of the term of this Lease. Whether or not Lessee has executed
such letter of acceptance, taking possession of the leased premises by Lessee
shall be deemed to establish conclusively that the improvements have been
completed in accordance with the plans and specifications, are suitable for the
purposes for which the leased premises are let, and that the leased premises are
in good and satisfactory condition as of the date possession was so taken by
Lessee, except for latent defects, if any.
13.06 Square Feet. "Square feet" or "square foot" as used in this Lease
includes the area contained within the leased premises together with a common
area percentage factor of the leased premises proportionate to the total
building area.
ARTICLE 14.00 MISCELLANEOUS
14.01 Waiver. Failure of Lessor to declare an event of default immediately
upon its occurrence, or delay in taking any action in connection with an event
of default, shall not constitute a waiver of the default, but Lessor shall have
the right to declare the default at any time and take such action as is lawful
or authorized under this Lease. Pursuit of any one or more of the remedies set
forth in article 11.00 above shall not preclude pursuit of any one or more of
the other remedies provided elsewhere in this Lease or provided by law, nor
shall pursuit of any remedy constitute forfeiture or waiver of any rent or
damages accruing to Lessor by reason of the violation of any of the terms,
provisions or covenants of this Lease. Failure by Lessor to enforce one or more
of the remedies provided upon an event of default shall not be deemed or
construed to constitute a waiver of the default or of any other violation or
breach of any of the terms, provisions and covenants contained in this Lease.
14.02 Act of God. Lessor shall not be required to perform any covenant or
obligation in this Lease, or be liable in damages to Lessee, so long as the
performance or non-performance of the covenant or obligation is delayed, caused
or prevented by an act of God, force majeure or by Lessee.
14.03 Attorney's Fees. In the event either party defaults in the
performance of any of the terms, covenants, agreements or conditions contained
in this Lease and the other party places in the hands of an attorney the
enforcement of all or any part of this Lease, the collection of any rent due or
to become due or recovery of the possession of the leased premises the
defaulting party agrees to pay the prevailing party costs of collection,
including reasonable attorney's fees for the services of the attorney, whether
suit is actually filed or not.
14.04 Successors. This Lease shall be binding upon and inure to the
benefit of Lessor and Lessee and their respective heirs, personal
representatives, successors and assigns. It is hereby covenanted and agreed that
should Lessor's interest in the leased premises cease to exist for any reason
during the term of this Lease, then notwithstanding the happening of such event
this Lease nevertheless shall remain unimpaired and in full force and effect,
and Lessee hereunder agrees to attorn to the then owner of the leased premises.
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<PAGE>
14.05 Rent Tax. If applicable in the jurisdiction where the leased
premises are situated. Lessee shall pay and be liable for all rental, sales and
use taxes or other similar taxes, if any, levied or imposed by any city, state,
county or other governmental body having authority, such payments to be in
addition to all other payments required to be paid to Lessor by Lessee under the
terms of this Lease. Any such payment shall be paid concurrently with the
payment of the rent, additional rent, operating expenses or other charge upon
which the tax is based as set forth above.
14.06 Captions. The captions appearing in this Lease are inserted only as
a matter of convenience and in no way define, limit, construe or describe the
scope or intent of any section.
14.07 Notice. All rent and other payments required to be made by Lessee
shall be payable to Lessor at the address set forth in section 1.05. All
payments required to be made by Lessor to Lessee shall be payable to Lessee at
the address set forth in section 1.05, or at any other address within the United
States as Lessee may specify from time to time by written notice. Any notice or
document required or permitted to be delivered by the terms of this Lease shall
be deemed to be delivered (whether or not actually received) when deposited in
the United States Mail, postage prepaid, certified mail, return receipt
requested, addressed to the parties at the respective addresses set forth in
section 1.05.
14.08 Submission of Lease. Submission of this Lease to Lessee for
signature does not constitute a reservation of space or an option to lease. This
Lease is not effective until execution by and delivery to both Lessor and
Lessee.
14.09 Corporate Authority. If Lessee executes this Lease as a corporation,
each of the persons executing this Lease on behalf of Lessee does hereby
personally represent and warrant that Lessee is a duly authorized and existing
corporation, that Lessee is qualified to do business in the state in which the
leased premises are located, that the corporation has full right and authority
to enter into this Lease, and that each person signing on behalf of the
corporation is authorized to do so. In the event any representation or warranty
is false, all persons who execute this Lease shall be liable, individually, as
Lessee.
14.10 Severability. If any provision of this Lease or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Lease and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
14.11 Lessor's Liability. If Lessor shall be in default under this Lease
and, if as a consequence of such default, Lessee shall recover a money judgment
against Lessor, such judgment shall be satisfied only out of the right, title
and interest of Lessor in the building as the same may then be encumbered and
neither Lessor nor any person or entity comprising Lessor shall be liable for
any deficiency. In no event shall Lessee have the right to levy execution
against any property of Lessor nor any person or entity comprising Lessor other
than its interest in the building as herein expressly provided.
14.12 Indemnity. Lessor agrees to indemnify and hold harmless Lessee from
and against any liability or claim, whether meritorious or not, arising with
respect to any broker whose claim arises by, through or on behalf of Lessor.
Lessee agrees to indemnify and hold harmless Lessor from and against any
liability or claim, whether meritorious or not, arising with respect to any
broker whose claim arises by, through or on behalf of Lessee.
ARTICLE 15.00 AMENDMENT AND LIMITATION OF WARRANTIES
15.01 Entire Agreement. IT IS EXPRESSLY AGREED BY LESSEE, AS A MATERIAL
CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE
SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF
THE PARTIES; THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES,
UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR
TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN
WRITING IN THIS LEASE.
15.02 Amendment. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR
EXTENDED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LESSOR AND LESSEE.
15.03 Limitation of Warranties. LESSOR AND LESSEE EXPRESSLY AGREE THAT
THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY,
FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE,
AND THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN
THIS LEASE.
ARTICLE 16.00 OTHER PROVISIONS
16.01 See Exhibit "B", Addendum to Lease, attached hereto and made a part
hereof.
ARTICLE 17.00 SIGNATURES
SIGNED at Memphis, Tennessee this 18th day of April , 1994
--------------------------- ---- -------- --
LESSOR LESSEE
Weston Management Company as Manager for Embassy Suites, Inc.
- ---------------------------------------- -------------------------
Metropolitan Life Insurance Company a Delaware Corporation
- ---------------------------------------- -------------------------
By: David C. Peck By: Neil F. Barnhast
- ---------------------------------------- -------------------------
David C. Peck, President Vice President
- ---------------------------------------- -------------------------
(Type Name and Title) (Type Name and Title)
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<PAGE>
RULES AND REGULATIONS
1. Lessor agrees to furnish Lessee two keys without charge. Additional keys
will be furnished at a nominal charge. Lessee shall not change locks or
install additional locks on doors without prior written consent of Lessor.
Lessee shall not make or cause to be made duplicates of keys procured from
Lessor without prior approval of Lessor. All keys to leased premises shall
be surrendered to Lessor upon termination of this Lease.
2. Lessee will refer all contractors, contractor's representatives and
installation technicians rendering any service on or to the leased premises
for Lessee to Lessor for Lessor's approval before performance of any
contractual service. Lessee's contractors and installation technicians
shall comply with Lessor's rules and regulations pertaining to construction
and installation. This provision shall apply to all work performed on or
about the leased premises or project, including installation of telephones,
telegraph equipment, electrical devices and attachments and installations
of any nature affecting floors, walls, woodwork, trim, windows, ceilings
and equipment or any other physical portion of the leased premises or
project.
3. Lessee shall not at any time occupy any part of the leased premises or
project as sleeping or lodging quarters.
4. Lessee shall not place, install or operate on the leased premises or in any
part of the building any engine, stove or machinery, or conduct mechanical
operations or cook thereon or therein, or place or use in or about the
leased premises or project any explosives, gasoline, kerosene, oil, acids,
causties, or any flammable, explosive or hazardous material without written
consent of Lessor.
5. Lessor will not be responsible for lost or stolen personal property,
equipment, money or jewelry from the leased premises or the project
regardless of whether such loss occurs when the area is locked against
entry or not.
6. No dogs, cats, fowl, or other animals shall be brought into or kept in or
about the leased premises or project.
7. Employees of Lessor shall not receive or carry messages for or to any
Lessee or other person or contract with or render free or paid services to
any Lessee or to any of Lessee's agents, employees or invitees.
8. None of the parking, plaza, recreation or lawn areas, entries, passages,
doors, elevators, hallways or stairways shall be blocked or obstructed or
any rubbish, litter, trash, or material of any nature placed, emptied or
thrown into these areas or such area used by Lessee's agents, employees or
invitees at any time for purposes inconsistent with their designation by
Lessor.
9. The water closets and other water fixtures shall not be used for any
purpose other than those for which they were constructed, and any damage
resulting to them from misuse or by the defacing or injury of any part of
the building shall be borne by the person who shall occasion it. No person
shall waste water by interfering with the faucets or otherwise.
10. No person shall disturb occupants of the building by the use of any radios,
record players, tape recorders, musical instruments, the making of unseemly
noises or any unreasonable use.
11. Nothing shall be thrown out of the windows of the building or down the
stairways or other passages.
12. Lessee and its employees, agents and invitees shall park their vehicles
only in those parking areas designated by Lessor. Lessee shall furnish
Lessor with state automobile license numbers of Lessee's vehicles and its
employees' vehicles within five days after taking possession of the leased
premises and shall notify Lessor of any changes within five days after such
change occurs. Lessee shall not leave any vehicle in a state of disrepair
(including without limitation, flat tires, out of date inspection stickers
or license plates) on the leased premises or project. If Lessee or its
employees, agents or invitees park their vehicles in areas other than the
designated parking areas or leave any vehicle in a state of disrepair,
Lessor, after giving written notice to Lessee of such violation, shall have
the right to remove such vehicles at Lessee's expense.
13. Parking in a parking garage or area shall be in compliance with all parking
rules and regulations including any sticker or other identification system
established by Lessor. Failure to observe the rules and regulations shall
terminate Lessee's right to use the parking garage or area and subject the
vehicle in violation of the parking rules and regulations to removal and
impoundment. No termination of parking privileges or removal of
impoundment of a vehicle shall create any liability on Lessor or be deemed
to interfere with Lessee's right to possession of its leased premises.
Vehicles must be parked entirely within the stall lines and all directional
signs, arrows and posted speed limits must by observed. Parking is
prohibited in areas not striped for parking, in aisles, where "No Parking"
signs are posted, on ramps, in cross hatched areas, and in other areas as
may be designated by Lessor. Parking stickers or other forms of
identification supplied by Lessor shall remain the property of Lessor and
not the property of Lessee and are not transferable. Every person is
required to park and lock his vehicle. All responsibility for damages to
vehicles or persons is assumed by the owner of the vehicle or its driver.
14. Movement in or out of the building of furniture or office supplies and
equipment, or dispatch to receipt by Lessee of any merchandise or materials
which requires use of elevators or stairways, or movement through the
building entrances or lobby, shall be restricted to hours designated by
Lessor. All such movement shall be under supervision of Lessor and carried
out in the manner agreed between Lessee and Lessor by prearrangement before
performance. Such prearrangement will include determination by Lessor of
time, method, and routing of movement and limitations imposed by safety or
other concerns which may prohibit any article, equipment or any other item
from being brought into the building. Lessee assumes, and shall indemnify
Lessor against, all risks and claims of damage to persons and properties
arising in connection with any said movement, other than damage caused by
Lessor's negligence or misconduct.
15. Lesssor shall not be liable for any damages from the stoppage of elevators
for necessary or desirable repairs or improvements or delays of any sort or
duration in connection with the elevator service.
16. Lessee shall not lay floor covering within the leased premises without
written approval of the Lessor. The use of cement or other similar adhesive
materials not easily removed with water is expressly prohibited.
17. Lessee agrees to cooperate and assist Lessor in the prevention of
canvassing, soliciting and peddling within the building or project.
18. Lessor reserves the right to exclude from the building or project, between
the hours or 6:00 p.m. and 7:00 a.m. on weekdays and at all hours on
Saturday, Sunday and legal holidays, all persons who are not known to the
building or project security personnel and who do not present a pass to the
building signed by the Lessee. Each Lessee shall be responsible for all
persons for whom he supplies a pass.
19. It is Lessor's desire to maintain in the building or project the highest
standard of dignity and good taste consistent with comfort and convenience
for Lessees. Any action or condition not meeting this high standard should
be reported directly to Lessor. Your cooperation will be mutually
beneficial and sincerely appreciated. Lessor reserves the right to make
such other and further reasonable rules and regulations as in its judgment
may from time to time be necessary, for the safety, care and cleanliness of
the leased premises and for the preservation of good order therein.
<PAGE>
ACKNOWLEDGMENTS FOR LESSOR AND LESSEE
STATE OF )
)ss.
COUNTY OF )
BEFORE ME, the undersigned Notary Public in and for the State and County
aforesaid, personally appeared Neil Barnhart with whom I am personally
acquainted (or proved to me on the basis of satisfactory evidence) and who, upon
oath, acknowledged himself to be the Vice President of Embassy Suites, Inc., a
Delaware Corporation the within named bargainor, a corporation and that he as
such Vice President executed the foregoing instrument for the purposes therein
contained, by signing the name of the corporation by himself as such Vice
President.
WITNESS my hand and Official Seal at office this 29th day of March, 1994.
Michael R. Brown
-----------------------------
Notary Public
My Commission Expires:
MY COMMISSION EXPIRES SEPT. 17, 1996
- ------------------------------------
STATE OF TENNESSEE )
) ss.
COUNTY OF SHELBY )
BEFORE ME, the undersigned Notary Public in and for the State and County
aforesaid, personally appeared David C. Peck with whom I am personally
acquainted (or proved to me on the basis of satisfactory evidence) and who, upon
oath, acknowledged himself to be the President of Weston Management Company, the
within named bargainor, a corporation, and that he as such President, executed
the foregoing instrument for the purposes therein contained, by signing the name
of the corporation by himself as such President.
WITNESS my hand and Official Seal at office this 18th day of April, 1994.
Karen Cray Carter
------------------------------
Notary Public
My Commission Expires:
<PAGE>
EXHIBIT "B"
ADDENDUM TO LEASE
between
WESTON MANAGEMENT COMPANY AS MANAGER FOR
METROPOLITAN LIFE INSURANCE COMPANY, LESSOR
and
EMBASSY SUITES, INC., A DELAWARE CORPORATION, LESSEE
1. Finish Allowance: It is agreed and understood Lessor will furnish Lessee a
finish allowance of up to $11.00/rentable square foot for the completion of
the construction of the improvements as specified on floor plan as Weston
Job Number 93278, which upon completion of final design and layout will be
attached hereto and made a part hereof as Exhibit "A". Any amount in excess
of the said finish allowance, including change orders, shall be paid to
Lessor by Lessee in cash upon completion of the improvements and prior to
occupancy of the premises. Any amount due from Lessee will be invoiced when
the work is released for construction and payment in full is due on the
completion date. After thirty (30) days, past due payments will have
interest added to the unpaid balance at a rate of 1 1/2% per month until
payment, including any added interest, is received in full.
2. Section 2.02 Operating Expenses: For the purposes of this Lease, the Lessor
reserves the right to appeal the 1993 real estate taxes, and in the event
the appeal with the taxing authority produces a reduction in real estate
taxes for the year 1993, the expense stop as set forth in Section 2.02 of
this Lease shall be reduced accordingly whether the appeal is successful in
1993 or in a succeeding year.
