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THIS DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(D) OF REGULATION S-T
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) June 16, 1997
Sky Games International Ltd.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Bermuda 0-22622 N/A
(State or other (Commission File Number) (IRS Employer
Jurisdiction of Identification Number)
incorporation)
</TABLE>
845 Crossover Lane
Memphis, Tennessee 38117
(901) 537-3801
(Address, including zip code,
and telephone number, including area code,
of registrant's principal executive offices)
<PAGE>
ITEM 5. Other Events.
Effective June 16, 1997, the shareholders of Sky Games International Ltd.,
a Bermuda exempted company ("Parent"), approved and adopted a resolution which
amended the bye-laws of Parent, changed the par value of the common stock of the
company to U.S.$.01 per share, and created 3,000 Redeemable Convertible Class A
Preference Shares and 5,000,000 Redeemable Class B Preference Shares, in
connection with the transactions contemplated by that certain Agreement and Plan
of Merger and Amalgamation (the "Amalgamation Agreement"), dated as of May 13,
1997, among Parent, SGI Holding Corporation Limited, a Bermuda exempted company
("SGIHC"), Interactive Entertainment Limited, a Bermuda exempted company
("IEL"), and Harrah's Interactive Investment Company, a Nevada corporation
("HIIC") .
Effective June 16, 1997, Parent consummated the conversion of the
outstanding balance (approximately U.S.$2.6 million) of Parent's promissory note
held by B/E Aerospace, Inc., into the newly created Class A Preference Shares.
The exact number of the Class A Preference Shares issued in consideration for
the conversion of the note balance was determined by dividing the loan amount by
U.S.$1,000.00. The Class A Preference Shares are convertible at any time into a
number of shares of Common Stock, as determined by a negotiated conversion
schedule. Dividends on the Class A Preference Shares are cumulative as of
February 28, 1997 and payable at an annual dividend rate of 9.0% per
U.S.$1,000.00. These shares do not have voting rights. Sky Games may, at its
option, redeem the Class A Preference Shares, in whole or in part, at any time
and from time to time, at a redemption price of U.S.$1,000.00 per share redeemed
plus any accrued and unpaid dividends thereon.
Effective June 17, 1997, Parent consummated the transactions contemplated
by the Amalgamation Agreement. Pursuant to the Amalgamation Agreement,
effective June 17, 1997 IEL was amalgamated with and into SGIHC and also
effective June 17, 1997 SGIHC was amalgamated with and into Parent (the
"Amalgamations"). According to the terms of the Amalgamation Agreement,
5,879,040 shares of common stock, U.S.$.01 per share ("Common Stock"), were
issued to HIIC in conversion of the 1,000,000 shares of stock of IEL held by
HIIC prior to the Amalgamations. HIIC and its affiliates will have approval
rights with respect to certain significant corporate actions by Parent for as
long as their aggregate share ownership exceeds certain levels. The
Amalgamations have been accounted for as a purchase. Pursuant to the
Amalgamation Agreement and the resolution adopted by the shareholders of Parent,
the name of Parent will be changed to "Interactive Entertainment Limited," as
promptly as such change can be effected in Bermuda.
An additional 1,007,875 shares of Common Stock were issued to HIIC in
conversion and satisfaction of a $1,000,000 loan (and accrued interest totaling
$7,875) from HIIC to IEL made pursuant to that certain Funding Agreement, dated
May 13, 1997, among Parent, SGHIC, IEL and HIIC.
The foregoing description of the Amalgamation Agreement and the
transactions contemplated thereby and consummated on June 17, 1997 is qualified
in its entirety by reference to the text of the Amalgamation Agreement, which is
filed as Exhibit 2 hereto and incorporated herein by reference,the text of the
Registration and Preemptive Rights Agreement, which is filed as Exhibit 4(a)
hereto and incorporated herein by reference, the text of the Funding Agreement,
which is filed as Exhibit 10 hereto, and the text of the Press Release, dated
June 18, 1997, which is filed as Exhibit 99 hereto and the issuance of the Class
A Preference Shares and granting of certain registration rights to B/E Aerospace
is qualified on its entirety by reference to the text of the Resolutions of the
Board of Directors of Parent setting forth the rights and preferences of the
Class A Preference Shares, which is filed as Exhibit 4(c) hereto and the text of
the Registration Rights Agreement, which is filed as Exhibit 4(b) hereto.
<PAGE>
ITEM 7. Financial Statements, Pro Forma, Financial Information and Exhibits
(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
2. Amalgamation Agreement, dated as of May 13, 1997.
4(a). Registration and Preemptive Rights Agreement with Harrah's
Interactive Investment Company, dated June 17, 1997.
4(b). Registration Rights Agreement with B/E Aerospace, dated June
17, 1997.
4(c). Resolutions of the Board of Directors of Sky Games
International, Ltd., setting forth the Rights and Preferences
of the Class A Preference Shares.
10. Funding Agreement, dated June 17, 1997.
20. Sky Games International Ltd. Proxy Statement, dated as of May
13, 1997
99. Press Release issued by Sky Games International, Ltd., dated
June 17, 1997.
ITEM 9. Sales of Equity Securities Pursuant to Regulation S.
As of June 13, 1997, Sky Games had closed sales of $xxx,xxx.00 of 8% Convertible
Debentures due March 31, 1999 (the "Debentures"). One-third of the Debentures
shall be convertible at any time after 60 days, one-third shall be convertible
after 90 days; and the balance shall be convertible after 105 days into Common
Stock at the lower of 85% of the average of the closing bid prices of the Common
Stock for the five trading days immediately preceding the execution by the
subscriber of its individual subscription for Debentures or 77.5% of the average
of the closing bid prices of the Common Stock for the five trading days
immediately preceding the date of conversion. London Select Enterprises, Ltd.,
is the broker of the offering. There is no principal underwriter.
Up to $3.5 million of Debentures will be sold at par value. London Select
Enterprises will be paid 0.8% of the gross proceeds from the sale of the
debentures. Additionally, London Select Enterprises will receive warrants
exercisable at any time within five years of the date such warrants were issued
to Broker to purchase up to 125,000 shares of Common Stock for 120% of the
average of the closing bid prices of the Common Stock for the five trading days
immediately preceding the date of issuance and up to 25,000 shares of Common
Stock at the average of the closing bid prices of the Common Stock for the five
trading days immediately preceding the date of issuance. However, Sky Games and
London Select Enterprises are continuing to negotiate the amount of the
aforementioned warrants.
Upon completion of the sales of the Debentures, Sky Games will disclose the
total results of the sales program.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SKY GAMES INTERNATIONAL LTD.
June 20, 1997 By: /s/ Gordon Stevenson
Gordon Stevenson
Chief Executive Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- - ----------- ----------- --------
<C> <S> <C>
2 Amalgamation Agreement, dated as of May 13, 1997. xx
4(a) Registration and Preemptive Rights Agreement with xx
Harrah's Interactive Investment Company, dated June
17, 1997.
4(b) Registration Rights Agreement with B/E Aerospace, xx
dated June 17, 1997.
4(c) Resolutions of the Board of Directors of Sky Games xx
International, Ltd., setting forth the Rights and
Preferences of the Class A Preference Shares.
10 Funding Agreement, dated June 17, 1997. xx
20 Sky Games International Ltd. Proxy Statement, dated as xx
of May 13, 1997.
99 Press Release issued by Sky Games International, Ltd., xx
dated June 18, 1997.
</TABLE>
<PAGE>
EXHIBIT 2
[EXECUTION COPY]
PLAN AND AGREEMENT OF MERGER AND AMALGAMATION
PLAN AND AGREEMENT OF MERGER AND AMALGAMATION dated as of May 13, 1997
(this "Agreement") among Sky Games International Ltd., a Bermuda exempted
company ("Parent"), SGI Holding Corporation Limited, a Bermuda exempted company
and a wholly-owned subsidiary of Parent ("Sub"), and Interactive Entertainment
Limited, a Bermuda exempted company ("IEL") (Sub and IEL being hereinafter
collectively referred to as the "Amalgamating Companies") and Harrah's
Interactive Investment Company, a Nevada corporation ("HIIC").