3. Section 9.03 Conditions of Assignment: Anything in Article 9.00 Assignment
or Sublease to the contrary notwithstanding, Lessee shall have the right to
assign this Lease or sublet the leased premises without the consent of the
Lessor to (a) an affiliate or subsidiary of Lessee, (b) an entity with
which Lessee is merged or consolidated, or (c) an entity which purchases
substantially all of Lessee's assets by stock purchase or otherwise,
provided such assignee or sublessee shall continue to use the leased
premises for the same purposes and in substantially the same manner as
Lessee, and provided further that the assignee's or sublessee's financial
strength meets Lessor's financial requirements. Lessee must give Lessor
thirty (30) days written notice of such assignment or sublease as set forth
herein. No such assignment or subletting shall be construed to constitute a
novation or release Lessee from any obligation or liability under this
Lease unless such release shall be in writing and signed by Lessor. No such
assignee or sublessee may assign or sublet the leased premises or any
portion thereof without the prior written consent of Lessor.
4. Insurance: Lessee shall at Lessee's expense, obtain and keep in force at
all times during the term of this Lease, comprehensive general liability
insurance including, property damage on an occurrence basis with limits of
not less than One Million Dollars (1,000,000) combined single limit
insuring Lessor and Lessee against any liability arising out of the
ownership, use, occupancy or maintenance of the leased premises and all
areas appurtenant thereto. The limit of said insurance shall not, however,
limit the liability of the Lessee hereunder. Lessee may carry said
insurance under a blanket policy providing an endorsement naming Lessor as
an additional insured is attached thereto.
5. Section 2.07 Holding Over: If Lessee holds over with the written consent of
Lessor, the holdover rent shall be at a rate negotiated by Lessee and
Lessor.
<PAGE>
Page 2
Addendum to Lease Agreement
Embassy Suites, Inc.
6. Section 4.01 Building Services: however, if such failure is within the
reasonable control of Lessor and not subject to the provisions of Section
14.02 of the Lease, Lessee upon giving written notice to Lessor of such
failure and the failure of Lessor to use its best efforts to provide such
service, may take reasonable necessary action to provide such services. The
cost of such repair shall be reimbursed to Lessee by Lessor within ten
(10) days upon receipt of an invoice from Lessee with paid receipts or
other evidence substantiating the actual cost of the work performed.
7. Section 7.05 Hold Harmless: This clause shall not apply to negligent acts
or negligent omissions of Lessor or Lessor's agents, contractors or
employees.
8. Section 9.04 Subordination: Lessor will use reasonable and diligent effort
to obtain a non-disturbance agreement for Lessee from any future mortgagee
or lien holder. Lessor covenants that as of the date hereof there is no
mortgage deed or trust or ground and/or building leases constituting a
lien against the land and/or building.
SIGNED by Lessor at Memphis, this 18th day of April, 1994.
LESSOR LESSEE
Weston Management Company as Manager for Embassy Suites, Inc.
Metropolitan Life Insurance Company a Delaware Corporation
- ---------------------------------------- ----------------------------------
BY: David C. Peck BY: Neil F. Barnhart
------------------------------------- ----------------------------------
TITLE: TITLE: VP
---------------------------------- ---------------------------
<PAGE>
LEASEHOLD IMPROVEMENTS
----------------------
<TABLE>
<CAPTION>
Asset # Description NBV 6-1-97
- ------- ------------ ----------
<S> <C> <C>
5 Fire Extinguisher $ 77.95
6 Ice Cuber 359.50
8 Refrigerator (Partial) 142.89
9 Refrigerator (Partial) 259.79
11 Voice & Data Wiring 53.39
13 Voice & Data Wiring 81.10
14 Voice & Data Wiring 38.81
15 Paging System 4,526.31
51 Window Film 427.77
---------
TOTAL $5,967.51
</TABLE>
<PAGE>
EXHIBIT C
Value of common use items at Audubon Woods
<TABLE>
<CAPTION>
NBV 6/1/97 Months Per Month
---------- ------ ---------
<S> <C> <C> <C>
5/31/97 - 4/30/99
Common Leasehold Improvements:
- ------------------------------
Fire Extinguisher 77.95 23 3.39
Ice Cuber 359.50 23 15.63
Partial Refrigerator 142.89 23 6.21
Partial Refrigerator 259.79 23 11.30
Voice & Data Wiring 53.39 23 2.32
Voice & Data Wiring 81.10 23 3.53
Voice & Data Wiring 38.81 23 1.69
Paging System 4,526.31 23 196.80
Carpet 5,890.97 23 256.13
Carpet Installation 6,626.50 23 288.11
China, Silverware for Breakroom 154.87 23 6.73
Tables for Breakroom 173.10 23 7.53
Conference Room Chairs 2,680.59 23 116.55
Conference Room Tables 897.00 23 39.00
Other Common Use Items:
- -----------------------
Alarm System (monitoring (WAG) 25.00
Copy Machine Plus Supplies (per Margaret) 400.00
Konica is $300/month = tax = .008 per copy
Coffee Service/Breakroom Supplies @ .50/ea/da (WAG) 195.00
------
Total Monthly Charge $1,574.90
=========
</TABLE>
<PAGE>
Exhibit 3.12
REDEMPTION AGREEMENT
--------------------
THIS REDEMPTION AGREEMENT ("Agreement") is made as of February 25, 1997 by
and among Sky Games International, Inc., a Nevada Corporation ("SGII"), Anthony
Paul Clements and Rex Fortescue (each, a "Shareholder" and collectively, the
"Shareholders") and Sky Games International Ltd., a Bermuda exempted company
(the "Company").
RECITALS
--------
A. The Shareholders own 3,525,000 issued and outstanding shares of common
stock, Cdn. $.01 par value per share, of the Company (the "Common Stock") which
are held in escrow (the "Escrow" and such stock, the "Escrowed Stock") with the
Montreal Trust Company of Canada (the "Escrow Agent") pursuant to the securities
laws of British Columbia, Canada and that certain Escrow Agreement dated as of
May 27, 1992 by and among the Escrow Agent, the Company and each Shareholder
(the "Escrow Agreement").
B. The Company desires to redeem the Escrowed Stock from the Shareholders
and the Shareholders desire to have the Company redeem the Escrowed Stock in
accordance with and on the terms and conditions set forth herein.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the mutual promises herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. Representations and Warranties. Assuming receipt of the Regulatory
Approval (as defined herein) or the release of Escrowed Stock from the Escrow
for any reason whatsoever:
(a) each Shareholder, including, without limitation, SGII, hereby
represents and warrants:
(1) neither the execution and delivery of this Agreement nor the
consummation of the transactions herein contemplated will result in a
violation of any statute, regulation, order, writ, injunction,
judgment or decree of any court or governmental authority or of any
arbitration award;
(2) the Shareholder is not a party to any unexpired,
undischarged or unsatisfied written or oral contract, agreement,
indenture, mortgage, debenture, note or other instrument under the
terms of which performance by the Shareholder according to the terms
of this Agreement will be a default, or whereby timely performance by
the Shareholder according to the terms of this Agreement may be
prohibited, prevented or delayed; and
1
<PAGE>
(3) the Escrowed Stock is owned beneficially and of record by
the Shareholder in the amount set forth opposite the Shareholder's
name on Exhibit A attached hereto free and clear of all voting trust
and other voting arrangements, liens, encumbrances, security
interests, transfer restrictions and claims of every nature, other
than those obligations arising out of the Escrow Agreement or by the
shareholders of SGII set forth on Exhibit B attached hereto with
respect to and in the amount of the Escrowed Stock set forth on
Exhibit B opposite their name;
(4) the Common Stock to be acquired by the Shareholders pursuant
to this Agreement as part of the Redemption Consideration (as herein
defined) is and shall be acquired for such holder's own account, for
investment purposes only and not with a present view to, or intention
of, distribution or resale thereof in violation of the United States
Securities Act of 1933, as amended (the "1933 Act") or any state
securities laws and that, irrespective of any other provisions of this
Agreement, such Common Stock shall be transferred only in compliance
with all applicable federal and state securities laws, including,
without limitation, the 1933 Act;
(5) the shares of Common Stock to be received by the
Shareholders hereunder are not registered under the 1933 Act and must
be held by the Shareholders until such shares of Common Stock are
registered under the 1933 Act or an exemption from such registration
is available; the Company shall have no obligation to take any actions
that may be necessary to make available any exemption from
registration under the 1933 Act; and the Company shall place "stop
transfer" restrictions on the party responsible for recording
transfers of shares of Common Stock in violation of the foregoing
provisions of this paragraph;
(6) the Shareholder is familiar with Rule 144 adopted by the
United States Securities and Exchange Commission (the "SEC") which
establishes guidelines governing, among other things, the resale of
"restricted securities" (securities, such as shares of Common Stock
acquired hereunder); and
(7) the Shareholder is able to evaluate the risks and merits of
the transaction contemplated by this Agreement and of making an
informed decision with respect thereto and has had an opportunity to
ask questions and receive answers concerning the terms and conditions
of this Agreement and to consult with legal counsel regarding this
Agreement;
(b) SGII hereby represents and warrants to the Company as follows:
(1) SGII is a corporation duly organized, existing and in good
standing, under the laws of the State of Nevada;
(2) all corporate action necessary to authorize the execution
and delivery of this Agreement by SGII, and the consummation of the
transactions contemplated hereby, has been taken; and
2
<PAGE>
(3) neither the execution and delivery of this Agreement, nor
the consummation of the transactions herein contemplated, will
conflict with or result in the breach of any of the terms, conditions
or provisions of the Articles of Incorporation or the By-laws of SGII;
and
(c) the Company represents and warrants to the Shareholders as
follows:
(1) the Company is a corporation duly organized and existing
under and in compliance with the corporate laws of Bermuda;
(2) all corporate action necessary to authorize the execution
and delivery of this Agreement by the Company, and the consummation of
the transactions contemplated hereby, has been taken;
(3) neither the execution and delivery of this Agreement, nor
the consummation of the transactions herein contemplated, will
conflict with or result in the breach of any of the terms, conditions
or provisions of the Memorandum of Continuance or the Bye-laws of the
Company, or, to the Company's knowledge, result in a violation of any
statute, administrative regulation, order, writ, injunction, judgment
or decree of any court or governmental authority or of any arbitration
award;
(4) the Company is not a party to any material unexpired,
undischarged or unsatisfied written or oral contract, agreement,
indenture, mortgage, debenture, note or other instrument under the
terms of which performance by the Company according to the terms of
this Agreement will be a default or an event of acceleration, or
grounds for termination, or whereby timely performance by the Company
according to the terms of this Agreement may be prohibited, prevented
or delayed; and
(5) all shares of Common Stock issued as the Redemption
Consideration (as defined herein) pursuant to the terms of this
Agreement shall be duly and validly issued and fully paid and
nonassessable.
2. Redemption, Issuance and Cancellation. On the terms and subject to the
conditions contained in this Agreement, including, without limitation, receipt
of the Regulatory Approval, the Shareholders agree to sell the Escrowed Stock to
the Company, and the Company agrees to purchase the Escrowed Stock of each
Shareholder by issuing to each Shareholder, as directed by each Shareholder, one
(1) share of the Common Stock for every three (3) shares of Escrowed Stock
redeemed as set forth on Exhibit A attached hereto (the "Redemption
Consideration"). Upon redemption, the Company shall cancel the Escrowed Stock.
3. Time and Place of Closings. The consummation of the transactions
described in paragraph 2 hereof (the "Closing") shall be deemed to have occurred
at the offices of Altheimer & Gray, 10 South Wacker Drive, Suite 4000, Chicago,
Illinois 60606 at 10:00 a.m., local time, on the date hereof (the "Initial
Closing") and thereafter on the date which is five (5) business days following
the date of the Regulatory Approval or the date of each release of Escrowed
Stock, in whole or in part, from the Escrow for any reason whatsoever (each, a
"Closing Date").
3
<PAGE>
4. Conditions Precedent to Closing Deliveries. The obligation of each of
the Shareholders to make the deliveries set forth in Section 5 is subject to the
fulfillment of the following conditions on the Closing Date:
(a) the parties shall have received the approval of the
Superintendent of Brokers appointed under the British Columbia Securities
Act, S.B.C. 1985, c. 83, to the transactions contemplated hereby in form
and substance reasonably satisfactory to the parties (the "Regulatory
Approval"); or
(b) Escrowed Shares shall have been released, in whole or in part,
from the Escrow, for any reason whatsoever (including, without limitation,
termination of the Escrow).
5. Closing Deliveries. To effectuate the transactions contemplated
hereby:
(a) SGII shall deliver to the Company at the Initial Closing a
certified copy of the resolutions of SGII's board of directors, authorizing
the execution and performance of this Agreement and all documents to be
delivered in connection with this Agreement; and
(b) the Shareholders, including SGII, shall deliver to the Company at
each Closing all of the following:
(1) an assignment separate from certificate, duly executed in
blank, for the Escrowed Stock as to which Regulatory Approval has been
received or which has been released from the Escrow for any other
reason whatsoever and, certificates representing such Escrowed Stock;
and
(2) a certificate duly executed by each Shareholder pursuant to
which the Shareholder represents and warrants to the Company that the
Shareholder's representations and warranties to the Company are true
and correct as of the Closing Date as if then originally made and that
all documents to be executed and delivered by the Shareholder at the
Closing have been duly executed; and
(c) the Company shall deliver at Initial Closing to the Shareholders
all of the following:
(1) a certified copy of resolutions of the Company's board of
directors, authorizing the execution and performance of this Agreement
and all documents to be delivered in connection with this Agreement;
and
(2) the Redemption Consideration as set forth on Exhibit A
attached hereto; provided, however, the Company acknowledges that it
is hereby instructed by SGII to issue the number of shares of Common
Stock which constitutes part of SGII's Redemption Consideration to the
parties and in the amounts set forth on Exhibit B attached hereto and
SGII hereby agrees that it shall be responsible for the compliance by
such parties with SGII's and their obligations hereunder, including,
without limitation,
4
<PAGE>
the obligations set forth under Section 6(b);
(d) in the event the Escrowed Shares are cancelled prior to release
from the Escrow, the Shareholders, including SGII, shall deliver to the
Company a general release of the Company from all claims in connection with
the Escrowed Stock, except for obligations of the Company under this
Agreement; and
(e) the parties shall execute and deliver at any Closing, or any time
thereafter, such further documents, and shall perform such further acts, as
may be necessary or desirable to effectuate the transactions contemplated
by this Agreement.
6. Piggyback Registration.
(a) If, at any time or times, prior to the second anniversary of the
date of this Agreement the Company determines to file with the SEC a
registration statement covering any shares of Common Stock to be issued or
sold by the Company (other than shares of Common Stock which are issuable
in an offering (i) to directors and employees of the Company or its
subsidiaries pursuant to an employee stock option, bonus or other employee
benefit plan, or (ii) in connection with the acquisition of another
company's asset or business by the Company or any of its subsidiaries or
the formation of a joint venture) (a "Piggyback Event"), the Company shall
notify each Shareholder in writing of the proposed registration statement,
such notification to describe in detail the proposed registration
(including those jurisdictions where registration is required under federal
and/or state securities laws). If one or more Shareholders or parties set
forth on Exhibit B attached hereto (individually, a "Piggyback Seller" and
collectively, the "Piggyback Sellers") requests the Company in writing,
within ten (10) days of the receipt of such notification from the Company,
to include in such registration statement all, and not less than all, of
such Piggyback Seller's shares of Common Stock constituting part of the
Redemption Consideration (the "Registrable Shares") then, subject to the
remaining provisions hereof, the Company will use reasonable efforts to
include those shares in the registration statement. Each such request by a
Piggyback Seller shall specify the number of Registrable Shares intended to
be offered and sold by each such Piggyback Seller, shall express each such
Piggyback Seller's present intent to offer such Registrable Shares for
distribution, shall, if the Company has not arranged for a plan of
distribution or other marketing arrangements for such distribution,
describe the nature or method of the proposed offer and sale thereof and
shall contain the undertaking of each such Piggyback Seller to provide all
such information and materials and take all such action as may be requested
in order to permit the Company to comply with all applicable requirements
of the SEC and to obtain acceleration of the effective date of such
registration statement. The Company, at its sole option, may elect not to
proceed with the registration statement which is the subject of such
notice. The obligations of the Company under this Section 6(a) are subject
to the limitations, conditions and qualifications set forth in Section
6(b).
(b) The obligation of the Company to use its reasonable efforts to
cause Registrable Shares to be registered under the 1933 Act, pursuant to
Section 6(a) are subject to each of the following limitations, conditions
and qualifications:
(1) the Company shall be entitled to reduce the number of
Registrable Shares of any Piggyback Seller to be included in such
registration if the managing underwriter(s) of a proposed public
offering of the Company's securities advises the Company that, in its
opinion, (or, if the
5
<PAGE>
offering is not underwritten, upon the Company's reasonable
determination that) inclusion of all of such Piggyback Seller's
requested Registrable Shares would adversely affect the public
offering of securities being sold by the Company;
(2) provided that the Company has not arranged for a plan of
distribution and other marketing arrangements for such registration,
it shall be a condition of the right of a Piggyback Seller to
participate that it shall have arranged for a plan of distribution of
its Registrable Shares which are to be registered which is reasonably
acceptable to the Company and made all pertinent marketing
arrangements for such Registrable Shares;
(3) all expenses incurred in connection with any registration
or qualification pursuant to Section 6(a), including, without
limitation, all SEC registration fees, state securities filing fees,
printing expenses (excluding the printing of any agreements, memoranda
or other documents pertaining solely to the sale of Registrable Shares
by Piggyback Sellers) shall, subject to requirements of any applicable
regulatory agency, be borne by the Company, and each participating
Piggyback Seller shall bear the fees and disbursements of its own
legal counsel, underwriting or brokerage discounts and commissions,
and transfer taxes, on the sale of its Registrable Shares;
(4) the Company may require, as a condition to fulfilling its
obligations under the registration provisions of Section 6(a) of this
Agreement, receipt of executed customary indemnification agreements in
form reasonably satisfactory to the Company from the Piggyback Sellers
whose Registrable Shares are to be registered.
(5) each participating Piggyback Seller, upon receipt of any
notice from the Company that any prospectus relating to Registrable
Stock contains an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, will immediately
discontinue disposition of Registrable Stock until such Piggyback
Seller's receipt of copies of a supplemented or amended prospectus or
until such Piggyback Seller is advised in writing by the Company that
the use of the prospectus may be resumed, and, if so directed by the
Company, such Piggyback Seller will, or will request the managing
underwriter or underwriters (if any) to, deliver to the Company all
copies, other than permanent file copies then in such holder's
possession, of the prospectus covering such Registrable Shares current
at the time of receipt of such notice; and
(6) each Piggyback Seller agrees (A) to notify the Company as
promptly as practicable of any inaccuracy or change in information
previously furnished by such Piggyback Seller to the Company or of the
occurrence of any event, in either case, as a result of which any
prospectus relating to such registration contains or would contain an
untrue statement of a material fact regarding such Piggyback Seller or
omits or would omit to state any material fact regarding such
Piggyback Seller required to be stated therein or necessary to make
the statements therein not misleading, and (B) promptly to furnish to
the Company any additional information required to correct and update
any previously furnished information or required so that such
prospectus shall not contain, with respect to such Piggyback Seller,
an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing.
6
<PAGE>
7. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and shall be
binding on them and on their respective legal representatives, successors and
assigns. Each exhibit to this Agreement is incorporated herein by reference. Any
amendments to this Agreement, and any alternative or supplementary provision,
must be made in writing and duly executed by an authorized representative or
agent of each of the parties hereto.
8. Non-Waiver. Neither the failure in any one or more instances of a
party to insist upon performance of any of the terms, covenants or conditions of
this Agreement or to exercise any right or privilege conferred in this
Agreement, nor the waiver by said party of any breach of any of the terms,
covenants or conditions of this Agreement, shall be construed as a subsequent
waiver of any such terms, covenants, conditions, rights or privileges, and all
of such terms, covenants, conditions, rights or privileges shall continue and
remain in full force and effect as if no such forbearance or waiver had
occurred. Any provision of this Agreement may be waived by the party for whose
benefit it is made, but no waiver shall be effective unless it is in writing and
signed by an authorized representative or agent of the waiving party.
9. Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed to be an original, and all of which when taken
together shall constitute but one instrument.
10. Severability. The invalidity of any provision of this Agreement or a
portion of a provision shall not affect the validity of any other provision of
this Agreement or the remaining portion of the applicable provision.
11. Applicable Law. This Agreement shall be governed and controlled as to
validity, enforcement, interpretation, construction, effect and in all other
respects by the internal laws of the State of Illinois.
* * * * *
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
SKY GAMES INTERNATIONAL LTD.
By: /s/ Malcolm P. Burke
--------------------------
Its: President
--------------------------
SKY GAMES INTERNATIONAL, INC.
By:
--------------------------
Its:
--------------------------
/s/ Anthony Paul Clements
-------------------------------
Anthony Paul Clements
/s/ Rex Fortescue
-------------------------------
Rex Fortescue
8
<PAGE>
Exhibit A
---------
Escrowed Stock Ownership
------------------------
<TABLE>
<CAPTION>
No. of shares of
Shareholder No. of Escrowed Shares Redemption Consideration
- ----------- ---------------------- ------------------------
<S> <C> <C>
Sky Games International, Inc. 2,000,000 666,667
Anthony Paul Clements 1,000,000 333,333
Dr. Rex Fortescue 525,000 175,000
--------- ---------
Total 3,525,000 1,175,000
</TABLE>
9
<PAGE>
Exhibit B
---------
Recipients of SGII Redemption Consideration
-------------------------------------------
<TABLE>
<CAPTION>
No. of shares of SGII
Party Redemption Consideration
- ----- ------------------------
<S> <C>
Kenneth Brookhart 21,733
David Ziemer 16,533
John Gyarfas 6,400
Shannon Bybee 6,133
G.F. Rand Plass, Jr. 6,133
John and Mary LeCours 3,067
James Dunaway 3,067
George Fuhrmann 2,467
Bob Brown 2,467
Theresa and Larry Lightfoot 1,867
Pat and Marge Burge 1,200
Annette and Wayne West 1,200
Marlene Splaine 1,200
Florence Ziemer 1,200
John Ermatinger 1,200
Baby E. Johnson 1,200
Carl V. Massegee 867
David Lund 600
Katie and Marty Allen 533
Kimberly L. Sweningson 467
Johnny Jay 400
Ken Williams 333
Steve Rossi 267
SGII 586,133
-------
Total 666,667
</TABLE>
10
<PAGE>
Exhibit 3.13
REDEMPTION AND CANCELLATION AGREEMENT
-------------------------------------
THIS REDEMPTION AND CANCELLATION AGREEMENT ("Agreement") is made as of
April 30, 1997 by and between Sky Games International, Inc., a Nevada
Corporation ("SGII"), and Sky Games International Ltd., a Bermuda exempted
company (the "Company").
RECITALS
--------
A. SGII owns 2,000,000 issued and outstanding shares of common stock,
Cdn.$.01 par value per share, of the Company (the "Common Stock") which are held
in escrow (the "Escrow" and such stock, the "Escrowed Stock") with the Montreal
Trust Company of Canada (the "Escrow Agent") pursuant to the securities laws of
British Columbia, Canada and that certain Escrow Agreement dated as of May 27,
1992 by and among the Escrow Agent, the Company, SGII, Anthony P. Clements and
Dr. Rex Fortescue (the "Escrow Agreement").
B. SGII has issued to the Company its promissory note bearing interest at
six percent (6%) per annum in the outstanding principal amount of five hundred
forty-nine thousand six hundred fifty-one dollars ($549,651) as of the date of
this Agreement (the "Note").
B. The Company desires to redeem the Escrowed Stock from SGII and
thereafter cancel the Escrowed Stock and SGII is willing to have the Company
redeem and to agree to the cancellation of the Escrowed Stock in exchange for
cancellation of the Note and the issuance of additional shares of Common Stock
and the Company is willing to cancel the Note and issue the shares of Common
Stock, in each case in accordance with and on the terms and conditions set forth
herein.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the mutual promises herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. Representations and Warranties. Assuming receipt of the Regulatory
Approval (as defined herein) or the release of Escrowed Stock (in whole or in
part) from the Escrow for any reason whatsoever:
(a) SGII hereby represents and warrants:
(1) neither the execution and delivery of this Agreement nor the
consummation of the transactions herein contemplated will result in a
violation of any statute, regulation, order, writ, injunction,
judgment or decree of any court or governmental authority or of any
arbitration award;
(2) it is not a party to any unexpired, undischarged or
unsatisfied written or oral contract, agreement, indenture, mortgage,
debenture, note or other instrument under the terms of which
performance by it according to the terms of this Agreement will be a
default, or whereby timely performance by it according to the terms of
this Agreement
1
<PAGE>
may be prohibited, prevented or delayed;
(3) the Escrowed Stock is owned beneficially and of record by it
free and clear of all voting trust and other voting arrangements,
liens, encumbrances, security interests, transfer restrictions and
claims of every nature, other than those obligations arising out of
the Escrow Agreement or by the shareholders of SGII with respect to
and in the amount of the Escrowed Stock set forth on Exhibit A
opposite their respective name;
(4) the Common Stock to be acquired by SGII pursuant to this
Agreement as part of the Redemption Consideration (as herein defined)
is and shall be acquired for such holder's own account, for investment
purposes only and not with a present view to, or intention of,
distribution or resale thereof in violation of the United States
Securities Act of 1933, as amended (the "1933 Act") or any state
securities laws and that, irrespective of any other provisions of this
Agreement, such Common Stock shall be transferred only in compliance
with all applicable federal and state securities laws, including,
without limitation, the 1933 Act;
(5) the shares of Common Stock to be received by SGII hereunder
are not registered under the 1933 Act and must be held until such
shares of Common Stock are registered under the 1933 Act or an
exemption from such registration is available; the Company shall have
no obligation to take any actions that may be necessary to make
available any exemption from registration under the 1933 Act; and the
Company shall place "stop transfer" restrictions on the party
responsible for recording transfers of shares of Common Stock in
violation of the foregoing provisions of this paragraph;
(6) SGII is familiar with Rule 144 adopted by the United States
Securities and Exchange Commission (the "SEC") which establishes
guidelines governing, among other things, the resale of "restricted
securities" (securities, such as shares of Common Stock acquired
hereunder);
(7) SGII is able to evaluate the risks and merits of the
transaction contemplated by this Agreement and of making an informed
decision with respect thereto and has had an opportunity to ask
questions and receive answers concerning the terms and conditions of
this Agreement and to consult with legal counsel regarding this
Agreement;
(8) SGII is a corporation duly organized, existing and in good
standing, under the laws of the State of Nevada;
(9) all corporate action necessary to authorize the execution
and delivery of this Agreement by SGII, and the consummation of the
transactions contemplated hereby, has been taken; and
(10) neither the execution and delivery of this Agreement, nor
the consummation of the transactions herein contemplated, will
conflict with or result in the breach of any of the terms, conditions
or provisions of the Articles of Incorporation or
2
<PAGE>
the By-laws of SGII; and
(b) the Company represents and warrants to SGII as follows:
(1) the Company is a corporation duly organized and existing
under and in compliance with the corporate laws of Bermuda;
(2) all corporate action necessary to authorize the execution
and delivery of this Agreement by the Company, and the consummation of
the transactions contemplated hereby, has been taken;
(3) neither the execution and delivery of this Agreement, nor
the consummation of the transactions herein contemplated, will
conflict with or result in the breach of any of the terms, conditions
or provisions of the Memorandum of Continuance or the Bye-laws of the
Company, or, to the Company's knowledge, result in a violation of any
statute, administrative regulation, order, writ, injunction, judgment
or decree of any court or governmental authority or of any arbitration
award;
(4) the Company is not a party to any material unexpired,
undischarged or unsatisfied written or oral contract, agreement,
indenture, mortgage, debenture, note or other instrument under the
terms of which performance by the Company according to the terms of
this Agreement will be a default or an event of acceleration, or
grounds for termination, or whereby timely performance by the Company
according to the terms of this Agreement may be prohibited, prevented
or delayed; and
(5) all shares of Common Stock issued as the Redemption
Consideration pursuant to the terms of this Agreement shall be duly
and validly issued and fully paid.
2. Redemption, Issuance and Cancellation. On the terms and subject to the
conditions contained in this Agreement, including, without limitation, receipt
of the Regulatory Approval, (i) SGII agrees to sell, transfer and convey the
Escrowed Stock to the Company, and (ii) the Company agrees to purchase the
Escrowed Stock by (a) issuing to SGII, as directed by SGII, eighty thousand five
hundred ninety (80,590) shares of Common Stock and (b) canceling the Note (such
issuance of shares and cancellation of the Note being referred to herein as the
"Redemption Consideration"). Upon redemption of the Escrowed Stock, the Company
shall cancel the Escrowed Stock and SGII hereby agrees to the cancellation of
the Escrowed Stock. The parties hereby agree that in the event the Regulatory
Approval is not obtained, all the consideration received by SGII from the
Company under this Agreement (i.e., cancellation of the Note and the eighty
thousand five hundred ninety (80,590) shares of Common Stock) shall not be
refunded or returned to the Company due to the failure of Regulatory Approval to
have been obtained.
3. Time and Place of Closings. The consummation of the transactions
described in paragraph 2 hereof (the "Closing") shall be deemed to have occurred
at the offices of Altheimer & Gray, 10 South Wacker Drive, Suite 4000, Chicago,
Illinois 60606 at 10:00 a.m., local time, on the date hereof (the "Initial
Closing") and thereafter on the date which is five (5) business days following
the date of the Regulatory Approval or the date of each release of Escrowed
Stock, in whole or in part, from the Escrow for any reason whatsoever (each, a
"Closing Date").
3
<PAGE>
4. Conditions Precedent to Closing Deliveries. The obligation of SGII to
make the deliveries set forth in Section 5(b) is subject to the fulfillment of
the following conditions on the Closing Date:
(a) the parties shall have received the approval of the
Superintendent of Brokers appointed under the British Columbia Securities
Act, S.B.C. 1985, c. 83, to the transactions contemplated hereby in form
and substance reasonably satisfactory to the parties (the "Regulatory
Approval"); or
(b) Escrowed Stock shall have been released, in whole or in part,
from the Escrow, for any reason whatsoever (including, without limitation,
by termination of the Escrow).
5. Closing Deliveries. To effectuate the transactions contemplated
hereby:
(a) SGII shall deliver to the Company at the Initial Closing all of
the following:
(1) a certified copy of the resolutions of SGII's board of
directors, authorizing the execution and performance of this Agreement
and all documents to be delivered in connection with this Agreement;
(2) an irrevocable proxy to the Company in such form as the
Company shall specify naming such party as the Company shall determine
the proxy for SGII with respect to any and all votes SGII may now or
in the future be entitled to with respect to the Escrowed Stock; and
(3) an assignment separate from certificate, duly executed in
blank, for the Escrowed Stock; and
(b) SGII shall deliver to the Company at each Closing (including, as
applicable, the Initial Closing) an assignment separate from certificate,
duly executed in blank, for the particular Escrowed Stock as to which
Regulatory Approval has been received or which has been released from the
Escrow for any other reason whatsoever and, certificates representing such
Escrowed Stock; and
(c) the Company shall deliver at Initial Closing to SGII all of the
following:
(1) a certified copy of resolutions of the Company's board of
directors, authorizing the execution and performance of this Agreement
and all documents to be delivered in connection with this Agreement;
(2) the original Note marked "cancelled"; and
(3) the shares of Common Stock constituting part of the
Redemption Consideration; provided, however, the Company acknowledges
that it is hereby instructed by SGII to issue the number of shares of
Common Stock which constitutes part of the Redemption Consideration to
the parties and in the amounts set forth on
4
<PAGE>
Exhibit A attached hereto and SGII hereby agrees that it shall be
responsible for the compliance by such parties with SGII's and their
obligations hereunder;
(d) in the event the Escrowed Stock is cancelled (in whole or in
part) prior to release from the Escrow, SGII shall deliver to the Company a
general release of the Company from all claims in connection with the
Escrowed Stock, except for obligations of the Company under this Agreement;
and
(e) the parties shall execute and deliver at any Closing, or any time
thereafter, such further documents, and shall perform such further acts, as
may be necessary or desirable to effectuate the transactions contemplated
by this Agreement.