W I T N E S S E T H:
WHEREAS, Parent, Sub, IEL and HIIC desire IEL to amalgamate with and into
Sub (the "Amalgamation"), upon the terms and subject to the conditions herein
set forth, whereby each issued and outstanding share of common stock, U.S.$1.00
par value per share, of IEL ("IEL Common Shares"), not owned directly or
indirectly by Sub or Parent, will be converted into shares of common stock,
Cdn.$.01 par value, of Parent ("Parent Common Shares");
WHEREAS, the Board of Directors of Parent has determined that the
Amalgamation is in furtherance of and consistent with its long-term business
strategies and is fair to and in the best interests of its shareholders;
WHEREAS, the respective Boards of Directors of Parent and Sub have approved
and declared advisable the Amalgamation;
WHEREAS, Sub has approved as a shareholder of IEL and Parent has approved
as the sole shareholder of Sub this Agreement and the Amalgamation;
NOW, THEREFORE, in consideration of the premises, representations,
warranties and agreements herein contained, the parties hereto agree as follows:
ARTICLE I
THE AMALGAMATION
Section 1.1 The Amalgamation. Upon the terms and subject to the
conditions herein set forth, and in accordance with The Companies Act 1981
("CA"), the Amalgamating Companies shall make the appropriate filings with the
Registrar of Companies in Bermuda and IEL shall be amalgamated with and into Sub
at the Effective Time (as hereinafter defined). Following the Amalgamation, the
separate corporate existence of IEL shall cease and IEL and Sub shall continue
as the amalgamated company (the "Amalgamated Company") and shall continue to
exist as a company incorporated and governed by the laws of Bermuda.
Section 1.2 Effective Time. The Amalgamation shall be effective on the
date shown in the Certificate of Amalgamation issued by the Registrar of
Companies in Bermuda (the "Effective Time").
Section 1.3 Effects of the Amalgamation. At the Effective Time, the
effect of the Amalgamation shall be as provided in the applicable provisions of
the CA and as set forth in this Agreement. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time, except as otherwise
provided herein:
(a) the amalgamation of the Amalgamating Companies and their
continuance as one company shall become effective;
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(b) all of the property, rights, privileges, powers and franchises of
Sub and IEL shall vest in the Amalgamated Company;
(c) all debts, liabilities and duties of Sub and IEL shall become the
debts, liabilities and duties of the Amalgamated Company;
(d) any existing cause of action, claim or liability to prosecution
shall be unaffected;
(e) any civil, criminal or administrative action or proceeding by or
against an Amalgamating Company may be continued to be prosecuted by or against
the Amalgamated Company; and
(f) any conviction against, or ruling, order or judgment in favor of
or against, an Amalgamating Company may be enforced by or against the
Amalgamated Company.
Section 1.4 Memorandum of Association; Bye-laws; Directors and Officers.
(a) At the Effective Time, the Memorandum of Association of Sub, as in effect
immediately prior to the Effective Time, shall be the Memorandum of Association
of the Amalgamated Company until thereafter changed or amended as provided
therein or by applicable law.
(b) The Bye-Laws of Sub, as in effect immediately prior to the
Effective Time, shall be the Bye-laws of the Amalgamated Company until
thereafter changed or amended as provided therein or as provided by applicable
law.
(c) The Board of Directors of the Amalgamated Company shall consist of
not less than three (3) directors to be designated by Parent, who shall serve
until their respective successors are duly elected and qualified. The names and
addresses of each of the individuals to serve as directors of the Amalgamated
Company are as follows:
(i) Gordon Stevenson, 1023 Cherry Road, Memphis, Tennessee
38117;
(ii) Laurence Geller, 10 South Wacker Drive, Suite 3500,
Chicago, Illinois 60606; and
(iii) John Boushy, 1023 Cherry Road, Memphis, Tennessee 38117.
(d) The officers of IEL immediately prior to the Effective Time shall
be the officers of the Amalgamated Company until their respective successors are
duly elected and qualified.
Section 1.5 Conversion of Securities. As of the Effective Time, by virtue
of the Amalgamation and without any action on the part of the shareholders of
either of the Amalgamating Companies:
(a) All IEL Common Shares owned by Sub or Parent shall be cancelled
without any repayment of capital in respect thereof and no capital stock of
Parent or other consideration shall be delivered in exchange therefor.
(b) Each IEL Common Share issued and outstanding immediately prior to
the Effective Time (other than shares to be cancelled in accordance with Section
1.5(a)) shall be converted into 5.879040 (such number being hereinafter referred
to as the "Conversion Number") validly issued and fully paid shares of Parent
Common Shares. All such IEL Common Shares, when so converted, shall no longer
be outstanding and shall automatically be cancelled and retired without any
repayment of capital in respect thereof; and each holder prior to the Effective
Time of any such IEL Common Shares shall cease to have any rights with respect
thereto, except the right to receive (i) certificates representing the shares of
Parent Common Shares into which such IEL Common Shares have been converted and
(ii) any dividends and other distributions in accordance with Section 1.7.
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Section 1.6 Parent to Make Stock Certificates Available. (a) Exchange of
Certificates. As soon as practicable after the Effective Time, Parent shall
cause its Transfer Agent and Registrar (the "Transfer Agent") to issue to the
holders of IEL Common Shares converted in the Amalgamation, certificates (the
"Parent Certificates") representing the shares of Parent Common Shares issuable
pursuant to Section 1.5(b) in exchange for the outstanding IEL Common Shares.
(b) Status of Company Certificates. Subject to the provisions of
Section 1.7, each certificate which immediately prior to the Effective Time
represented IEL Common Shares to be converted in the Amalgamation (the "IEL
Certificates") shall, from and after the Effective Time and until surrendered in
exchange for Parent Certificate(s) in accordance with this Section 1.6, be
deemed for all purposes to represent the number of shares of Parent Common
Shares into which such IEL Common Shares shall have been so converted. For
purposes of this Section 1.6, Parent may rely conclusively on the shareholder
records of IEL in determining the identity of, and the number of IEL Common
Shares held by, each holder of an IEL Certificate at the Effective Time.
Section 1.7 Dividends; Transfer Taxes; Withholding. (a) No dividends or
other distributions that are declared on or after the Effective Time on Parent
Common Shares, or are payable to the holders of record thereof who became such
on or after the Effective Time, shall be paid to any person entitled by reason
of the Amalgamation to receive Parent Certificates representing Parent Common
Shares until such person shall have surrendered its IEL Certificate(s) as
provided in Section 1.6. Subject to applicable law, there shall be paid to each
person receiving a Parent Certificate representing such shares of Parent Common
Shares: (i) at the time of such surrender or as promptly as practicable
thereafter, the amount of any dividends or other distributions theretofore paid
with respect to the shares of Parent Common Shares represented by such Parent
Certificate and having a record date on or after the Effective Time and a
payment date prior to such surrender; and (ii) at the appropriate payment date
or as promptly as practicable thereafter, the amount of any dividends or other
distributions payable with respect to such shares of Parent Common Shares and
having a record date on or after the Effective Time but prior to such surrender
and a payment date on or subsequent to such surrender. In no event shall the
person entitled to receive such dividends or other distributions be entitled to
receive interest on such dividends or other distributions.
(b) If any Parent Certificate representing shares of Parent Common
Shares is to be issued in a name other than that in which IEL Certificate
surrendered in exchange therefor is registered, it shall be a condition of such
exchange that the IEL Certificate so surrendered shall be properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange shall pay to the Transfer Agent any transfer or other taxes required by
reason of the issuance of such Parent Certificate in a name other than that of
the registered holder of IEL Certificate so surrendered, or shall establish to
the satisfaction of the Transfer Agent that such tax has been paid or is not
applicable.
Section 1.8 No Further Ownership Rights in IEL Common Shares. All
certificates representing Parent Common Shares delivered upon the surrender for
exchange of any IEL Certificate in accordance with the terms hereof shall be
deemed to have been delivered in full satisfaction of all rights pertaining to
IEL Common Shares represented by such IEL Certificate.
Section 1.9 Closing of Company Transfer Books. At the Effective Time, the
transfer books of IEL for IEL Common Shares shall be closed, and no transfer of
IEL Common Shares shall thereafter be made. If, after the Effective Time, IEL
Certificates are presented to the Amalgamated Company, they shall be cancelled
and exchanged as provided in this Article I.
Section 1.10 Further Assurances. If, at any time after the Effective
Time, the Amalgamated Company shall consider or be advised that any deeds, bills
of sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (i) to vest, perfect or confirm, of record or otherwise, in
the Amalgamated Company its right, title and interest in, to or under any of the
rights, privileges, powers, franchises, properties or assets of either of the
Amalgamating Companies or (ii) otherwise to carry out the purposes of this
Agreement, the Amalgamated
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Company and its proper officers and directors or their designees shall be
authorized to execute and deliver, in the name and on behalf of either
Amalgamating Company, all such deeds, bills of sale, assignments and assurances
and to do, in the name and on behalf of either Amalgamating Company, all such
other acts and things as may be necessary, desirable or proper to vest, perfect
or confirm the Amalgamated Company's right, title and interest in, to and under
any of the rights, privileges, powers, franchises, properties or assets of such
Amalgamating Company and otherwise to carry out the purposes of this Agreement.
Section 1.11 Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall be deemed to take place at the offices of
Altheimer & Gray, 10 South Wacker Drive, Suite 4000, Chicago, Illinois at 12:01
p.m., Central Daylight Savings Time, on the first business day on which each of
the conditions set forth in Article VII shall have been (and continue to be)
fulfilled or waived, or at such other time and place as Parent and HIIC may
agree.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant, jointly and severally, to HIIC as
follows:
Section 2.1 Organization, Standing and Power. Each of Parent and Sub is
an exempted company duly organized, validly existing and in good standing under
the laws of Bermuda; and each of Parent and Sub has the requisite corporate
power and authority to carry on its business as now being conducted. Each
Subsidiary (as hereinafter defined) of Parent is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated and has the requisite corporate power and authority to
carry on its business as now being conducted. Parent and each of its
Subsidiaries are duly qualified to do business, and are in good standing, in
each jurisdiction where the character of their properties owned or held under
lease or the nature of their activities makes such qualification necessary,
except where the failure to be so qualified would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect (as
hereinafter defined) on Parent. Parent and its Subsidiaries are not subject to
any material joint venture, joint operating or similar arrangement or any
material shareholders agreement relating thereto other than the Shareholders
Agreement among Sub, HIIC and IEL dated December 30, 1994 (the "Shareholders
Agreement") and the Management Agreement between IEL and Harrah's Interactive
Entertainment Company, a Nevada corporation ("HIEC"), dated December 30, 1994
(the "Management Agreement"). For purposes of this Agreement: (i) "Material
Adverse Change" or "Material Adverse Effect" means, when used with respect to
Parent or HIIC, as the case may be, any change or effect that is materially
adverse to the business, properties, assets, liabilities, condition (financial
or otherwise) or results of operations of Parent and its Subsidiaries and IEL
taken as a whole, or HIIC and its Subsidiaries taken as a whole, as the case may
be, except, in the case of a Material Adverse Change, for any change resulting
from conditions or circumstances generally affecting the industry as a whole in
which Parent or HIIC, as the case may be, operates; and (ii) "Subsidiary" means
any corporation, partnership, joint venture or other legal entity of which
Parent or HIIC, as the case may be (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 interests 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, other than, with respect to
Parent and Sub, IEL and its Subsidiary.
Section 2.2 Capital Structure. As of the date hereof, the authorized
capital stock of Parent consists of: 50,000,000 shares of Parent Common Shares.
At the close of business on April 21, 1997, 13,304,405 shares of Parent Common
Shares were issued and outstanding, all of which were validly issued and are
fully paid and are free of preemptive rights. All of the shares of Parent
Common Shares issuable in exchange for IEL Common Shares at the Effective Time
in accordance with this Agreement will be, when so issued, duly authorized,
validly issued and fully paid. As of the date of this Agreement, other than
outstanding options for 1,190,000 shares of Parent Common
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Shares; the authority to issue options for 4,070,105 additional shares of Parent
Common Shares; outstanding share purchase warrants for the purchase of 308,528
shares of Parent Common Shares; the rights of HIIC pursuant to that certain
convertible secured promissory note and that certain warrant issued to HIIC in
connection with the Funding Agreement among Parent, Sub, IEL and HIIC dated May
13, 1997 (the "Funding Agreement"); and the agreement to issue, subject to
necessary shareholder approvals to create a class of preference shares and
authorize such issuance, up to 3,000 shares of convertible redeemable preference
shares of Parent to B/E Aerospace, Inc., a Delaware corporation ("B/EA"), which
are convertible into Parent Common Shares at a percentage of the trading price
of the Parent Common Shares as previously disclosed to HIIC (the "B/E
Conversion") (collectively, the "Parent Stock Rights"), there are no options,
warrants, calls, rights or agreements to which Parent or any of its Subsidiaries
is a party or by which any of them is bound obligating Parent or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of Parent or any such Subsidiary or
obligating Parent or any such Subsidiary to grant, extend or enter into any such
option, warrant, call, right or agreement. Each outstanding share of capital
stock of each Subsidiary of Parent is duly authorized, validly issued, fully
paid and nonassessable and each such share is beneficially owned by Parent or
another Subsidiary of Parent, free and clear of all security interests, liens,
claims, pledges, options, rights of first refusal, agreements, limitations on
voting rights, charges and other encumbrances of any nature whatsoever, other
than those interests granted to HIIC pursuant to the Funding Agreement. All of
Sub's outstanding shares of capital stock are owned directly by Parent. Sub
owns four million (4,000,000) shares of IEL Common Shares in the aggregate
represented by IEL Certificate numbers 3, 8, 10, 12, 14, 16, 18, 20, 22, 33, 34,
37, 38, 39 and 40 issued in the name of Sub and neither Parent nor any of its
Subsidiaries owns any other IEL Common Shares or, except pursuant to the
Shareholders Agreement, any option, warrant, call, right or agreement to receive
any other IEL Common Shares.
Section 2.3 Authority. The Board of Directors of Parent has declared as
advisable and fair to and in the best interests of the shareholders of Parent
(and, in the case of clauses (b) and (c) below, has resolved to recommend to
such shareholders for approval) (a) the Amalgamation and the transactions to be
effected thereby, (b) amendments to the Bye-Laws of Parent set forth on Exhibit
A attached hereto (collectively, the "Bye-Law Amendments") and (c) the
resolutions to be adopted by the shareholders of Parent set forth on Exhibit B
attached hereto (the "Resolutions"). The Boards of Directors of Parent and Sub
have each approved this Agreement and all agreements to be entered into by
Parent or Sub in connection therewith (collectively, "Parent Ancillary
Agreements"). Parent has approved the Amalgamation and this Agreement as the
sole shareholder of Sub. The Board of Directors of Sub has declared the
Amalgamation advisable, and Sub has approved the Amalgamation and this Agreement
as a shareholder of IEL. Parent has all requisite power and authority to enter
into this Agreement and the Parent Ancillary Agreements to which it is a party
and (subject to (x) approval of the Resolutions by a majority of the votes cast
at the Parent Shareholder Meeting (as hereinafter defined) by the holders of
Parent Common Shares, and (y) adoption of the Bye-Law Amendments by seventy-five
percent (75%) of the votes cast at the Parent Shareholder Meeting by the holders
of Parent Common Shares) to consummate the transactions contemplated hereby and
thereby. Sub has all requisite power and authority to enter into this Agreement
and the Parent Ancillary Agreements to which it is a party and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the Parent Ancillary Agreements by Parent and Sub and the consummation by
Parent and Sub of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action on the part of Parent and Sub,
subject, in the case of this Agreement, to (x) approval of the Resolutions by a
majority of the votes cast at the Parent Shareholder Meeting by the holders of
Parent Common Shares, and (y) adoption of the Bye-Law Amendments by seventy-five
percent (75%) of the votes cast at the Parent Shareholder Meeting by the holders
of Parent Common Shares. This Agreement and the Parent Ancillary Agreements
have been duly executed and delivered by Parent and Sub and (assuming the valid
authorization, execution and delivery hereof and thereof by HIIC and any other
parties hereto and thereto and the validity and binding effect hereof and
thereof on HIIC and any other parties thereto) each constitutes the valid and
binding obligation of Parent and Sub enforceable against Parent and Sub in
accordance with its terms, except as to the effect, if any, of (a) applicable
bankruptcy and other similar laws affecting the rights of creditors generally,
(b) rules of law governing specific performance, injunctive relief and other
equitable remedies, and (c) the enforceability of provisions requiring
indemnification in connection with the offering, issuance or sale of securities.