6. Expenses. The Company shall reimburse SGII for the reasonable
professional fees and expenses of one (1) law firm and one (1) financial advisor
incurred by it in connection with the negotiation, preparation, execution and
delivery of this Agreement upon the presentation of proper invoices therefor
(including supporting back-up such as itemization of expenses and time entries)
in an aggregate amount not to exceed ten thousand dollars ($10,000). The Company
shall not be liable for any other costs or expenses incurred by SGII in
connection with this Agreement or the performance of its obligations hereunder.
7. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and shall be
binding on them and on their respective legal representatives, successors and
assigns. Each exhibit to this Agreement is incorporated herein by reference. Any
amendments to this Agreement, and any alternative or supplementary provision,
must be made in writing and duly executed by an authorized representative or
agent of each of the parties hereto.
8. Non-Waiver. Neither the failure in any one or more instances of a
party to insist upon performance of any of the terms, covenants or conditions of
this Agreement or to exercise any right or privilege conferred in this
Agreement, nor the waiver by said party of any breach of any of the terms,
covenants or conditions of this Agreement, shall be construed as a subsequent
waiver of any such terms, covenants, conditions, rights or privileges, and all
of such terms, covenants, conditions, rights or privileges shall continue and
remain in full force and effect as if no such forbearance or waiver had
occurred. Any provision of this Agreement may be waived by the party for whose
benefit it is made, but no waiver shall be effective unless it is in writing and
signed by an authorized representative or agent of the waiving party.
9. Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed to be an original, and all of which when taken
together shall constitute but one instrument.
10. Severability. The invalidity of any provision of this Agreement or a
portion of a provision shall not affect the validity of any other provision of
this Agreement or the remaining portion of the applicable provision.
11. Applicable Law. This Agreement shall be governed and controlled as to
validity, enforcement, interpretation, construction, effect and in all other
respects by the internal laws of the State of Tennessee.
5
<PAGE>
* * * * *
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
SKY GAMES INTERNATIONAL LTD.
By:/s/ Malcolm P. Burke
--------------------------
Its: President
------------------------
SKY GAMES INTERNATIONAL, INC.
By: /s/ James P. Grymyr
-------------------------
Its: President
------------------------
6
<PAGE>
Exhibit A
---------
Recipients of Redemption Consideration
--------------------------------------
<TABLE>
<CAPTION>
No. of shares of
Party Redemption Consideration
- ----- ------------------------
<S> <C>
Kenneth Brookhart 21,744
David Ziemer 16,538
John Gyarfas 6,431
Shannon Bybee 6,125
G.F. Rand Plass, Jr. 6,125
John and Mary LeCours 3,063
James Dunaway 3,063
George Fuhrmann 2,450
Bob Brown 2,450
Theresa and Larry Lightfoot 1,837
Pat and Marge Burge 1,225
Annette and Wayne West 1,225
Marlene Splaine 1,225
Florence Ziemer 1,225
John Ermatinger 1,225
Baby E. Johnson 1,225
Carl V. Massegee 857
David Lund 612
Katie and Marty Allen 520
Kimberly L. Sweningson 483
Johnny Jay 367
Ken Williams 306
Steve Rossi 269
------
Total 80,590
======
</TABLE>
7
<PAGE>
Exhibit 3.14
CONSULTING AGREEMENT
--------------------
THIS CONSULTING AGREEMENT ("Agreement") is made as of April 30, 1997, by
and between Sky Games International Ltd., a Bermuda exempted company (the
"Company"), and James P. Grymyr ("Consultant").
R E C I T A L S
---------------
A. The Company acquired certain assets used in the Business (as herein
defined from Sky Games International Inc., a Nevada corporation controlled by
Consultant ("SGII"), pursuant to an Asset Purchase Agreement dated November 7,
1991, as amended (the "Purchase Agreement").
B. Consultant has provided various consulting and advisory services to
the Company in connection with the Business since it was acquired from SGII and
the Company desires for Consultant to continue providing such services.
C. The Company and Consultant desire to (i) specify the terms of
Consultant's role with the Company and (ii) provide for the protection of
Confidential Information (as herein defined) and restrictions on Consultant
during and following the Consulting Term (as herein defined).
A G R E E M E N T S
-------------------
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Adoption of Recitals. The parties hereto adopt the foregoing Recitals
and agree and affirm that construction of this Agreement shall be guided
thereby.
2. Definitions. For purposes of this Agreement, the following terms shall
have the following meanings:
"Affiliate" of a Person means, a spouse or child of such Person, any
other Person controlling, controlled by or under common control with such Person
and any partner of such Person if such Person is a partnership and any member of
such Person if such Person is a limited liability company;
"Board" means the board of directors of the Company;
"Business" means the development, sale and operation of content for
in-flight entertainment systems (including, without limitation, gaming systems),
and any other business conducted by the Company or any subsidiary;
"Competing Business" means any business which is, in whole or in part,
directly or indirectly, engaged in the Business;
"Confidential Information" means any information of any kind relating
to the Business,
1
<PAGE>
Exhibit 3.14
the Company Group or any Affiliates of a member of the Company Group except such
information as (a) was publicly available prior to the date of this Agreement or
becomes a part of the public domain, without fault or breach of Consultant, (b)
was known to Consultant prior to this Agreement without any obligation of
confidentiality by Consultant, (c) is rightfully obtained by Consultant from a
third party who does not have any obligation of confidentiality with respect to
such information or (d) Consultant is advised in writing by legal counsel that
such information is required to be disclosed by law and then only such
information as is required to be disclosed and only if Consultant has given the
Company reasonable prior notice of the obligation prior to any disclosure;
"Company Group" means the Company and its Subsidiaries;
"Intellectual Property" shall mean all trade secrets, ideas,
inventions, designs, developments, devices, methods and processes (whether or
not patented or patentable, reduced to practice or included in the Confidential
Information) and all patents and patent applications related thereto, all
copyrights, copyrightable works and mask works (whether or not included in the
Confidential Information) and all registrations and applications for
registration related thereto, all Confidential Information, and all other
proprietary rights contributed to, or conceived or created by, Consultant
(whether alone or jointly with others) at any time during Consultant's
engagement by the Company that: (a) relate to the Business or to the actual or
anticipated research or development of the Company Group; (b) result from any
work that Consultant performs for the Company; or (c) are created using the
equipment, supplies or facilities of the Company or any Confidential
Information.
"Person" means an individual, a partnership, a corporation, a limited
liability company or partnership, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization, or the United States of
America or any other nation, any state or other political subdivision thereof,
or any entity exercising executive, legislative, judicial, regulatory or
administrative functions of government;
"Subsidiary" means: (i) any Person of which the Company owns, directly
or indirectly, securities having a majority of the voting power in electing the
board of directors directly or through one or more subsidiaries (or, in the case
of a partnership, limited liability company or other similar entity, securities
conveying, directly or indirectly, a majority of the economic interests in such
partnership or entity), or (ii) any other Person of which any member of the
Company Group serves as general partner or managing member; and
"Termination Date" means the date on which the Consulting Term expires
or terminates or its terminated for any reason.
3. Engagement and Scope of Duties.
-------------------------------
(a) The Company hereby engages Consultant as a consultant to the
Company, and Consultant hereby accepts such engagement, to provide the services
described in paragraph (b) below, all on the terms and subject to the conditions
set forth herein.
(b) Consultant shall be reasonably available to the Board and
executive officers of the Company to render, upon request, advice with respect
to (i) the general supervision and
2
<PAGE>
Exhibit 3.14
management of the Business as conducted by the Company Group, (ii)
developing and integrating the products offered by the Company Group with
the systems of its clients, and (iii) and protecting and promoting the
reputation and goodwill of the Company Group and its products.
4. Term. The term of the engagement of Consultant by the Company as a
consultant under this Agreement (the "Consulting Term") shall:
(a) commence as of the date hereof and shall expire on April 30,
1998; and
(b) may be terminated by either party at any time: (a) by service of
written notice of such termination not less than 45 days prior to the
effective date of such termination; and (b) immediately upon a material
breach of this Agreement by the other party.
5. Consulting Fee.
(a) The Company shall issue Consultant five hundred eighty-six
thousand seventy-seven (586,077) fully paid shares of common stock, par
value Cdn.$01 per share, of the Company (the "Common Stock") as the sole
consideration for all consulting services previously furnished by
Consultant to the Company and for all services to be provided by Consultant
to the Company hereunder. Consultant shall be reimbursed for all reasonable
expenses incurred by Consultant in performing his services hereunder;
provided he has received prior written authorization from the Chief
Executive Officer to incur such specific expenses.
(b) The Company shall deliver to Consultant as promptly as
practicable but no later than May 30, 1997, a certificate representing the
Common Stock to be issued to Consultant under this Agreement bearing the
appropriate legends to indicate it is restricted stock.
(c) All payments payable to or on behalf of Consultant hereunder
shall be subject to such deductions and withholdings as required by
applicable law and the Company shall deliver a Form 1099 to Consultant.
(d) In the event this Agreement is terminated pursuant to Section
4(b), no part of the Common Stock paid pursuant to Section 5(a) as the fee
hereunder shall be refunded to the Company.
(e) In the event that Consultant sells, transfers, attempts to sell
or attempts to transfer the Common Stock to be issued to Consultant under
this Agreement within one year after issuance of the Common Stock in a
manner which violates federal or state securities laws, including, without
limitation, the 1933 Act (as herein defined), the Company shall have the
right to repurchase the Common Stock at a price of one dollar ($1.00) per
share.
6. Covenants of Non-Competition and Non-Disclosure. Consultant
acknowledges that: through his continuing service to the Company, he has had and
will have and has learned and will learn valuable trade secrets and other
proprietary information relating to the Business, including without limitation,
Confidential Information; has been and will be exposed to and may have been and
may be
3
<PAGE>
Exhibit 3.14
involved in creating Intellectual Property that may be subject to trade secret
protection; and the services of Consultant are unique. Accordingly, as an
inducement to the Company to enter into this Agreement and in consideration of
the Company's agreement contained in Sections 4 and 5 hereof, Consultant
covenants and agrees that:
(a) from the date hereof and continuing for the lesser of (x) one (1)
year from the Termination Date and (y) the longest time permitted by
applicable law, neither Consultant nor any Affiliate of Consultant shall do
any one or more of the following, directly or indirectly:
(i) engage or participate (including by advertising and other
forms of solicitation), anywhere in the world (Consultant hereby
acknowledging that since the Company's customers are international
airlines, the geographic scope of the Business as conducted by the
Company Group is worldwide), as an owner, director, employee, partner,
shareholder, consultant, or (without limitation by the specific
enumeration of the foregoing) otherwise in any Competing Business; or
(ii) take any actions which are calculated to persuade any
current or potential customers, employees, representatives or agents
of the Company Group to terminate their association with the Company;
or
(iii) hire, engage or in any way retain any person who was an
employee, representative or agent of the Company Group at any time
during the Consulting Term; and
(b) during the time that he is engaged by the Company, and for the
longest period permitted by law following the Termination Date, he will not
divulge to persons not employed or engaged by the Company or use for his
own benefit or the benefit of Persons not employed or engaged by the
Company, any Confidential Information.
In the event of any breach of subsection (a) or (b) of this Section 6, the time
period during which Consultant remains in breach of said subsection shall extend
the term of each covenant contained in said subsection for the period of such
breach. The foregoing covenants are in addition to, and shall not be construed
to be in derogation of Consultant's obligations under the Purchase Agreement.
7. Ownership. All Intellectual Property is, shall be and shall remain the
exclusive property of the Company. Consultant hereby assigns to the Company all
right, title and interest in and to the Intellectual Property; provided,
however, that, when applicable, the Company shall own the copyrights in all
copyrightable works included in the Intellectual Property pursuant to the "work-
made-for-hire" doctrine (rather than by assignment), as such term is defined in
the 1976 Copyright Act. All Intellectual Property shall be owned by the Company
irrespective of any copyright notices or confidentiality legends to the
contrary which may have been placed on such works by Consultant or others.
Consultant shall ensure that all copyright notices and confidentiality legends
on all Intellectual Property authored by Consultant shall conform to the
Company's practices and shall specify the Company as the owner of the work.
8. Return of Documents. Promptly upon the Termination Date, Consultant
(or in the event
4
<PAGE>
Exhibit 3.14
of his death, his personal representative) shall, at the written request of the
Company, return to the Company any and all copies (whether prepared by himself
or by any member of the Company), of books, records, notes, materials, memoranda
and other data containing or pertaining to Confidential Information or
Intellectual Property, which are in his possession or control at the time of
such termination or expiration. Consultant acknowledges that he does not have,
nor can he acquire, any property rights or claims to any of such materials or
the underlying data.
9. Cooperation. At the request of the Company or any of its Affiliates
made at any time or from time to time hereafter, Consultant (or in the event of
his death, his personal representative) shall make, execute and deliver all
applications, papers, assignments, conveyances, instruments or other documents
and shall perform or cause to be performed such other lawful acts as the Company
or any of its Affiliates may deem necessary or desirable to implement any of the
provisions of this Agreement, and he shall give testimony and cooperate with the
Company in any controversy or legal proceedings involving the Company or any of
its Affiliates. The Company shall reimburse Consultant for his reasonable
expenses which are incurred in connection with the giving of any such testimony.
10. Representations and Warranties. Consultant hereby represents and
warrants:
(a) the Common Stock to be acquired by Consultant pursuant to this
Agreement is and shall be acquired for such holder's own account, for
investment purposes only and not with a present view to, or intention of,
distribution or resale thereof in violation of the United States Securities
Act of 1933, as amended (the "1933 Act") or any state securities laws and
that, irrespective of any other provisions of this Agreement, such Common
Stock shall be transferred only in compliance with all applicable federal
and state securities laws, including, without limitation, the 1933 Act;
(b) the shares of Common Stock to be received by Consultant hereunder
are not registered under the 1933 Act and must be held until such shares of
Common Stock are registered under the 1933 Act or an exemption from such
registration is available; the Company shall have no obligation to take any
actions that may be necessary to make available any exemption from
registration under the 1933 Act; and the Company shall place "stop
transfer" restrictions on the party responsible for recording transfers of
shares of Common Stock in violation of the foregoing provisions of this
paragraph;
(c) Consultant is familiar with Rule 144 adopted by the United States
Securities and Exchange Commission (the "SEC") which establishes guidelines
governing, among other things, the resale of "restricted securities"
(securities, such as shares of Common Stock acquired hereunder);
(d) Consultant is able to evaluate the risks and merits of the
transaction contemplated by this Agreement and of making an informed
decision with respect thereto and has had an opportunity to ask questions
and receive answers concerning the terms and conditions of this Agreement
and to consult with legal counsel regarding this Agreement.
11. Expenses. The Company shall reimburse Consultant for the reasonable
professional fees and expenses of one (1) law firm and one (1) financial advisor
incurred by him in connection with the
5
<PAGE>
Exhibit 3.14
negotiation, preparation, execution and delivery of this Agreement upon the
presentation of proper invoices therefor (including supporting back-up such as
itemization of expenses and time entries) in an aggregate amount not to exceed
five thousand dollars ($5,000). The Company shall not be liable for any other
costs or expenses incurred by Consultant in connection with this Agreement or
the performance of his obligations hereunder.
12. Enforcement. Consultant agrees and acknowledges that his violation or
breach of the covenants contained in this Agreement shall cause the Company
irreparable injury and, in addition to any other right or remedy available to
the Company at law or in equity, the Company shall be entitled to enforcement by
court injunction. Notwithstanding the foregoing sentence, nothing herein shall
be construed as prohibiting the Company from also pursuing any other rights,
remedies or defenses, for such breach or threatened breach including receiving
damages and attorney's fees. The election of any remedy shall not be construed
as a waiver on the part of the Company of any rights it might otherwise have at
law or in equity. Said rights and remedies shall be cumulative.