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Section 2.4 Consents and Approvals; No Violation. The execution and
delivery of this Agreement and the Parent Ancillary Agreements do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a material benefit under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
Parent or any of its Subsidiaries under: (i) subject to adoption of the
Resolutions and Bye-Law Amendments as described in Section 2.3, any provision of
the Memorandum of Continuance and Bye-laws of Parent or the comparable charter
or organization documents or by-laws of any of its Subsidiaries, (ii) assuming
approval by HIIC under the Shareholders Agreement and HIEC under the Management
Agreement and the consent of Singapore Airlines Limited ("SAL") to IEL as
previously furnished by IEL to HIIC and Parent (the "SAL Consent"), any loan or
credit agreement, note, bond, mortgage, indenture, lease, agreement, instrument,
permit, concession, franchise or license applicable to Parent or any of its
Subsidiaries or (iii) assuming adoption of the Resolutions and Bye-law
Amendments as described in Section 2.3, any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Parent or any of its
Subsidiaries or any of their respective properties or assets, other than, in the
case of clauses (ii) and (iii), any such violations, defaults, rights, liens,
security interests, charges or encumbrances that, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect on
Parent and would not materially impair the ability of Parent or Sub to perform
their respective obligations hereunder or under the Parent Ancillary Agreements
or prevent the consummation of any of the transactions contemplated hereby or
thereby. No filing or registration with, or authorization, consent or approval
of, any domestic (federal and state), foreign (including provincial) or
supranational court, commission, governmental body, regulatory agency, authority
or tribunal (a "Governmental Entity") is required by or with respect to Parent
or any of its Subsidiaries in connection with the execution and delivery of this
Agreement or the Parent Ancillary Agreements by Parent and Sub, or is necessary
for the consummation of the Amalgamation and the other transactions contemplated
by this Agreement or the Parent Ancillary Agreements, except: (i) for the filing
with the Registrar of Companies in Bermuda of an application for consent and an
application for registration of the Amalgamation and appropriate documents with
the relevant authorities of other states in which IEL or any of its Subsidiaries
is qualified to do business; (ii) for receipt of consent of the Minister of
Finance in Bermuda and such other consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under the laws of any
foreign country (including, without limitation, any political subdivision
thereof) in which Parent or its Subsidiaries conducts any business or owns any
property or assets; and (iii) for such other consents, orders, authorizations,
registrations, declarations and filings the failure of which to obtain or make
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on Parent and would not materially impair the ability of
Parent or Sub to perform their respective obligations hereunder or under the
Parent Ancillary Agreements or prevent the consummation of any of the
transactions contemplated hereby or thereby.
Section 2.5 SEC Documents and Other Reports. As of their respective
dates, all documents filed by Parent with the U. S. Securities and Exchange
Commission (the "SEC") on or after January 4, 1994 (the "Parent SEC Documents"),
copies of which have been delivered to HIIC, complied in all material respects
with the requirements of the U. S. Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as the case may be, and none of the Parent SEC Documents
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
Section 2.6 Absence of Certain Changes or Events. Except as set forth in
the Parent SEC Documents filed prior to the date hereof, on or after January 4,
1994: (i) Parent and its Subsidiaries have not incurred any material liability
or obligation (indirect, direct or contingent), or entered into any material
oral or written agreement or other transaction, that is not in the ordinary
course of business or that has resulted or would reasonably be expected to
result in a Material Adverse Effect on Parent; (ii) Parent and its Subsidiaries
have not sustained any loss or interference with their business or properties
(whether or not covered by insurance) that has had or that would reasonably be
expected to have a Material Adverse Effect on Parent; (iii) there has been no
material change in the indebtedness of Parent and its Subsidiaries (other than
changes in the ordinary course of business or as a result of a contemplated
private
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placement by Parent of 8% convertible debentures in an amount not to exceed $3.5
million (the "Debentures"), no change in the outstanding shares of capital stock
of Parent except for the issuance of Parent Common Shares pursuant to the Parent
Stock Rights and no dividend or distribution of any kind (including stock
dividends, stock splits and the like) declared, paid or made by Parent on any
class of its capital stock and (iv) there has been no Material Adverse Change
with respect to Parent, nor any event or development that would, individually or
in the aggregate, reasonably be expected to result in a Material Adverse Change
with respect to Parent.
Section 2.7 No Existing Violation, Default, Etc. Neither Parent nor any
of its Subsidiaries is in violation of (i) its Memorandum of Continuance,
Memorandum of Association or Bye-laws, (ii) any applicable law, ordinance or
administrative or governmental rule or regulation or (iii) any order, decree or
judgment of any Governmental Entity having jurisdiction over Parent or any of
its Subsidiaries, except for any violations that, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect on
Parent. Assuming consummation of the B/E Conversion, there is no existing event
of default or event that, but for the giving of notice or lapse of time, or
both, would constitute an event of default under any loan or credit agreement,
note, bond, mortgage, indenture or guarantee of indebtedness for borrowed money
and there is no existing event of default or event that, but for the giving of
notice or lapse of time, or both, would constitute an event of default under any
lease, other agreement or instrument to which Parent or any of its Subsidiaries
is a party or by which Parent or any such Subsidiary or any of their respective
properties, assets or business is bound, in the case of each clause immediately
above, which, individually or in the aggregate, has had or would reasonably be
expected to have a Material Adverse Effect on Parent.
Section 2.8 Actions and Proceedings. There are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental Entity against
Parent or any of its Subsidiaries, any of its or their properties, assets or
business, or, to the knowledge of Parent, any of its or their current or former
directors or officers, as such, that would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Parent. Other
than continuing monthly review by the National Association of Securities Dealers
of Parent's compliance with the continued listing requirements of the Nasdaq
SmallCap Market, there are no actions, suits or claims or legal, administrative
or arbitration proceedings or investigations pending or, to the knowledge of
Parent, threatened against Parent or any of its Subsidiaries, any of its or
their properties, assets or business, or, to the knowledge of Parent, any of its
or their current or former directors or officers, as such, that would reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on Parent. As of the date hereof, there are no actions, suits or claims or
legal, administrative or arbitration proceedings or investigations pending or,
to the knowledge of Parent, threatened against Parent or any of its
Subsidiaries, any of its or their properties, assets or business, or, to the
knowledge of Parent, any of its or their current or former directors or
officers, as such, relating to the transactions contemplated by this Agreement.
Section 2.9 Contracts. All of the material contracts of Parent and its
Subsidiaries that are required to be described in the Parent SEC Documents or to
be filed as exhibits thereto have been described or filed as required. Neither
Parent or any of its Subsidiaries nor, to the knowledge of Parent, any other
party is in breach of or default under any such contracts which are currently in
effect, except for such breaches and defaults which would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect on
Parent. Except as set forth in the Parent SEC Documents, neither Parent nor any
of its Subsidiaries is a party to or bound by any non-competition agreement or
any other agreement or obligation which purports to limit in any material
respect the manner in which, or the localities in which, Parent or any such
Subsidiary is entitled to conduct all or any material portion of the business of
Parent and its Subsidiaries taken as whole.
Section 2.10 Liabilities. Except as fully reflected or reserved against
in the most recent audited consolidated financial statements for the fiscal year
ended February 28, 1997, or disclosed in the footnotes thereto, Parent and its
Subsidiaries had no liabilities (including, without limitation, liabilities for
income, use or any other taxes) at the date of such consolidated financial
statements, absolute or contingent, of a nature which are required by generally
accepted accounting principles to be reflected on such consolidated financial
statements or disclosed in the footnotes thereto, that were material, either
individually or in the aggregate, to Parent and its Subsidiaries and IEL taken
as a whole.
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Except as so reflected, reserved, disclosed or set forth, Parent and its
Subsidiaries have no commitments which are reasonably expected to be materially
adverse, either individually or in the aggregate, to Parent and its Subsidiaries
and IEL taken as a whole.
Section 2.11 Operations of Sub. Sub was formed solely for the purpose of
owning its interest in IEL and has engaged in no other business activities and
has conducted its operations only as contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HIIC
HIIC represents and warrants to Parent and Sub as follows:
Section 3.1 Organization, Standing and Power. HIIC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada; owns one million (1,000,000) shares of IEL Common Shares in the
aggregate represented by IEL Certificates numbers 5, 6, 25, 26, 27, 28, 29, 30,
31, 32, 35 and 36 issued in the name of HIIC and neither HIIC nor any of its
Affiliates (as hereinafter defined) owns any other IEL Common Shares; or, except
pursuant to the Shareholders Agreement, any option, warrant, call, right or
agreement to receive any other IEL Common Shares and has the requisite corporate
power and authority to carry on its business as now being conducted. For
purposes of this Agreement, "Affiliates" means, any Person which Controls a
party to this Agreement, which that party Controls or which is under common
Control with that party; "Person" means an individual, partnership, limited
partnership, corporation, limited liability company, association, joint stock
company, trust, joint venture or 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; and "Control" means the power, direct
or indirect, to direct or cause the direction of the management and policies of
a Person through voting securities, contract or otherwise.
Section 3.2 Authority. Subject to the approval of the Board of Directors
of HIIC, prior to the Effective Time, HIIC shall have approved the Amalgamation
and this Agreement as a shareholder of IEL. Subject to the approval by the Board
of Directors of each of HIIC and HIEC, HIIC and, as applicable, HIEC have all
requisite power and authority to enter into this Agreement and all agreements to
be entered into by HIIC and HIEC in connection therewith (collectively, "HIIC
Ancillary Agreements") and to consummate the transactions contemplated hereby
and thereby. Subject to the approval of the Board of Directors of each of HIIC
and HIEC, prior to the Effective Time, the execution and delivery of this
Agreement and the HIIC Ancillary Agreements by HIIC and HIEC and the
consummation by HIIC and HIEC of the transactions contemplated hereby and
thereby shall have been duly authorized by all necessary corporate action on the
part of HIIC and, as applicable, HIEC. Subject to the approval by the Board of
Directors of each of HIIC and HIEC, prior to the Effective Time, this Agreement
and the HIIC Ancillary Agreements shall have been duly executed and delivered by
HIIC and HIEC, as applicable, (assuming the valid authorization, execution and
delivery hereof by Parent, Sub and any other parties hereto and thereto and the
validity and binding effect hereof on Parent, Sub and any other parties thereto)
and each constitutes the valid and binding obligation of HIIC and HIEC, as
applicable, enforceable against HIIC and HIEC, as applicable, in accordance with
its terms, except as to the effect, if any, of (a) applicable bankruptcy and
other similar laws affecting the rights of creditors generally, (b) rules of law
governing specific performance, injunctive relief and other equitable remedies,
and (c) the enforceability of provisions requiring indemnification in connection
with the offering, issuance or sale of securities.
Section 3.3 Consents and Approvals; No Violation. The execution and
delivery of this Agreement and the HIIC Ancillary Agreements does not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a material benefit under, or result in the creation of any lien,
security interest, charge or encumbrance
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upon any of the properties or assets of HIIC or HIEC under: (i) any provision of
the Articles of Incorporation or By-Laws of HIIC or its Affiliates, (ii)
assuming approval by the other parties thereto under the Shareholders Agreement
and the Management Agreement and the SAL Consent, any loan or credit agreement,
note, bond, mortgage, indenture, lease, agreement, instrument, permit,
concession, franchise or license applicable to HIIC or HIEC or (iii) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to HIIC or HIEC or any of its properties or assets, other than, in the case of
clauses (ii) and (iii), any such violations, defaults, rights, liens, security
interests, charges or encumbrances that, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect on HIIC or HIEC and
would not materially impair the ability of HIIC or, as applicable, HIEC to
perform its obligations hereunder or under the HIIC Ancillary Agreements or
prevent the consummation of any of the transactions contemplated hereby or
thereby. No filing or registration with, or authorization, consent or approval
of, any Governmental Entity is required by or with respect to HIIC or HIEC in
connection with the execution and delivery of this Agreement or the HIIC
Ancillary Agreements by HIIC or HIEC or is necessary for the consummation of the
Amalgamation and the other transactions contemplated by this Agreement or the
HIIC Ancillary Agreements, except: (i) for the filing with the Registrar of
Companies in Bermuda of an application for approval and for registration of the
Amalgamation, (ii) for receipt of consent of the Minister of Finance in Bermuda
and such other consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under the laws of any foreign
country (including, without limitation, any political subdivision thereof) in
which HIIC or HIEC conducts any business or owns any property or assets and
(iii) for such other consents, orders, authorizations, registrations,
declarations and filings the failure of which to obtain or make would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on HIIC or HIEC and would not materially impair the ability of
HIIC or HIEC to perform its obligations hereunder or under the HIIC Ancillary
Agreements or prevent the consummation of any of the transactions contemplated
hereby and thereby.
Section 3.4 Actions and Proceedings. As of the date hereof, there are no
actions, suits or claims or legal, administrative or arbitration proceedings or
investigations pending or, to the knowledge of HIIC, threatened against HIIC or
any of its Subsidiaries or Affiliates, any of its or their properties, assets or
business relating to the transactions contemplated by this Agreement.
Section 3.5 Ownership of Parent Capital Stock. Neither HIIC nor any of its
Affiliates owns any shares of the capital stock of Parent.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF IEL
IEL represents and warrants to HIIC, Parent and Sub as follows:
Section 4.1 Organization, Standing and Power. IEL is an exempted company
duly organized, validly existing and in good standing under the laws of Bermuda;
and IEL has the requisite corporate power and authority to carry on its business
as now being conducted. Each Subsidiary of IEL is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated and has the requisite corporate power and authority to
carry on its business as now being conducted. IEL and each of its Subsidiaries
are duly qualified to do business, and are in good standing, in each
jurisdiction where the character of their properties owned or held under lease
or the nature of their activities makes such qualification necessary, except
where the failure to be so qualified would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on IEL. IEL is not
subject to any material joint venture, joint operating or similar arrangement or
any material shareholders agreement relating thereto other than the Shareholders
Agreement and the Management Agreement.
Section 4.2 Capital Structure. As of the date hereof, the authorized
capital stock of IEL consists of: 5,000,000 shares of IEL Common Shares, all of
which are issued and outstanding, were validly issued, are fully paid
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and are free of preemptive rights, except for rights under the Shareholders
Agreement. As of the date of this Agreement, other than rights and options
which may arise under the Shareholders Agreement (collectively, the "IEL Stock
Rights"), there are no options, warrants, calls, rights or agreements to which
IEL or any of its Subsidiaries is a party or by which any of them is bound
obligating IEL or any of its Subsidiaries to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock of IEL or
obligating IEL to grant, extend or enter into any such option, warrant, call,
right or agreement. Each outstanding share of capital stock of each Subsidiary
of IEL is duly authorized, validly issued, fully paid and nonassessable and each
such share is beneficially owned by IEL, free and clear of all security
interests, liens, claims, pledges, options, rights of first refusal, agreements,
limitations on voting rights, charges and other encumbrances of any nature
whatsoever.