13. Construction. In the event any court shall finally hold that the time
or territory or any other provision of this Agreement constitutes an
unreasonable restriction against Consultant, Consultant agrees that the
provisions hereof shall not be rendered void, but shall apply as to such time,
territory, and other extent as such court may judicially determine or indicate
constitutes a reasonable restriction under the circumstances involved.
14. Agreement Not a Partnership or Property Interest
(a) The parties hereto intend by this Agreement solely to effect the
engagement of Consultant as an independent contractor. No other
relationship is intended to be created between the parties hereto. Nothing
in this agreement shall be construed as (i) giving Consultant any rights as
a partner in or owner of the Company, or (ii) entitling Consultant to
control in any manner the conduct of the Company's business.
(b) Nothing in this Agreement shall be deemed to create or constitute
the relationship of employer and employee between the Company and
Consultant. Consultant shall have no authority to act on behalf of or bind
the Company.
15. Notices. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, mailed by first class mail (postage
prepaid and return receipt requested) or sent by confirmed facsimile (provided,
however, that notices delivered by facsimile shall only be effective if such
notice is also delivered by hand, or mailed by first class mail (postage prepaid
and return receipt requested) or sent by reputable overnight courier (charges
prepaid), on or before two (2) business days after its delivery by facsimile) or
by reputable overnight courier service (charges prepaid) to the recipient at the
address indicated below:
6
<PAGE>
Exhibit 3.14
To the Company:
--------------
Sky Games International Ltd.
1115-595 Howe Street
Vancouver, British Columbia V6C 2T5
Attention: Chief Executive Officer
Telecopier: (604) 687-8678
With a copy to:
--------------
Altheimer & Gray
10 South Wacker Drive
Suite 4000
Chicago, Illinois 60606
Attention: Andrew W. McCune
Telecopier: (312) 715-4800
To Consultant at his last known address and information as disclosed
by the books and record of the Company
or such other address or information or to the attention of such other person as
the recipient party shall have specified by prior written notice to the sending
party. Any notice under this Agreement shall be deemed to have been given, (a)
if delivered in person, when so delivered, (b) if sent by facsimile or overnight
courier, one business (1) day following transmission or delivery to courier (as
the case may be), or (c) if mailed, three (3) days following deposit in the
U.S. mail.
16. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original and all of which, when taken together,
shall constitute one instrument.
17. Number and Gender. As used in this Agreement and each schedule and
exhibit attached hereto, the masculine, feminine and neuter gender and the
singular or plural number shall be deemed to include the others whenever the
context so indicates or requires.
18. Descriptive Headings. Title headings are for reference purposes only
and shall have no interpretive effect.
19. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof. Any amendments to
this Agreement must be made in writing and duly executed by each of the parties
or by an authorized representative or agent of each such party.
20. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, their heirs, representatives, successors and
permitted assigns. The rights and obligations of Consultant under this
Agreement shall not be assignable without the prior written consent of the
Company.
7
<PAGE>
Exhibit 3.14
21. Applicable Law. This Agreement shall be governed as to validity,
construction and in all other respects by the laws of the State of Tennessee
applicable to contracts made in that State.
*****
8
<PAGE>
Exhibit 3.14
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
SKY GAMES INTERNATIONAL LTD.
By: /s/ Malcolm P. Burke
-----------------------------
Its: President
/s/ James P. Grymyr
-----------------------------
James P. Grymyr
9
<PAGE>
Exhibit 3.15
SHAREHOLDER RIGHTS AGREEMENT
----------------------------
This Agreement is dated as of 17 June, 1997 between Sky Games International Ltd.
("Sky Games"), a Bermuda exempted company, and Harrah's Interactive Investment
Company, a Nevada corporation ("HIIC").
WHEREAS:
A. Interactive Entertainment Limited ("IEL"), a Bermuda exempted company,
proposes to amalgamate with and into SGI Holding Corporation Limited
("SGIHC"), a Bermuda exempted company (the "Amalgamation"), pursuant to a
Plan and Agreement of Merger and Amalgamation dated 13 May, 1997 (the
"Amalgamation Agreement"), whereby each issued and outstanding share of
common stock, US$1.00 par value per share of IEL will be cancelled and, in
respect of such shares owned by HIIC, which will be converted into shares of
common stock of US$.01 par value each of the Sky Games;
B. SGIHC will amalgamate with and into Sky Games immediately after the
Amalgamation (the "Parent Amalgamation"; the company continuing therefrom is
hereafter referred to as the "Amalgamated Company").
NOW, THEREFORE, in consideration of the premises, representations, warranties
and agreements herein contained, the receipt and sufficiency of which are hereby
acknowledged, each party hereto agrees as follows:
<PAGE>
2
I. TERMS
-----
Capitalised terms not defined herein shall have the same meanings ascribed to
them as set out in the Bye-laws of Sky Games as in effect upon the closing of
the Amalgamation (the "Bye-laws").
II. BOARD APPROVAL RIGHTS
---------------------
(A) As long as the HIIC Entities own 20% or more of the outstanding Voting
Shares of the Amalgamated Company on a "fully diluted basis" (as such term is
defined in the Bye-laws), none of the following actions shall be taken by the
Amalgamated Company unless the same shall first be approved by a Special Board
Majority:
(a) the sale of all or any material portion of the assets of the
Amalgamated Company together with any corporation, partnership, joint
venture or other legal entity of which the Amalgamated Company (either
alone or through or together with any other of its Subsidiaries),
owns, directly or indirectly, fifty percent (50%) or more of the
capital stock or other equity interest the holders of which are
generally entitled to vote with respect to the election of directors
or other managing authority and/or other matters to be voted on in
such corporation, partnership, joint venture or other legal entity
(each a "Subsidiary").
(b) the incurrence, renewal, refinancing, prepayment or amendment of the
terms of indebtedness of the Amalgamated Company together with its
Subsidiaries in excess of US$5 million in any one fiscal year;
(c) the Amalgamated Company or any of its Subsidiaries entering into any
material joint venture or partnership agreement which is beyond
activities on board commercial
<PAGE>
3
aircraft through the use of in-flight entertainment hardware and
software installed or installable on aircraft seats and in aircraft
cabins;
(d) any material acquisition of assets by the Amalgamated Company or any
of its Subsidiaries, including by lease or otherwise (other than by
merger, consolidation or amalgamation) and other than pursuant to a
previously approved budget or plan, or the acquisition by the
Amalgamated Company or any of its Subsidiaries of the stock of another
entity, in each case involving an acquisition valued at US$5 million
or more;
(e) any material change in the nature of the business conducted by the
Amalgamated Company or any of its Subsidiaries;
(f) any material amendments to the MIP (as defined in the Amalgamation
Agreement) for 12 months following the closing of the Parent
Amalgamation;
(g) the adoption of any stock option plans for greater than 5% of the then
outstanding Common Shares of the Amalgamated Company on a
fully-diluted basis other than the MIP in any one fiscal year;
(h) material changes in accounting policies; and
(i) the creation or adoption of any shareholder rights plan.
<PAGE>
4
(B) As long as the HIIC Entities own 10% or more of the outstanding Voting
Shares of the Amalgamated Company on a fully diluted basis, none of the
following actions shall be taken by the Amalgamated Company unless the same
shall first be approved by a Special Board Majority:
(a) any change in or conduct of the Amalgamated Company's or any of its
Subsidiaries' business or proposed business (including, but not limited to,
the terms of repurchase or redemption of any debt from any holder thereof
if such holder would be a Disqualified Holder (as defined in the Bye-laws)
if such Person held shares of the Amalgamated Company) that would
constitute or result in; or (b) any action or inaction of or by the
Amalgamated Company or any of its Subsidiaries
which HIIC or the Affiliates of HIIC determine in their reasonable business
judgement would result in, in the case of either (a) or (b), any actual or
threatened disciplinary action or any actual or threatened regulatory sanctions
with respect to or affecting the loss of, or the inability to obtain or failure
to secure the reinstatement of, any registration, certification, license or
other regulatory approval held by HIIC or the Affiliates of HIIC in any
jurisdiction in which HIIC or any of the Affiliates of HIIC are actively
conducting business or as to which any of them has received final approval or
authorisation or proceed, even on a preliminary basis, from its respective board
of directors (or any appropriate committee established by such board of
directors) of plans to conduct business (each such change, conduct, action or
inaction referred to herein as a "Disqualifying Action"); provided, the
reasonable business judgement to be exercised by HIIC and the Affiliates of HIIC
in determining whether a Disqualifying Action has occurred or would result need
not involve any consideration of the effect of the Disqualifying Action on the
Amalgamated Company alone or together with its Subsidiaries because the purpose
of the protections afforded by the determination of a Disqualifying Action is
for the benefit of the separate businesses and investments of HIIC and the
Affiliates of HIIC.
<PAGE>
5
III. ENTIRE AGREEMENT; AMENDMENT
---------------------------
This Agreement constitutes the entire agreement between the parties in respect
of the subject matter hereof. No provision of this Agreement may be amended or
waived except by an instrument in writing executed by the parties.
IV. GOVERNING LAW
-------------
This Agreement shall be governed by and construed in accordance with the laws of
Bermuda, regardless of the laws that might otherwise govern under applicable
principles of conflict of laws of such country, and the parties hereby submit
expressly to the non-exclusive jurisdiction of the courts of Bermuda.
V. HEADINGS
--------
The headings appearing above certain paragraphs of this Agreement are for
convenience only and shall not affect the construction or interpretation hereof.
VI. ASSIGNMENT
----------
Neither this Agreement nor any of the rights, interests, or obligations
hereunder shall be assigned by operation of law or otherwise by any party hereto
without the prior written consent of the other party, and any purported
assignment without such consent shall be void; provided that HIIC may assign
this Agreement to any of its Affiliates without consent. Subject to the
foregoing sentence, this Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the parties.
VII. SEVERABILITY
------------
If any term or provision of this Agreement is invalid, illegal or incapable of
being enforced by any rule of law, or public policy, all other terms, provisions
and conditions of this Agreement shall nevertheless
<PAGE>
6
remain in full force and effect so long as the economic and legal substance of
the transactions contemplated hereby are not affected in any manner materially
adverse to any party hereto. Upon any determination that any term or other
provision hereof is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of such parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this Agreement
may be consummated as originally contemplated to the fullest extent possible.
VIII. ENFORCEMENT OF THIS AGREEMENT
The parties hereto agree that irreparable damage would occur in the event that
any of the terms or provisions of this Agreement were not performed in
accordance with their specific wording or were otherwise breached. It is
accordingly agreed that each of the parties hereto shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of Bermuda or the
United States of America or any state having jurisdiction, such remedy being in
addition to any other remedy to which any party may be entitled at law or in
equity. In any action to enforce its rights hereunder, the prevailing party
shall be entitled to recover its reasonable fees and expenses (including
reasonable attorney's fees and expenses) from the non-prevailing party.
IX. COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of which
shall be considered one and the same agreement.
<PAGE>
SIGNED by )
for and on behalf of SKY GAMES ) /s/ Laurence Geller
INTERNATIONAL LTD. in the )
presence of ) /s/ Andrew W. McCune
SIGNED by )
for and on behalf of HARRAH'S ) /s/ John M. Boushy
INTERACTIVE INVESTMENT COMPANY )
in the presence of ) /s/ John McConomy
<PAGE>
SOFTWARE LICENSE AGREEMENT
This Software License Agreement (the "License Agreement") is made effective
as of this 17 day of June, 1997 by and between Interactive Entertainment
Limited, a Bermuda exempted company, (f/k/a Sky Games International Limited)
("Licensor") and Harrah's Interactive Entertainment Company, a Nevada
corporation ("Licensee").
Recitals
A. Licensor owns, or has the right to grant license rights with respect
to, the software identified on Exhibit A hereto.
B. Licensor, SGI Holding Corporation Limited, Interactive Entertainment
Limited and Licensee have, prior to executing this License Agreement, entered
into a Plan and Agreement of Merger and Amalgamation dated as of May 13, 1997
(the "Merger").
C. Licensee and Licensor have agreed, that pursuant to the Merger,
Licensor shall grant to Licensee certain license rights to use the software
identified in Exhibit A.
D. Licensor and Licensee wish to establish in this License Agreement the
terms and conditions upon which Licensee may use the software identified in
Exhibit A.
NOW, THEREFORE, in consideration of the foregoing, of the covenants
contained herein, and of other good and valuable consideration, the parties
agree as follows:
1. DEFINITIONS
1.1 "Affiliate" means an entity, including but not limited to a
corporation, general partnership, business trust or joint venture, controlling,
controlled by or under common control of the referenced party.
1.2 "Company Premises" means any traditional casino venue (i.e., landbased
and river boat based casinos and casinos on Indian reservations) which the
Licensee or its Affiliates owns, operates, or manages.
1.3 "Derivative Software" means any enhanced or otherwise modified version
of the Software and/or Documentation created by Licensee pursuant to the license
set forth in Section 2.l (b) below.
1.4 "Documentation" means any user documentation or other written
documentation concerning the use and functioning of the Software supplied by
Licensor to Licensee with the
1
<PAGE>
Software.
1.5 "Licensee" means Harrah's and its Affiliates.
1.6 "Modifications" means any enhancements, upgrades, error corrections or
other modifications made to the Software and/or Documentation by Licensor during
the term of this License Agreement and put into use by Licensor for its own
business and/or commercially distributed to third parties.
1.7 "Non-Competitive Use" means any use on Company Premises for a
Permitted Purpose.
1.8 "Software" means, collectively, the software identified on Exhibit A
hereto.
1.9 "Source Code" means the source code for the Software.
2. GRANT OF LICENSE
2.1 Grant. Subject to compliance with the terms and conditions of this
License Agreement, Licensor grants to Licensee a fully paid up, nonexclusive,
worldwide license to:
(a) copy and use the Software and Documentation for a Non-Competitive
Use on Company Premises and only for Licensee's own internal purposes and for
copying for archival or backup purposes (the "Permitted Purposes"); and
(b) modify and create derivative works based upon the Software and
Documentation to the extent deemed necessary or desirable by Licensee to assist
Licensee's use of the Software for the Permitted Purposes. Any Derivative
Software created by Licensee pursuant to this Section 2.1 (b) will be deemed
Software subject to all the terms and conditions of this License Agreement.
2.2 Restrictions. Licensee has no right and agrees not to:
(a) use or copy the Software or Documentation for any use or purpose
other than the Permitted Purposes;
(b) use the Software or Documentation at any location other than on
Company Premises; or
(c) sell, license, transfer or otherwise distribute copies of the
Software or Documentation to third parties, or use the Software or Documentation
for service bureau or other commercial service operations for the benefit of
third parties.
2
<PAGE>
2.3 Condition to Right to Copy and to Make Derivative Works of the
Software and Documentation. As a condition to Licensee's right to make copies of
the Software and Documentation and to make derivative works based upon the
Software and Documentation as set forth in Section 2.1 above, Licensee will
reproduce all copyright and other notices contained on the original copies of
the Software and Documentation supplied by Licensor hereunder on each copy of
the Software and Documentation made by Licensee and on Derivative Software made
by Licensee, including the placement of such notice on the first screen on any
computer, video or other display device.
2.4 Supply and Use of Source Code. Upon the request of Licensee, Licensor
agrees to supply a copy of the Source Code for all or a portion of the Software
licensed hereunder for use by Licensee solely in pursuit of its rights to create
Derivative Software set forth in Section 2.1 (b) above. Licensee acknowledges
that the Source Code is the proprietary and confidential information of
Licensor. Licensee will keep the Source Code strictly confidential within its
own organization, and will not disclose the Source Code to any third party other
than to those of its own employees and contractors who have a need to know and
who have been informed in advance of Licensee's obligations with respect to the
Source Code and who have agreed to abide by such obligations. Licensee will use
the Source Code only within Company Premises. Licensee will take all reasonable
steps to protect the Source Code against unauthorized use or disclosure,
including but not limited to keeping copies of the Source Code stored on
removable physical media under lock and key when not actually in use for the
Permitted Purposes, and restricting access to copies of the Source Code in
electronic form through passwords or other appropriate security measures.