Section 4.3 Authority. Prior to the Effective Time, the Board of Directors
of IEL shall have approved this Agreement, and subject to approval of the Board
of Directors of IEL and the approval of Sub and HIIC as the only shareholders of
IEL, IEL has all requisite power and authority to enter into this Agreement and
all agreements to be entered into by IEL in connection therewith (collectively,
"IEL Ancillary Agreements") to which it is a party and to consummate the
transactions contemplated hereby and thereby. Prior to the Effective Time, the
execution and delivery of this Agreement and the IEL Ancillary Agreements by IEL
and the consummation by IEL of the transactions contemplated hereby and thereby
shall have been duly authorized by all necessary corporate action on the part of
IEL. Subject to approval of the Board of Directors of IEL and the approval of
Sub and HIIC as the only shareholders of IEL, this Agreement and the IEL
Ancillary Agreements has been duly executed and delivered by IEL and (assuming
the valid authorization, execution and delivery hereof and thereof by the other
parties hereto and thereto and the validity and binding effect hereof and
thereof on the other parties thereto) each constitutes the valid and binding
obligation of IEL enforceable against IEL in accordance with its terms , except
as to the effect, if any, of (a) applicable bankruptcy and other similar laws
affecting the rights of creditors generally, (b) rules of law governing specific
performance, injunctive relief and other equitable remedies, and (c) the
enforceability of provisions requiring indemnification in connection with the
offering, issuance or sale of securities.
Section 4.4 Consents and Approvals; No Violation. The execution and
delivery of this Agreement and the IEL Ancillary Agreements do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a material benefit under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
IEL or any of its Subsidiaries under: (i) any provision of the Memorandum of
Association and Bye-laws of IEL or the comparable charter or organization
documents or by-laws of any of its Subsidiaries, (ii) assuming approval by the
other parties thereto under the Shareholders Agreement and the Management
Agreement and the SAL Consent, any loan or credit agreement, note, bond,
mortgage, indenture, lease, agreement, instrument, permit, concession, franchise
or license applicable to IEL or any of its Subsidiaries (other than (a) the
Mutual Confidentiality and Non-Disclosure Agreement, dated March 22, 1996, by
and between IEL and the In-Flight Entertainment Division of B/E Aerospace, Inc.,
(b) the Software Integration Assistance Agreement, dated as of June 1, 1995, by
and between IEL and Matsushita Avionics Systems Corporation, (c) the Public
Relations Services Agreement dated March 28, 1996, by and between Karen Weiner
Escalera Associates, Inc. and IEL) and (d) Sublicense Agreement effective as of
October 11, 1996 between Harrah's Operating Company, Inc. and IEL or (iii) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to IEL or any of its Subsidiaries or any of their respective properties or
assets, other than, in the case of clauses (ii) and (iii), any such violations,
defaults, rights, liens, security interests, charges or encumbrances that,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on IEL and would not materially impair the ability of
IEL to perform its obligations hereunder or under the IEL Ancillary Agreements
or prevent the consummation of any of the transactions contemplated hereby or
thereby. No filing or registration with, or authorization, consent or approval
of any Governmental Entity is required by or with respect to IEL or any of its
Subsidiaries in connection with the execution and delivery of this Agreement or
the IEL Ancillary Agreements by IEL, or is necessary for the consummation of the
Amalgamation and the other transactions contemplated by this Agreement or the
IEL Ancillary Agreements, except: (i) for the filing with the Registrar of
Companies in Bermuda of an application for approval and for registration of the
Amalgamation and appropriate documents with the relevant authorities of other
states in which IEL
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or any of its Subsidiaries is qualified to do business; (ii) for receipt of
consent from the Minister of Finance in Bermuda and such other consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under the laws of any foreign country (including, without
limitation, any political subdivision thereof) in which IEL or any of its
Subsidiaries conducts any business or owns any property or assets; and (iii) for
such other consents, orders, authorizations, registrations, declarations and
filings the failure of which to obtain or make would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on IEL and
would not materially impair the ability of IEL to perform its obligations
hereunder or under the IEL Ancillary Agreements or prevent the consummation of
any of the transactions contemplated hereby or thereby.
Section 4.5 Absence of Certain Changes or Events. Since December 30, 1994,
(i) IEL has not incurred any material liability or obligation (indirect, direct
or contingent), or entered into any material oral or written agreement or other
transaction, that is not in the ordinary course of business or as otherwise
authorized by the Management Agreement or the 1995 business plan of IEL, the
1996 business plan of IEL or the 1997 business plan of IEL (the "1997 IEL Plan")
or reflected or reserved against in the annual audited consolidated financial
statements of IEL or disclosed in the footnotes thereto for the fiscal years
ending December 31, 1995 and 1996, each as approved by the Board of Directors of
IEL, or that has resulted or would reasonably be expected to result in a
Material Adverse Effect on IEL; (ii) IEL and its Subsidiaries have not sustained
any loss or interference with their business or properties (whether or not
covered by insurance) that has had or that would reasonably be expected to have
a Material Adverse Effect on IEL; (iii) there has been no material change in the
indebtedness of IEL and its Subsidiaries (other than changes in the ordinary
course of business or pursuant to the Funding Agreement), no change in the
outstanding shares of capital stock of IEL, except for any increases in the
authorized share capital approved by Sub and HIIC, and no dividend or
distribution of any kind (including stock dividends, stock splits and the like)
declared, paid or made by IEL on any class of its capital stock and (iv) there
has been no Material Adverse Change with respect to IEL, nor any event or
development that would, individually or in the aggregate, reasonably be expected
to result in a Material Adverse Change with respect to IEL.
Section 4.6 No Existing Violation, Default, Etc. IEL is not in violation
of (i) its Memorandum of Association or bye-laws, (ii) any applicable law,
ordinance or administrative or governmental rule or regulation or (iii) any
order, decree or judgment of any Governmental Entity having jurisdiction over
IEL or any of its Subsidiaries, except for any violations that, individually or
in the aggregate, would not reasonably be expected to have a Material Adverse
Effect on IEL. There is no existing event of default or event that, but for the
giving of notice or lapse of time, or both, would constitute an event of default
under any loan or credit agreement, note, bond, mortgage, indenture or guarantee
of indebtedness for borrowed money and there is no existing event of default or
event that, but for the giving of notice or lapse of time, or both, would
constitute an event of default under any lease, other agreement or instrument to
which IEL or any of its Subsidiaries is a party or by which IEL or any such
Subsidiary or any of their respective properties, assets or business is bound,
in the case of each of clause (i) and (ii) immediately above, which,
individually or in the aggregate, has had or would reasonably be expected to
have a Material Adverse Effect on IEL.
Section 4.7 Actions and Proceedings. There are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental Entity against IEL
or any of its Subsidiaries, any of its or their properties, assets or business,
or, to the knowledge of IEL, any of its or their current or former directors or
officers, as such, that would reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect on IEL. There are no actions, suits or
claims or legal, administrative or arbitration proceedings or investigations
pending or, to the knowledge of IEL, threatened against IEL or any of its
Subsidiaries, any of its or their properties, assets or business, or, to the
knowledge of IEL, any of its or their current or former directors or officers,
as such, that would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on IEL. As of the date hereof, there are no
actions, suits or claims or legal, administrative or arbitration proceedings or
investigations pending or, to the knowledge of IEL, threatened against IEL or
any of its Subsidiaries, any of its or their properties, assets or business, or,
to the knowledge of IEL, any of its or their current or former directors or
officers, as such, relating to the transactions contemplated by this Agreement.
Section 4.8 Contracts. Neither IEL or any of its Subsidiaries nor, to the
knowledge of IEL, any other party is in breach of or default under any material
contract to which it is a party which is currently in effect, except for such
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breaches and defaults which would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on IEL. Neither IEL
nor any of its Subsidiaries is a party to or bound by any non-competition
agreement or any other agreement or obligation which purports to limit in any
material respect the manner in which, or the localities in which, IEL or any
such Subsidiary is entitled to conduct all or any material portion of the
business of IEL and its Subsidiaries taken as whole (other than the Shareholders
Agreement).