3. SUPPLY OF MODIFICATIONS
Licensor will have no obligation hereunder to provide the Licensee
modifications to the Software made by or on behalf of Licensor during the term
of this License Agreement, or to provide maintenance or support with respect to
the Software or Documentation, or to correct any errors therein that may be
discovered by Licensee.
4. PROPRIETARY RIGHTS
4.1 Proprietary Rights in Software and Documentation. The Software and
Documentation are proprietary to Licensor and all copies thereof will at all
times remain the property of Licensor, and will be returned to Licensor or
destroyed in accordance with the provisions of Section 9.5 below upon any
termination of this License Agreement or Licensee's rights hereunder with
respect to such Software and Documentation. Licensee agrees that any ideas,
concepts, know-how and techniques contained in the Software and Documentation
that Licensor does not otherwise make freely publicly available, or that become
publicly available without breach of this License Agreement, will be kept
confidential by Licensee and will not be disclosed by Licensee to any person
other than Licensee's own employees or consultants who
3
<PAGE>
have a need to know, unless Licensor gives its express prior written consent to
disclosure thereof. Licensee will exercise no less care to safeguard such
confidential information than it uses to safeguard its own confidential
information, and in no event less than reasonable care.
4.2 Proprietary Rights in Derivative Software. Any versions of Derivative
Software created by Licensee hereunder are proprietary to and will be owned by
Licensee. Licensee agrees that it will use and otherwise exploit said
Derivative Software subject to the same terms, conditions and restrictions as
the original Software provided by Licensor.
5. COMPLIANCE WITH EXPORT AND OTHER LAWS
Licensee acknowledges that the Software or Documentation may be subject to
United States export control laws and regulations. Licensee agrees to comply
with all such laws and regulations at all times and not to use, copy, export or
distribute any copy of the Software or Documentation other than in full
compliance with such laws and regulations. Licensee agrees to comply at all
times with all other applicable laws and regulations in Licensee's exercise of
its rights hereunder with respect to the Software and Documentation.
6. LIMITED INFRINGEMENT INDEMNITY
6.1 Indemnity. Licensor will, subject to the limitations set forth in
Section 8 below, at its expense defend Licensee against, and pay all costs and
damages made in settlement or awarded against the other party resulting from, a
claim that any Software or Documentation as supplied by Licensor hereunder
infringes a United States patent, or a copyright, trade secret or trademark
valid anywhere in the world, provided that Licensee (a) gives Licensor prompt
written notice of any such claim, (b) allows Licensor to direct the defense and
settlement of the claim, and (c) provides Licensor with the authority,
information and assistance that Licensor deems reasonably necessary for the
defense and settlement of the claim. If a final injunction is obtained in an
action based on any such claim against Licensee's use of such Software or
Documentation by reason of such infringement, or if in Licensor's opinion such
an injunction is likely to be obtained, Licensor may, at its sole option, either
(1) obtain for Licensee the right to continue using such Software or
Documentation, or (2) replace or modify such Software or Documentation so that
it becomes non-infringing, or (3) if neither (1) or (2) can be effected by
Licensor, instruct Licensee to return the Software and Documentation.
6.2 Limitations. Notwithstanding Section 6.1, Licensor will have no
liability for any infringement claim of any kind (1) to the extent it is based
on modification of the Software or Documentation other than by Licensor, with or
without authorization, or combination of such Software with software or hardware
not supplied by Licensor, if the claim would have been avoided by the use of
such Software apart from such combination or would have been avoided if such
Software or Documentation had not been modified or had been combined with other
hardware or software; or (2) to the extent it results from failure of Licensee
to use updated or modified software provided by Licensor for avoid infringement
or a reason related thereto.
4
<PAGE>
Licensee agrees to defend and indemnify Licensor against any such claim to the
extent set forth in this Section 6.2, subject to the same three conditions set
forth in the first sentence of Section 6.1 above (with Licensor's and Licensee's
names reversed).
6.3 Entire Liability. THE PROVISIONS OF THIS SECTION 6 SET FORTH THE
ENTIRE LIABILITY OF LICENSOR AND THE SOLE REMEDIES OF LICENSEE WITH RESPECT TO
INFRINGEMENT AND ALLEGATIONS OF INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS OR
OTHER PROPRIETARY RIGHTS OF ANY KIND OF ANY THIRD PARTY IN CONNECTION WITH THE
INSTALLATION, OPERATION, DESIGN, DISTRIBUTION OR USE OF ANY SOFTWARE AND
DOCUMENTATION LICENSED HEREUNDER.
7. DISCLAIMER OF WARRANTIES
ALL SOFTWARE AND DOCUMENTATION SUPPLIED TO LICENSEE IS SUPPLIED "AS IS"
WITHOUT WARRANTY OF ANY KIND, AND EACH PARTY EXPRESSLY DISCLAIMS ANY WARRANTIES,
BOTH EXPRESS AND IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT.
8. LIMITATIONS OF LIABILITY
8.1 DISCLAIMER OF CERTAIN TYPES OF LIABILITY. REGARDLESS WHETHER ANY
REMEDY SET FORTH HEREIN FAILS OF ITS ESSENTIAL PURPOSE OR OTHERWISE, IN NO EVENT
WILL LICENSOR BE LIABLE TO LICENSEE, WHETHER ARISING UNDER CONTRACT, TORT
(INCLUDING NEGLIGENCE), STRICT LIABILITY, BREACH OF WARRANTY, MISREPRESENTATION,
OR OTHERWISE (EXCEPT FOR LIABILITY FOR INFRINGEMENT OF THE INTELLECTUAL PROPERTY
RIGHTS OF THE OTHER PARTY) FOR ANY LOST PROFITS, LOSS BY REASON OF PLANT
SHUTDOWN, NON-OPERATION OR INCREASED EXPENSE OF OPERATION, SERVICE
INTERRUPTIONS, CLAIMS OF CUSTOMERS, LOST DATA OR MESSAGES, LOST BUSINESS, LOST
GOODWILL, OR FOR ANY FORM OF SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR
PUNITIVE DAMAGES OF ANY KIND, EVEN IF LICENSOR HAS BEEN INFORMED IN ADVANCE OF
THE POSSIBILITY OF SUCH DAMAGES.
8.2 GENERAL LIMITATION OF LIABILITY. IN NO EVENT WILL LICENSOR'S TOTAL
CUMULATIVE LIABILITY HEREUNDER, FROM ALL CAUSES OF ACTION OF ANY KIND, INCLUDING
CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, BREACH OF WARRANTY,
MISREPRESENTATION, OR OTHERWISE (EXCEPT FOR LIABILITY FOR INFRINGEMENT OF THE
INTELLECTUAL PROPERTY RIGHTS OF THE OTHER PARTY), EXCEED ANY AMOUNTS ACTUALLY
PAID TO IT BY LICENSEE PURSUANT TO THIS LICENSE AGREEMENT.
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<PAGE>
8.3 General. The parties agree that Licensor has entered into this License
Agreement in reliance upon the disclaimers of liability set forth herein, that
the same reflect an allocation of risk between the parties (including the risk
that a contract remedy may fail of its essential purpose and cause consequential
loss), and that the same form an essential basis of the bargain between the
parties.
9. TERM AND TERMINATION
9.1 Term. This License Agreement will commence on the date hereof and
shall be perpetual, unless earlier terminated in accordance with the provisions
hereof.
9.2 Termination Upon Notice of Breach. In the event that Licensee commits
a material breach of any term or condition of this License Agreement, and such
material breach is not cured within sixty (60) days of written notice of the
same from the other party, then Licensor may, in addition to any other remedy
that it may have at law or in equity or under this License Agreement, terminate
this License Agreement.
9.3 Termination by Licensor. In the event that Licensor or its affiliates
are unable to obtain, after request or application therefor, or maintain the
approval or license of any regulatory authority in any country, state, or
political subdivision anywhere in the world to conduct or operate gaming
operations due to Licensor's relationship with Licensee as contemplated by this
Agreement or any such approval or license held by Licensor is denied, revoked,
or suspended due to Licensor's relationship with Licensee as contemplated by
this Agreement, then the parties agree to negotiate promptly in good faith to
alter or amend the terms of this Agreement and/or the structure of the
relationship contemplated by this Agreement in order to obtain or maintain such
approval or license and to carry out the intent of this Agreement. If after
such negotiations, Licensor is still unable to obtain or maintain such approval
or license and carry out the intent of this Agreement, the Licensor may
terminate the License Agreement upon 120 days prior written notice to Licensee.
9.4 Termination by Licensee. Licensee may at its option terminate this
License Agreement for any reason upon ten (10) days prior written notice to
Licensor.
9.5 Effect of Termination. All licenses granted by Licensor to Licensee
will automatically cease as of the date of termination of this License
Agreement, and Licensee will thereafter cease all use and copying of the
versions of the Software and Documentation. Upon any termination becoming
effective, Licensee will, within ten (10) business days thereafter, return to
Licensor all copies of the Software and Documentation licensed to it hereunder
or, at the option of Licensee with the advance consent of Licensor, destroy all
such copies and certify to Licensor in writing by an officer of Licensee that
Licensee has done so. Under no circumstance will either party be entitled to a
return of monies paid before such expiration or termination. The provisions of
Sections 4, 6, 8, and 10 of this License Agreement will survive
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<PAGE>
the expiration or termination of this License Agreement.
10. GENERAL
10.1 Assignment. This License Agreement may not be assigned, in whole or in
part, by Licensee without the prior written consent of Licensor, provided that
Licensee's rights hereunder may be assigned and delegated by Licensee: (i) by
operation of law; (ii) to an Affiliate of Licensee; and (iii) to anyone
acquiring all or substantially all of the assets or stock of Licensee. Subject
to the foregoing, the terms and conditions of this license will issue to the
benefit of and be binding upon the respective successors and assignees of the
Licensee.
10.2 Communications. All notices and demands which may be or are required
to be given by either party to the other hereunder shall be in writing and shall
be personally delivered or sent by United States certified or registered mail,
postage prepaid, or by prepaid express mail or overnight courier. Notices and
demands delivered personally shall be deemed given on the date of delivery.
Notices and demands delivered by mail shall be deemed given three business days
after deposit in the United States mail, and notices and demands delivered by
express mail or overnight courier shall be deemed given one business day after
deposit.
Notices sent to Licensor shall be addressed as follows:
Interactive Entertainment Limited
845 Crossover Lane
Suite 215
Memphis, Tennessee 38117
Attention: Gordon Stevenson
Facsimile: (901) 537-3801
with a copy to: Laurence Geller
10 South Wacker Drive
Suite 3500
Chicago, Illinois 60606
Facsimile: (312) 715-4212
and to: Altheimer & Gray
10 South Wacker Drive
Suite 5000
Chicago, Illinois 60606
Attention: Phillip Gordon
Facsimile: (312) 715-4800
or to such other person or place as Licensor may from time to time designate in
a written notice to Licensee.
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<PAGE>
Notices sent to Licensee shall be addressed as follows:
Harrah's Interactive Entertainment Company
1023 Cherry Road
Memphis, Tennessee 38117
Attention: John Boushy
Facsimile: (901) 762-8914
with a copy to:
Harrah's Entertainment, Inc.
1023 Cherry Road
Memphis, Tennessee 38117
Attention: John W. McConomy
Facsimile: (901) 762-8735
or to such other person or place as Licensee may from time to time designate in
a written notice to Licensor.
10.3 Governing Law. This License Agreement will be governed by and
construed in accordance with the laws of the State of Tennessee, without regard
to or application of choice of law rules or principles.
10.4 Multiple Counterparts. This License Agreement may be executed in any
number of counterparts, each such counterpart being deemed to be an original
instrument, and such counterparts will together constitute the same agreement.
This License Agreement may be executed by the attachment of signature pages
which have been previously executed.
10.5 Amendment in Writing. No addition to or modification of any provision
of this License Agreement will be binding upon either party unless made in
writing and signed by a duly authorized representative of both parties. This
License Agreement cannot be changed or terminated orally and the parties
acknowledge that no representative of a party has the authority to alter the
terms of this License Agreement except in a writing executed by a properly
authorized representative of that party.
10.6 Severability. Should any provision of this License Agreement be
declared, or found to be illegal, unenforceable or void, both parties will be
relieved of all obligations arising under that provision. If the remainder of
this License Agreement is capable of substantial performance, the remainder of
this License Agreement will remain in full force and effect.
10.7 No Right to Use Names. Nothing contained in this License Agreement
will be construed as conferring any right to use in advertising, publicity, or
other promotional activities
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<PAGE>
any name, trade name, trademark, logo, or other designation of one party by the
other party hereto (including any contraction, abbreviation or simulation of any
of the foregoing).
10.8 Cumulative Rights. All rights and remedies enumerated in this
License Agreement will be cumulative and none will exclude any other right or
remedy permitted herein or by law.
10.9 Relationship Between the Parties. Nothing contained herein is
intended to create a relationship between the parties other than as independent
contractors. Neither party hereto has undertaken to perform any obligation of
the other party or to assume any responsibility for the business or operations
of the other. Nothing herein will be construed to allow either party to bind the
other.
10.10 Waiver of Breach. Waiver by either party of nonperformance or any
other breach of any provision of this License Agreement will not operate as a
waiver of any subsequent nonperformance or other breach of the same or any other
provision. The failure by a party to exercise any of its rights under this
License Agreement will not be deemed to constitute a waiver of any of such
rights, or other rights or remedies available to such party.
10.11 Compliance with Law. Under no circumstances will any provision of
this License Agreement require Licensor or Licensee to do anything that violates
any applicable law or regulation of the United States or any of its states or
respective political subdivisions, or any other jurisdiction in which the
Licensor or Licensee may do business from time to time.
10.12 Entire Agreement. This License Agreement between the parties
constitutes the entire agreement between the parties with respect to the subject
matter hereof, and all prior agreements, representations, and statements with
respect to such subject matter are superseded thereby.
10.13 Headings. The headings contained in this License Agreement are
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this License Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this License Agreement through
their duly authorized representatives as set forth below:
LICENSOR: LICENSEE:
Interactive Entertainment Limited, Harrah's Interactive Entertainment
f/k/a Sky Games International Ltd. Company
By: /s/ Malcolm P. Burke By: /s/ John M. Boushy
------------------------------ ------------------------------------
Title: Director Title: Senior Vice President
--------------------------- ---------------------------------
RECEIPT
Pursuant to Provision 2.4 of the Software License Agreement (the
"Agreement") dated June 17, 1997 by and between Interactive Entertainment
Limited (f/k/a Sky Games International Limited) ("Licensor") and Harrah's
Interactive Entertainment Company ("Licensee"), the undersigned, on behalf of
the Licensee, hereby acknowledges receipt of the Software as referenced in
Exhibit A of the Agreement and a copy of the Source Code for the Software. A
copy of Exhibit A of the Agreement is attached hereto.
Receipt is hereby acknowledged this 17th day of June, 1997.
HARRAH'S INTERACTIVE ENTERTAINMENT COMPANY
By: /s/ John M. Boushy
-------------------------------------
Title: Senior Vice President
----------------------------------
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Confidential treatment has been requested for the remainder of this document.
Document headings are provided.
Exhibit A
Product Description and Requirements
Introduction
The Gaming Entertainment Experience
The Games
Customer Defined Options
Gaming Application Flow Diagrams
Sky Games Technical Description and Requirements
System Design Features
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Exhibit 3.17
CONTINUING SERVICES AGREEMENT
-----------------------------
THIS AGREEMENT (the "Agreement") is made as of June 17, 1997 by and between
HARRAH'S INTERACTIVE ENTERTAINMENT COMPANY, a Nevada corporation ("HIEC"), and
SKY GAMES INTERNATIONAL LTD., a Bermuda exempted company ("SGI").