Section 4.9 Liabilities. Except as fully reflected or reserved against in
the most recent audited consolidated financial statements of IEL for the year
ended December 31, 1996, or disclosed in the footnotes thereto, IEL had no
liabilities (including, without limitation, liabilities for income, use or other
taxes) at the date of such consolidated financial statements, absolute or
contingent, of a nature which are required by generally accepted accounting
principles to be reflected on such consolidated financial statements or
disclosed in the footnotes thereto, that were material, either individually or
in the aggregate, to IEL and its Subsidiaries taken as a whole, except for
amounts owed to HIEC pursuant to and in accordance with the terms and provisions
of the Management Agreement. Except as so reflected, reserved, disclosed or set
forth, IEL and its Subsidiaries have no commitments which are reasonably
expected to be materially adverse, either individually or in the aggregate, to
IEL and its Subsidiaries taken as a whole, assuming IEL has adequate financial
resources to fulfill its obligations to SAL under the Software License and
Software Service Agreement dated November 7, 1995 with SAL and the Services
Agreement dated November 7, 1995 and SAL (collectively, the "SAL Agreements").
Section 4.10 Operations of Subsidiary. The Subsidiary of IEL was formed
solely for the purpose of conducting all operations required to be conducted by
IEL in Singapore pursuant to the SAL Agreements and attempting to secure
additional contracts with other Asian airlines and has engaged in no other
business activities.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
-----------------------------------------
Section 5.1 Conduct of Business Pending the Amalgamation. (a) Actions by
Parent. During the period from the date of this Agreement through the Effective
Time, except as otherwise expressly required by this Agreement and the Parent
Ancillary Documents, Parent shall, and shall cause each of its Subsidiaries to,
in all material respects carry on its business in, and not enter into any
material transaction other than in accordance with, the ordinary course of its
business as currently conducted and, to the extent consistent therewith, use its
reasonable best efforts to preserve intact its current business organization,
keep available the services of its current officers and employees and preserve
its relationships with customers, suppliers and others having business dealings
with it, all to the end that its goodwill and ongoing business shall be
unimpaired at the Effective Time. Without limiting the generality of the
foregoing, and except as otherwise expressly contemplated by this Agreement and
the Parent Ancillary Documents, Parent shall not, and shall not permit any of
its Subsidiaries to, without the prior written consent of HIIC:
(i) (A) declare, set aside or pay any dividends (including any
stock dividends) on, or make any other actual, constructive or deemed
distributions or stock splits or similar actions in respect of, any of its
capital stock, or otherwise make any payments to its shareholders in their
capacity as such; or (B) purchase, redeem or otherwise acquire any shares
of its capital stock or those of any Subsidiary or any other securities
thereof or any rights, warrants or options to acquire any such shares or
other securities;
(ii) issue, deliver, sell, pledge, dispose of or otherwise encumber
any shares of its capital stock (other than pursuant to the Funding
Agreement), any other voting securities or equity equivalent or any
securities convertible into, or any rights, warrants or options to acquire,
any such shares, voting securities, equity equivalent or convertible
securities (other than the issuance of Parent Common Shares during the
period from the date of this Agreement through the Effective Time upon the
exercise of Parent Stock Rights, except for the issuance of Parent Common
Shares upon conversion of the convertible redeemable preference shares of
Parent issued upon the B/E Conversion) unless a number of voting shares of
Parent are issued to
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HIIC upon payment by HIIC of the par value thereof such that such number of
shares plus the number of Parent Common Shares into which HIIC's IEL Common
Shares are to be converted pursuant to Section 1.5 plus the number of
shares of Parent Common Shares issuable to HIIC under the Funding Agreement
constitutes the same percentage of the outstanding voting shares of Parent
on a fully diluted basis (as used in this Agreement, "fully diluted basis"
shall be as defined in the bye-laws of Parent as to be amended by the Bye-
Law Amendments in substantially the form attached hereto as Exhibit A) as
the number of Parent Common Shares into which HIIC's IEL Common Shares are
to be converted pursuant to Section 1.5 plus the number of shares of Parent
Common Shares issuable to HIIC under the Funding Agreement constituted of
the outstanding voting shares of Parent on a fully diluted basis prior to
such issuance;
(iii) amend its Memorandum of Association; or amend its bye-laws if
such amendment would adversely affect the rights of HIIC hereunder or upon
consummation of the Amalgamation;
(iv) acquire or agree to acquire, by amalgamating, merging or
consolidating with, by purchasing a substantial portion of the assets of or
equity in or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof
or otherwise acquire or agree to acquire any assets, other than
transactions that are not material to Parent and its Subsidiaries taken as
a whole;
(v) sell, lease or otherwise dispose of, or agree to sell, lease or
otherwise dispose of, any of its assets (other than the real property owned
by a Subsidiary of Parent), other than transactions that are not material
to Parent and its Subsidiaries taken as a whole;
(vi) incur or assume any indebtedness for borrowed money or
guarantee any such indebtedness (other than pursuant to the Funding
Agreement or as a result of the issuance of the Debentures) or make any
loans, advances or capital contributions to, or other investments in, any
other person;
(vii) violate or fail to perform any material obligation or duty
imposed upon Parent or any Subsidiary by any applicable federal, state,
local, foreign or provincial law, rule, regulation, guideline or ordinance;
(viii) take any action, other than reasonable and usual actions in the
ordinary course of business consistent with past practice, with respect to
accounting policies or procedures; or
(ix) authorize, recommend, propose or announce an intention to do
any of the foregoing, or enter into any contract, agreement, commitment or
arrangement to do any of the foregoing.
Parent shall promptly advise HIIC orally and in writing of any change
or event having, or which would reasonably be expected to have, a Material
Adverse Effect on Parent.
(b) Actions by HIIC. During the period from the date of this
Agreement through the Effective Time, except as otherwise expressly required by
this Agreement or the HIIC Ancillary Agreements, HIIC shall cause HIEC to manage
the business of IEL in accordance with the terms of the Management Agreement,
the Shareholders Agreement and the 1997 IEL Plan and to cause IEL not to enter
into any material transaction, contract or agreement other than as authorized by
the Management Agreement, the Shareholders Agreement, the 1997 IEL Plan or by
the Board of Directors of IEL in writing. Without limiting the generality of the
foregoing, and except as otherwise expressly contemplated by this Agreement,
HIIC shall not, and shall cause HIEC not to, without the prior written consent
of Parent, during the period from the date of this Agreement through the
Effective Time:
(i) with respect to any employees or agents of IEL or employees or
agents used to conduct the business of IEL, enter into or adopt any
employee benefit or welfare plan, or amend in any material respect
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any existing employee benefit or welfare plan, other than as required by
law or in the ordinary course of business consistent with past practices;
(ii) with respect to any employees or agents of IEL or employees or
agents used to conduct the business of IEL, increase the compensation
payable or to become payable to its officers or employees or grant any
severance or termination pay to, or enter into, or amend or modify, any
employment, severance or consulting agreement with, any director, officer,
employee or agent of IEL or any of its Subsidiaries, or, except in the
ordinary course of business consistent with past practices, establish,
adopt, enter into or, except as may be required to comply with applicable
law or, except in the ordinary course of business consistent with past
practices, amend in any material respect or take action to enhance in any
material respect or accelerate any rights or benefits under, any collective
bargaining, bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any director, officer or employee; or
(iii) acquire any shares of capital stock of Parent.
HIIC shall promptly advise Parent orally and in writing of any change
or event having, or which would reasonably be expected to have, a Material
Adverse Effect on IEL.
ARTICLE VI
ADDITIONAL AGREEMENTS
---------------------
Section 6.1 Shareholder Meetings. Parent shall call a meeting of its
shareholders (the "Parent Shareholder Meeting") to be held as promptly as
practicable (but in no event prior to the fulfillment of the conditions
specified in Section 7.1(c) to each party's obligation to effect the
Amalgamation) for the purpose of voting upon the Bye-Law Amendments and the
Resolutions.