Recitals
--------
A. Prior to the date hereof, Harrah's Interactive Investment Company
("HIIC") an affiliate of HIEC, and a subsidiary of SGI were 20% and 80% owners,
respectively, of Interactive Entertainment Limited, a Bermuda exempted company
("IEL"), the day to day business of which was managed by HIEC, pursuant to a
management agreement dated as of December 30, 1994 between and among HIEC and
IEL (the "Management Agreement").
B. Pursuant to the Plan and Agreement of Merger and Amalgamation dated as
of May 13, 1997 (the "Amalgamation Agreement"), IEL was merged into a subsidiary
of SGI, effective June 17, 1997, with such subsidiary as the surviving company,
which was then merged into SGI, with SGI as the surviving company (the
"Amalgamation").
C. Pursuant to the Amalgamation Agreement, HIEC and SGI agreed to
terminate the Management Agreement effective June 17, 1997 and further agreed
that HIEC would provide certain continuing administrative and support services
to SGI after the Amalgamation.
D. Pursuant to the Amalgamation and that certain Termination and Release
Agreement dated June 17, 1997, the Management Agreement has been terminated
effective June 17, 1997.
Agreement
---------
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Term. The term of this Agreement shall commence on the date hereof and
shall continue from month to month thereafter, provided that either party may
terminate this Agreement as to any or all component(s) of the Continuing
Services (as hereinunder defined) upon 90 days prior written notice to the other
party, except as to those Continuing Services described in Schedule AI, for
which 150 days prior notice must be given; subject to, in the case of SGI
serving such notice to terminate on HIEC, the payment of certain of HIEC's
termination costs (the "Termination Costs") by SGI as provided in Schedule B.
2. Continuing Services.
(a) HIEC shall provide to SGI the services set forth in Schedule A
attached hereto and incorporated herein (the "Continuing Services").
(b) The Continuing Services shall be rendered in a timely and professional
manner consistent with the standards for the provision of such services by HIEC
to SGI pursuant to the Management Agreement.
3. Fees. In consideration of HIEC providing the Continuing Services SGI
will pay HIEC the fees therefore as set out in Schedule B attached hereto and
incorporated herein (the "Fees"). The Fees shall be paid monthly, in arrears,
on or before the fifteenth day of each month, following receipt of HIEC's
invoice therefore.
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4. Maintenance. It is understood that regular maintenance and testing may
be required in order to assure the smooth operation of the various systems and
equipment used to provide the Continuing Services, and each party shall
schedule, to the greatest extent possible, all systems maintenance and testing
at times reasonably agreed upon by both SGI and HIEC which shall be selected to
minimize interference with regular operations. If the two parties are unable to
agree on such times, maintenance and testing shall be scheduled at times
consistent with the practices of HIEC and SGI prior to the date hereof.
5. Default. Each of the following events shall constitute an "Event of
Default" hereunder:
(a) either party breaches any covenant set forth in Section 8 hereof; or
(b) either party breaches any other covenant, warranty or agreement
hereunder and such breach continues for 15 days after receipt of written
notice thereof.
6. Remedies. If any Event of Default shall occur, the non-defaulting
party shall have the right to: (i) suspend its obligations hereunder; or (ii)
terminate this Agreement without any liability to the defaulting party for such
termination and shall have all other rights and remedies available to it at law
or in equity.
7. Force Majeure. HIEC shall be excused for any failure or delay of
performance hereunder in the event such is caused by natural disaster, fire,
flood, act of God or other occurrence beyond the reasonable control of such
party and which has resulted in HIEC's or its affiliates' inability to perform
for itself those services which constitute Continuing Services.
8. Confidentiality. All non-public information concerning either party or
its business activities communicated to or otherwise acquired by the other party
at any time, shall be held in confidence and shall be used only for the purpose
of providing or receiving the Continuing Services as set forth herein, except to
the extent that such information can be shown to have been (a) in the public
domain through no fault of the other party, its affiliates, agents or employees,
or (b) lawfully acquired from other sources by the other party. Such information
shall not be disseminated by the other party other than to those persons who
have responsibility for carrying out or receiving the Continuing Services or as
may be otherwise required by law.
9. Disclaimer of Warranty: Limitation of Liability.
(a) HIEC shall not be liable to SGI for any liability, claim, loss,
damage or expense of any kind or nature (including strict liability in
tort) caused directly or indirectly, by the provision of Continuing
Services, regardless of source, or any inadequacy thereof for any purpose,
or any deficiency or defect therein; or any interruption or loss of
Continuing Services, or for any loss of business, loss of anticipated
profits or any special, indirect, incidental, consequential or exemplary
damages whatsoever caused.
(b) HIEC shall not be liable to SGI for any loss of business, loss of
anticipated profits or any indirect, incidental, consequential or exemplary
damages arising from any cause whatsoever, including, without limitation,
any breach of this Agreement.
(c) Any and all express and implied warranties including, but not
limited to, warranties of merchantability or fitness for any purpose or
use, are expressly excluded and disclaimed. It is agreed that the sole
obligations of HIEC to SGI are limited to those expressly set forth in this
Agreement.
10. Cooperation and Dispute Resolution. The parties hereto acknowledge
that certain scheduling conflicts may arise with respect to certain matters,
including scheduling of out-of-service times for certain equipment and systems
for testing and upgrading. The parties agree to cooperate with respect to such
Page 2
<PAGE>
matters so as to effect the minimum disruption to the business of each party.
If the parties are unable to agree on such items, resolution of the dispute
shall be achieved as follows:
(a) Pam Rooks of HIEC and Dennis Crisculo of SGI shall meet and attempt to
resolve any such dispute. If such dispute is not resolved by them within 5
days, the dispute shall proceed to step (b).
(b) John Boushy of HIEC and Laurence Geller of SGI shall meet and attempt
to resolve such dispute not resolved in step (a). If such dispute is not
resolved by them within 5 days, the parties agree that such dispute shall
be submitted to arbitration pursuant to Section 11 hereof.
11. Arbitration.
(a) Any arbitration of disputes hereunder shall be conducted in accordance
with the following procedures:
(i) The parties shall mutually agree upon a single qualified and
disinterested arbitrator who is not an affiliate of either party (except as
noted below) who shall render a decision within 30 days of such
appointment.
(ii) If the parties cannot agree on a single arbitrator within 20 days
after an election to submit the matter to arbitration, then each party
shall appoint one arbitrator within 10 days following such 20-day period.
The two appointed arbitrators shall within 10 days of such referral appoint
a third arbitrator, and if such arbitrators are not able to agree on such
third arbitrator, shall apply to the branch of the American Arbitration
Association nearest to Memphis, Tennessee, to designate and appoint such
third arbitrator. The three arbitrators shall reach a decision within 20
days after the appointment of the third arbitrator.
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<PAGE>
(A) If either party fails to appoint an arbitrator, then the single
arbitrator designated by the other party shall act as the sole
arbitrator and shall be deemed to be the unanimously approved
arbitrator to resolve such dispute. The decision and award of such
sole arbitrator shall be binding upon the parties.
(iii) The fees and expenses of the arbitrators shall be paid by the party
whose position is not adopted by the arbitrators. The award of any
arbitrators made in accordance with this Section 11 shall be binding on the
parties and enforceable in any court of competent jurisdiction.
(b) In all arbitration proceedings submitted to the arbitrators, the
arbitrators shall be required to agree upon and approve the substantive
position advocated by one party with respect to the dispute. All
proceedings by the arbitrators shall be conducted in accordance with the
Uniform Arbitration Act, except to the extent the provisions of such Act
are modified by this Agreement or the mutual agreement of the parties.
Unless otherwise agreed, all arbitration proceedings shall be conducted in
Memphis, Tennessee.
12. Assignment. This Agreement may not be assigned, in whole or in part, by
either party without the prior written consent of the other party.
13. Notice. All notices and demands which may be or are required to be
given by either party to the other hereunder shall be in writing and shall be
personally delivered or sent by facsimile, United States certified or registered
mail, postage prepaid, or by prepaid express mail or overnight courier. Notices
and demands delivered personally or by facsimile shall be deemed given on the
date of delivery, notices and demands delivered by mail shall be deemed given
three business days after deposit in the United States mail, and notices and
demands delivered by express mail or overnight courier shall be deemed given one
business day after deposit.
Notices sent to SGI shall be addressed as follows:
Sky Games International Ltd.
845 Crossover Lane, Suite D-215
Memphis, Tennessee 38117
Attn: Gordon Stevenson
With a copy to:
Altheimer & Gray
10 South Wacker Drive, Suite 400
Chicago, Illinois 60606
Attn: Andrew McCune, Esq.
or to such other person or place as SGI may from time to time designate in a
written notice to HIEC.
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<PAGE>
Notices sent to HIEC shall be addressed as follows:
Harrah's Interactive Entertainment Company
1023 Cherry Road
Memphis, Tennessee 38117
Attn: John M. Boushy
With a copy to:
Harrah's Interactive Entertainment Company
1023 Cherry Road
Memphis, Tennessee 38117
Attn: John W. McConomy
or to such other person or place as HIEC may from time to time designate in a
written notice to SGI.
14. Applicable Law. This Agreement shall be governed and construed in
accordance with the internal laws of the State of Tennessee without regard to
conflict of laws provisions.
15. Waiver of Breach. Waiver by either party of nonperformance or any
other breach of any provision of this Agreement shall not operate as a waiver of
any subsequent nonperformance or other breach of the same or any other
provision.
16. Relationship Between the Parties. Nothing contained herein is
intended to create a relationship between the parties other than as independent
contractors. Neither party hereto has undertaken to perform any obligation of
the other party to assume any responsibility for the business or operations of
the other. Nothing herein shall be construed to allow either party to bind the
other.
17. Severability. Should any provision of this Agreement be declared or
found to be illegal, unenforceable or void, both parties shall be relieved of
all obligations arising under that provision. If the remainder of this
Agreement is capable of substantial performance, the remainder of this Agreement
shall remain in full force and effect.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
19. Complete Agreement. This Agreement, when executed by both parties,
constitutes the final written expression of all the terms of the agreement
between the parties with respect to the subject matter hereof, and is a complete
and exclusive statement of those terms. It supersedes all understandings and
negotiations concerning the matters specified in this Agreement. Any
representations, promises, warranties or other statements made by either party
not expressly set forth herein shall be given no force or effect. No addition
to or modification of any provision of this Agreement be binding upon either
party unless made in writing and signed by a duly authorized representative by
both parties.
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<PAGE>
Sky Games International Ltd. Harrah's Interactive Entertainment Company
By: /s/ Laurence Geller By: /s/ John M. Boushy
-------------------------- --------------------------
Title: Chairman Title: President
-------------------------- --------------------------
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<PAGE>
Schedule A
I. Data Network and Voice Telecommunications
Overview:
IEL will use various voice and data telecommunications network and
equipment services provided by or controlled by HIEC. These voice and data
telecommunications network and equipment services will be provided only
while IEL is a sub-lessee of HIEC at 845 Crossover Lane, Suite D-215,
Memphis, Tennessee 38117.
Services:
Local telephone access and usage via BellSouth
. Point to Point T1 1023 Cherry Road to 845 Crossover Lane
. Voice Mail
Long distance telephone access and usage via AT&T (or HIEC current long
distance service provider.)
. Includes network charges, D channel usage, T1 usage, and
BellSouth Smartpath.
Telephone equipment
. Telephones
. 21 phones (combination of new and existing equipment)
. PBX equipment
. 1 AT&T Definity G3S
. 4 Digital Line Cards
. 1 Aux Trunk Interface
. 2 16 Port Analog Line Cards
. 1 DS1 Card
. 1 715 BCS Terminal
. All telephone and PBX installation and maintenance billing for the
845 Crossover Lane equipment is on a separate account. The invoice
will be forwarded to IEL each month for their direct payment.
Data Network Router, HUB, DSU/CSU and Maintenance
. Network access to HIEC network using the following equipment
housed at 845 Crossover Lane
. CNX 500
. Dual TR
. Quad Serial
. Series 90
. 4 TR Modules
. Uninterrupted power supply system
Maintenance and support of voice telecommunications network and equipment
includes HIEC telecommunication engineering services not to exceed 8 hours
per month. Additional hours may be requested and billed separately if the
request can be accommodated.
Maintenance and support of data network and equipment includes HIEC network
engineering services not to exceed 8 hours per month. Additional hours may
be requested and billed separately if the request can be accommodated.
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Intervals and other charges for Maintenance and support of voice
telecommunications network and equipment including adds, moves, and changes
of voice terminals are as follows:
Where equipment is available:
1 to 3 stations 3 working days
4 to 10 stations 7 working days
11 to 15 stations 14 working days
16+ stations Must be scheduled
Where equipment is not available:
1 to 5 stations 7 working days
6 to 10 stations 14 working days
11 to 15 stations 17 working days
16 + stations Must be scheduled
Internet Access:
IEL will be able to use their current Internet services (World-Wide-
Web access, email) after the transition occurs. HIEC will provide
troubleshooting, email set-up and server configuration services. HIEC
will not provide web site hosting or unique domain registration for
email services unless negotiated in a separate agreement. HIEC will
not provide support for individual PC networking problems.
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<PAGE>
II. Harrah's Systems Support
Overview:
IEL will use customer help desk services provided by HIEC to report
problems with equipment used to provide the Services contained herein,
including data network connectivity, voice telecommunications, and data
center based servers. Specifically excluded from the HIEC Systems Support
services are PC-related questions typically resolved by end-user
consultants.
Services:
HIEC will provide 24 hour-per-day, 7 day-per-week telephone support to all
users of HIEC Transitional Services. Support will be consistent with the
services provided to IEL prior to the merger. This includes answering
trouble calls from IEL users, opening trouble tickets, performing initial
trouble-shooting, and when necessary, escalating the problem to the
appropriate engineering group.
HIEC System Support staff will not provide PC support for end-user
applications, user errors, or PC problems not related to the Transitional
Services.
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III. Client/Server Engineering
Overview:
IEL will use client/server engineering services provided by HIEC to perform
server configuration and support, game programming design review and
troubleshooting, client/server messaging design review and troubleshooting,
network analysis on laboratory and on-board systems, and general
consulting. These services have been commonly performed by Bobby Wilkins,
but may be performed by engineers with the requisite technical skills.
Services:
IEL will give HIEC notice via email or letter to HIEC (Attention: Jim
Burks) four weeks in advance of any overseas travel requirements. Within
five working days HIEC will respond whether staff can be provided for the
trip.
IEL will give HIEC notice via email or letter to HIEC (Attention: Jim
Burks) two weeks in advance of any domestic travel requirements. Within
three working days HIEC will respond whether staff can be provided for the
trip.
HIEC may, at its discretion, substitute personnel provided that all
personnel provided have the requisite skill sets if project schedules or
resource scheduling require. HIEC will attempt to provide continuity of
personnel where possible to ensure that transition times are minimized.
HIEC will provide engineering services up to 40 hours/month (with excess
hours billable dependent upon resource availability).
HIEC Client/Server Workstation Engineering will provide support to IEL's
development servers (while the systems meet HIEC supported hardware and
software standards), the game development servers and game test equipment.
HIEC Client/Server Workstation Engineering will not provide support to
IEL's individual workstations.
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<PAGE>
Description of Client/Server services/skill set:
<TABLE>
<CAPTION>
=========================================================================================================================
Location Category Description Skill Set Timeframe
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Memphis & Development Meetings/planning Project management Ad-hoc
Irvine
- -------------------------------------------------------------------------------------------------------------------------
Memphis Architecture review Systems architecture Ad-hoc
SCO UnixWare
Windows Networking
Client/Server prog.
IEL Game familiarity
IEL Txn Server
Token Ring networks
TCP/IP protocol
- -------------------------------------------------------------------------------------------------------------------------
Memphis Problem Determination & Systems architecture Ad-hoc
Irvine Resolution SCO UnixWare
Singapore Windows Networking
Client/Server prog.
IEL Game familiarity
IEL Trxn Server
Token Ring networks
TCP/IP protocol
Network Sniffer
LanMeter
- -------------------------------------------------------------------------------------------------------------------------
Memphis Support NT Server & Workstation Windows NT Ad-hoc
Irvine Windows Networking
- -------------------------------------------------------------------------------------------------------------------------
Memphis Windows/DOS PC Windows 3.11 Ad-hoc
Irvine Windows Networking
- -------------------------------------------------------------------------------------------------------------------------
Memphis UnixWare server PC hardware
Irvine SCO UnixWare
Windows Networking
Client/Server prog.
IEL Game familiarity
IEL Trxn Server
Token Ring networks
TCP/IP protocol
Network Sniffer
LanMeter
- -------------------------------------------------------------------------------------------------------------------------
Memphis MASC systems PC hardware Ad-hoc
Irvine SCO UnixWare
MASC applications
Token Ring networks
TCP/IP protocol
Network Sniffer
LanMeter
- -------------------------------------------------------------------------------------------------------------------------
Memphis Internet Email & www Standard Internet services Ad-hoc
- -------------------------------------------------------------------------------------------------------------------------
Memphis File transfer Local storage for externally Ad-hoc
Irvine accessed files
Directed-access to external
(Quest) internet sites
- -------------------------------------------------------------------------------------------------------------------------
Singapore Testing Networking Token Ring networks As scheduled
& Other TCP/IP protocol and approved
=========================================================================================================================
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
=========================================================================================================================
Location Category Description Skill Set Timeframe
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Network Sniffer
LanMeter
- -------------------------------------------------------------------------------------------------------------------------
Server operation SCO UnixWare As scheduled
MASC applications and approved
- -------------------------------------------------------------------------------------------------------------------------
Game operation Windows Networking As scheduled
Client/Server prog. and approved
IEL Game familiarity
IEL Trxn Server
Token Ring networks
TCP/IP protocol
Network Sniffer
LanMeter
=========================================================================================================================
</TABLE>
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<PAGE>
IV. Data Center Operations
Overview:
IEL will use data center operations support provided by HIEC to monitor
equipment used to provide the Services contained herein, including
premises-based network hardware, communications servers, and file servers.
Operations staff will also back-up computer programs and files located on
file servers on a schedule similar to one followed prior to the spin-off.
Services:
HIEC will provide 24 hour-per-day, 7 day-per-week data center operations
support to IEL. Support will be consistent with the services provided prior
to the merger. This includes assisting HIEC System Support staff with
troubleshooting, providing tape back-ups of data files and programs on
servers at the center, and monitoring equipment for performance.
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V. Unix Engineering
Overview:
IEL will use Unix Engineering support provided by HIEC troubleshoot and
maintain IEL owned equipment operating at the HIEC Data Center.
Services:
HIEC will provide 24 hour-per-day, 7 day-per-week Unix Engineering on-call
support to users of HIEC SkyServer. Support will be consistent with the
services provided prior to the merger. This includes assisting HIEC System
Support staff with troubleshooting, routine maintenance, and technical
consulting. Total baseline Unix Engineering support includes 8 hours per
month.
SkyServer software license fees will be billed under the separate Software
License Agreement dated August 1, 1996.
SkyServer hardware assets (specifically the NCR model S40 3438-1000-8090;
Serial No. 36-30122150 (the "Computer") and the U.S. Robotics modem) will
be transferred to IEL at a cost of $12,500, effective June 17, 1997. HIEC
will, at the request of IEL, execute any documents necessary to effect such
transfer. Ongoing maintenance fees and hardware expenses will be the
responsibility of IEL. IEL will pay HIEC the sum of $12,500 on June 17,
1997.
SkyServer purchased software (i.e., UNIX Operating System and Informix data
base) loaded on the Computer will be transferred to IEL, at a cost of
$19,695.84, assuming that the term of the license for each such software
program permit such assignment. If assignment is not permitted, HIEC will
seek such an assignment and IEL will execute any documents reasonably
necessary to effect such assignment. Ongoing maintenance fees and upgrades
will be the responsibility of IEL. IEL will pay HIEC the sum of $19,695.84
on June 17, 1997.
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VI. Rich O'Beirne Consulting
Overview:
IEL will use consulting support provided by HIEC employee Rich O'Beirne.
Services:
HIEC will provide consulting services of employee Rich O'Beirne to transfer
his current responsibilities and knowledge specific to IEL development
efforts to IEL employees designated by IEL.
HIEC will provide such services up to 90 days after the spin-off. Pricing
includes up to 40 hours per week for the first 4 weeks, then up to 20 hours
per week for the next 4 weeks in a consulting role with IEL and "on call"
for the next 4 weeks. Additional hours may be used and billed separately
based on availability.
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Schedule B
Fees
Methodology:
I. Data Network and Voice Telecommunications - $5,000 per month
. Includes equipment depreciation and maintenance.
. Includes telecommunication engineering support up to 8 hours per month.
. Includes network engineering support up to 8 hours per month.
. Includes telephone local and long distance usage charges up to $1,000 per
month. Charges in excess of $1,000 will be billed separately.
. Telephone equipment moves or additions may be expedited for an additional
$800 per day.
. Any services over the noted maximum hours per month will be billed at $80.00
per hour.
II. HIEC System Support - $550 per month
. Includes HIEC's System Support up to 10 hours per month.
. Any services over the noted maximum hours per month will be billed at $55.00
per hour.
III. Client/Server Engineering - $4,000 per month
. Client/Server Engineering up to 120 hours per quarter.
. Any services over the noted maximum hours per quarter will be billed at $150
per hour.
IV. Data Center Operations - $1,200 per month
. Data Center Operations support up to 20 hours per month.
. Any services over the noted maximum hours per month will be billed at $55 per
hour
V. Unix Engineering - $800 per month
. Includes SkyServer depreciation, maintenance, and software maintenance.
. Unix Engineering support up to 24 hours per quarter.
. Any services over the noted maximum hours per quarter will be billed at $150
per hour
VI. Rich O'Beirne Consulting
. Includes up to 160 hours (40 hours per week) for the first 4 weeks - $12,800
. Includes up to 80 hours (20 hours per week) for the second 4 weeks - $6,400
. "On call" and any services over the noted maximum hours per month will be
billed at $100 per hour.
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<PAGE>
Termination Costs
HIEC's actual cost of removing equipment and disconnecting connections to be
billed at $100 per hour for time spent in such activities.
Page 17
<PAGE>
Exhibit 3.21
EXECUTION COPY
--------------
TERMINATION AGREEMENT AND RELEASE
This Termination Agreement and Release ("Agreement") is made as of June 17,
1997 among Sky Games International Ltd., a Bermuda exempted company f/k/a
Creator Capital, Inc. ("Sky Games"), SGI Holding Corporation Limited, a Bermuda
exempted company ("SGIHC"), Interactive Entertainment Limited, a Bermuda
exempted company ("IEL"), Sky Games International Corp., a Nevada corporation
("SGIC"), Harrah's Interactive Entertainment Company, a Nevada corporation
("HIEC"), Harrah's Interactive Investment Company, a Nevada corporation
("HIIC"), and the shareholders of HIIC, HIEC, IEL and SGIHC.
RECITALS:
---------
A. WHEREAS, IEL and HIEC are parties to that certain Management Agreement
dated December 30, 1994 (the "Management Agreement").
B. WHEREAS, SGIHC, HIIC and IEL are parties to that certain Shareholders
Agreement dated December 30, 1994 (the "Shareholders Agreement").
C. WHEREAS, Sky Games, SGIHC, SGIC, IEL and HIEC are parties to that
certain Cross-License Agreement, dated December 30, 1994 (the "Cross-License
Agreement").
D. WHEREAS, Sky Games, IEL, SGIC and SGIHC are parties to that certain
Trademark License Agreement, dated as of December 30, 1994 (the "Trademark
License Agreement").
E. WHEREAS, Sky Games, SGIHC, IEL, HIIC are parties to that certain Plan
and Agreement of Merger and Amalgamation, dated as of May 13, 1997 (the
"Amalgamation Agreement") pursuant to which IEL is to Amalgamate with and into
SGIHC and SGIHC is to amalgamate with and into Sky Games.
F. WHEREAS, pursuant to Section 7.1(d) of the Amalgamation Agreement, a
condition to the closing of the amalgamations and transactions contemplated
thereby, is that the parties thereto enter into agreements to terminate the
Management Agreement, the Shareholders Agreement and the Cross-License
Agreement.
AGREEMENTS:
-----------
NOW, THEREFORE, in consideration of consummation of the transactions
contemplated by the Amalgamation Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned hereby agree as follows:
1. As of the Effective Date (as defined in the Amalgamation Agreement),
and forever thereafter:
(a) IEL and HIEC hereby agree that the Management Agreement is hereby
terminated and that all rights and obligations thereunder shall cease
(except IEL shall comply with Article
1
<PAGE>
12.1(iv)) and that the Management Agreement shall be void and of no force
and effect;
(b) SGIHC, HIIC and IEL hereby agree that, pursuant to Section 7.2(iii) of
the Shareholders Agreement, that the same is hereby terminated and that all
rights and obligations thereunder shall cease and that the Shareholders
Agreement shall be void and of no force and effect;
(c) Sky Games, SGIHC, SGIC, HIIC and IEL hereby agree that the Cross-
License Agreement (and all licenses created thereby) is hereby terminated
and that all rights and obligations thereunder shall cease and that the
Cross-License Agreement shall be void and of no force and effect; and
(d) Sky Games, SGIC, SGIHC and IEL hereby agree that the Trademark License
(and all licensees created thereby) is hereby terminated and that all
rights and obligations there under shall cease and that the Trademark
License shall be void and of no further force and effect;
provided, however, Sky Games shall indemnify, defend and hold harmless HIEC from
and against any and all liability in connection with or arising or resulting
from a claim by any third party for amounts which were properly owed by IEL
pursuant to the terms of the Management Agreement.
2. Subject to the provisions of Section 1, except with respect to the
amounts set forth in Section 4 hereof, each party hereto on their own behalf,
and on behalf of their successors and assigns, hereby irrevocably and
unconditionally forever releases, waives and discharges the other parties
hereto, their affiliates, predecessors, successors and assigns and each of their
respective officers, directors, shareholders, partners, members, employees,
agents, attorneys, assigns and beneficiaries from each and every unknown,
disclosed or undisclosed claim, right, demand, action and actions of all manner,
obligations, liabilities, sums of money, suits, debts, reckonings, accounts,
bonds, bills, penalties, covenants, controversies, contracts, agreements,
promises, variances, trespasses, damages, costs and expenses (including
attorneys' fees and costs), judgments, liens, executions and causes of action,
known or unknown, of any nature whatsoever (based in contract, tort, equity,
other principles of law or otherwise including, but not limited to, fraud),
arising from, or related to the Management Agreement, the Shareholders
Agreement, the Cross-License Agreement or the Trademark License. Each of the
parties hereto hereby acknowledges that this Termination Agreement has been
negotiated and agreed upon in light of this understanding.
3. IEL and HIEC hereby acknowledge and agree that one hundred sixty-five
thousand nine hundred forty dollars and three cents ($165,940.03) is a good
faith estimate by each of IEL and HIEC of the amount due from IEL to HIEC in
full satisfaction and final settlement of all amounts owed by IEL to HIEC under
the terms of the Management Agreement (including, without limitation, management
fees under section 8.1) (the "Settlement Amount"). IEL and HIEC hereby agree
that they will use their best efforts to determine the final Settlement Amount
on or prior to August 15, 1997, and in the event the estimated Settlement Amount
exceeds the final Settlement Amount, HIEC shall promptly pay the amount of such
excess to IEL in cash, and in the event the estimated Settlement Amount is less
than the final Settlement Amount, IEL shall promptly pay the amount of such
shortage to HIEC in cash.
4. As of the date hereof:
2
<PAGE>
(a) IEL and HIEC hereby agree to amend the choice of law provisions of the
Management Agreement so that with respect to termination of the Management
Agreement, the internal laws of Bermuda shall apply, without giving effect
to the principals of conflicts of laws of Bermuda; provided, however, that
with respect to the survival of the provisions of Article 12.1(iv) of the
Management Agreement, the internal laws of the State of Nevada shall
continue to apply;
(b) SGIHC, IEL and HIIC hereby agree to amend the choice of law provisions
of the Shareholders Agreement so that with respect to termination of the
Shareholders Agreement, the internal laws of Bermuda shall apply, without
giving effect to the principals of conflicts of laws of Bermuda;
(c) Sky Games, SGIHC, IEL, SGIC and HIEC hereby agree to amend choice of
law provisions of the Cross-License Agreement so that with respect to
termination of the Cross-License Agreement, the internal laws of Bermuda
shall apply, without giving effect to the principals of conflicts of laws
of Bermuda; and
(d) Sky Games, SGIC, SGIHC and IEL hereby agree to amend the choice of law
provisions of the Trademark License so that with respect to termination of
the Trademark License, the internal laws of Bermuda shall apply, without
giving effect to the principals of conflict of laws of Bermuda.
5. This Agreement represents the entire agreement of the parties with
respect to the subject matter contained herein and supersedes any and all prior
agreements, understandings and inducements, whether express or implied, oral or
written with respect to such subject matter.
6. Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be unenforceable or invalid under
said applicable law, such provision shall be ineffective only to the extent of
such unenforceability or invalidity, and the remaining provisions of this
Agreement shall continue to be binding and in full force and effect.
7. All parties and their attorneys have participated in the drafting of
this Agreement, this Agreement shall not be construed against any party by
reason of the drafting of this Agreement by such party or its attorney.
8. This Agreement shall be binding upon the parties hereto and their
respective heirs, legal representatives and successors.
9. This Agreement may be executed in multiple counterparts, each of which
shall be deemed to be an original, and all of such counterparts shall constitute
but one instrument.
10. This Agreement shall be governed by the internal laws of Bermuda,
without giving affect to the principals of conflicts of laws of Bermuda.
* * * * * * *
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
SKY GAMES INTERNATIONAL LTD. HARRAH'S INTERACTIVE
ENTERTAINMENT COMPANY
By: /s/ Malcolm P. Burke By: /s/ John M. Boushy
------------------------ --------------------------
Its: President Its: Senior Vice President
----------------------- -------------------------
SGI HOLDING CORPORATION LIMITED HARRAH'S INTERACTIVE INVESTMENT
COMPANY
By: /s/ Malcolm P. Burke By: /s/ John M. Boushy
----------------------- --------------------------
Its: President Its: /s/ Senior Vice President
----------------------- -------------------------
INTERACTIVE ENTERTAINMENT LIMITED
By: /s/ Malcolm P. Burke
-------------------------
Its: Vice President
------------------------
4
<PAGE>
EXHIBIT 6.1
<PAGE>
BUCKLEY DODDS
================================================================================
Chartered Accountants Suite 1140 - 1185 West Georgia Street
Vancouver, B.C. Canada V6E 4E6
Telephone (604) 688-7227
Fax: (604) 681-7716
August 29, 1997
Securities Exchange Commission
Dear Sirs:
Re: Interactive Entertainment Limited, "the Company" (formerly Skygames
--------------------------------------------------------------------
International Inc.)
-------------------
We refer to the Form 20-F of the Company dated August 29, 1997.
We consent to the use in the above mentioned Form 20-F of our report dated
April 28, 1997 to the shareholders of the Company on the following
financial statements:
- Consolidated balance sheets as at February 28, 1997 and February 29,
1996;
- Consolidated statements of operations, deficit and changes in
financial position for the years then ended.
We report that we have read the Form 20-F and have no reason to believe that
there are any misrepresentations in the information contained therein that is
derived from the financial statements upon which we have reported or that is
within our knowledge as a result of our audit of such financial statements.
This letter is provided to the Securities Regulatory Authority to which it is
addressed pursuant to the requirements of their securities legislation and not
for any other purpose.
Yours truly,
/s/ BUCKLEY DODDS
- ---------------------
Chartered Accountants
A Partnership of Incorporated Professionals
================================================================================