Section 6.2 Access to Information. Parent shall, and shall cause each of
its Subsidiaries to, afford, during normal business hours during the period from
the date of this Agreement through the Effective Time, to the accountants,
counsel, financial advisors, officers and other representatives of HIIC
reasonable access to, and permit them to make such inspections as may reasonably
be requested of, its properties, books, contracts, commitments and records
(including, without limitation, the work papers of independent public
accountants), and also permit such interviews with its officers and employees as
may be reasonably requested; and, during such period, Parent shall, and shall
cause each of its Subsidiaries to, furnish promptly to HIIC (i) a copy of each
report, schedule, registration statement and other document filed by it during
such period pursuant to the requirements of federal or state securities laws and
(ii) all other information concerning its properties, assets, business and
personnel as the other may reasonably request.
Section 6.3 Stock Exchange Listings. Parent shall use its reasonable
best efforts to list on the Nasdaq SmallCap Market, upon official notice of
issuance, the Parent Common Shares to be issued in connection with the
Amalgamation.
Section 6.4 Fees and Expenses. Except as otherwise provided in this
Section 6.4, whether or not the Amalgamation shall be consummated, all costs and
expenses incurred in connection with this Agreement, the Parent Ancillary
Agreements and the HIIC Ancillary Agreements and the transactions contemplated
hereby and thereby, including, without limitation, the fees and disbursements of
counsel, financial advisors, accountants, actuaries and consultants, shall be
paid by the party incurring such costs and expenses. Parent and HIIC hereby
acknowledge and agree that IEL has not incurred any costs and expenses in
connection with this Agreement, the Parent Ancillary
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Agreements and the HIIC Ancillary Agreements and the transactions contemplated
hereby and thereby; provided, HIEC may receive reimbursement in accordance with
the terms and provisions of the Management Agreement for services provided to
IEL solely for the benefit of IEL which involved any of the foregoing.
Section 6.5 Reasonable Best Efforts. (a) Upon the terms and subject to
the conditions set forth in this Agreement, each of the parties hereto agrees to
use its reasonable best efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, and to assist and cooperate with the other parties
in doing, all things necessary, proper or advisable, to consummate and make
effective, as soon as reasonably practicable, the Amalgamation and the other
transactions contemplated by this Agreement, including, but not limited to: (i)
the obtaining of all necessary actions or non-actions, waivers, consents and
approvals from all Governmental Entities and the making of all necessary
registrations and filings with, and the taking of all other reasonable steps as
may be necessary to obtain an approval or waiver from, or to avoid an action or
proceeding by, any Governmental Entity; (ii) the obtaining, of all necessary
consents, approvals or waivers from persons other than Governmental Entities;
(iii) the defending of any lawsuits or other legal proceedings, whether judicial
or administrative, challenging this Agreement, the Parent Ancillary Agreements
and HIIC Ancillary Agreements, or the consummation of the transactions
contemplated hereby or thereby, including seeking to have any stay or temporary
restraining order entered by any court or other Governmental Entity vacated or
reversed; and (iv) the execution and delivery of any additional instruments
necessary to consummate the transactions contemplated by this Agreement.
(b) Each party hereto shall use its reasonable best efforts not to
take any action, or to enter into any transaction, which would cause any of its
representations or warranties contained in this Agreement to be untrue or to
result in a breach of any of its covenants in this Agreement.
(c) Notwithstanding any provision in this Agreement to the contrary
neither Parent nor HIIC shall be obligated to use its reasonable best efforts or
to take any action (or omit to take any action) pursuant to this Agreement if
the Board of Directors of Parent or HIIC, as the case may be, shall conclude in
good faith on the basis of the advice of its outside counsel that such action
would be inconsistent with the fiduciary obligations of such Board of Directors
under applicable law.
Section 6.6 Public Announcements. Parent and HIIC shall consult with each
other before issuing any press release or otherwise making any public statement
with respect to the transactions contemplated by this Agreement and shall not
issue any such press release or make any such public statement prior to such
consultation and without the written approval (which shall not unreasonably be
withheld) of the other, except as may be required by applicable law or
regulation or by existing obligations pursuant to any listing agreement with any
national securities exchange.
Section 6.7 Notification of Certain Matters. Parent shall give prompt
notice to HIIC and HIIC shall give prompt notice to Parent, of: (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which does or would be likely to cause (A) any representation or warranty
contained in this Agreement to be untrue or inaccurate in any material respect
or (B) any covenant, condition or agreement contained in this Agreement not to
be complied with or satisfied; and (ii) any failure of Parent, Sub, HIIC or IEL,
as the case may be, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder; provided, however,
that the delivery of any notice pursuant to this Section 6.7 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
Section 6.8 Amalgamation of Parent and Sub. Parent and Sub agree to use
their reasonable best efforts to take, or cause to be taken, all actions, and to
do, or cause to be done all things necessary, proper or advisable, to consummate
and make effective, as soon as reasonably practicable after the Effective Time,
the amalgamation of the Amalgamated Company with and into Parent and, as part of
such transaction, to change the name of Parent to "Interactive Entertainment
Limited, " in accordance with the CA (the "Parent Amalgamation").
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ARTICLE VII
CONDITIONS PRECEDENT TO THE AMALGAMATION
----------------------------------------
Section 7.1 Conditions to Each Party's Obligation to Consummate the
Amalgamation. The respective obligations of each party hereto to consummate the
Amalgamation shall be subject to the fulfillment at or prior to the Effective
Time of the following conditions:
(a) Shareholder Approval. The Resolutions shall have been duly
approved by a majority of the votes cast at the Parent Shareholder Meeting by
the holders of shares entitled to vote thereon, in accordance with applicable
law and the Bye-laws of Parent, and the Bye-Law Amendments shall have been duly
adopted by seventy-five percent (75%) of the votes cast at the Parent
Shareholder Meeting by the holders of shares entitled to vote thereon in
accordance with applicable law and the Bye-laws of Parent.
(b) SAL and Other Approvals.
(i) IEL shall have received the written consent of SAL to the
Amalgamations and the transactions contemplated thereby, including, without
limitation, termination of the Management Agreement; and
(ii) all authorizations, consents, orders, declarations or
approvals of, or filings with, or terminations or expirations of waiting
periods imposed by, any Governmental Entity, which the failure to obtain,
make or occur would have the effect of making the Amalgamation or any of
the transactions contemplated hereby illegal (or without which the
Amalgamation could not become effective) or would have a Material Adverse
Effect on Parent or IEL (as the Amalgamated Company), assuming the
Amalgamation had taken place, shall have been obtained, shall have been
made or shall have occurred.
(c) No Order. No court or other Governmental Entity having
jurisdiction over IEL or Parent, or any of their respective Subsidiaries, shall
have enacted, issued, promulgated, enforced or entered any law, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is then in effect and has the effect
of making illegal or prohibiting the Amalgamation or any of the transactions
contemplated hereby.
(d) Termination Agreements. The parties thereto shall have entered
into agreements reasonably satisfactory to the parties thereto to terminate the
following agreements:
(i) the Management Agreement effective as of the Effective Time
(which shall contain a mutual release by the parties thereto);
(ii) the Shareholders Agreement effective as of the Effective
Time (which shall contain a mutual release by the parties thereto); and
(iii) the Cross-License Agreement among Parent (f/k/a Creator
Capital Inc., a Yukon Territory corporation), IEL and HIEC dated December
30, 1994 effective as of the effective time of the Parent Amalgamation.
(e) Litigation. There shall not have been instituted and be pending
any suit, action or proceeding by any Governmental Entity or any shareholder of
Parent (including any shareholder derivative action) with proper standing to
bring such suit, action or proceeding as a result of this Agreement or any of
the transactions contemplated hereby which, if such Governmental Entity or
shareholder of Parent were to prevail, would reasonably be expected to have the
effect of preventing or materially delaying the Amalgamation.
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(f) Performance of Obligations; Representations and Warranties. IEL
shall have performed in all material respects each of its agreements contained
in this Agreement required to be performed at or prior to the Effective Time,
each of the representations and warranties of IEL contained in this Agreement
that is qualified by materiality shall be true and correct at and as of the
Effective Time as if made at and as of the Effective Time and each of such
representations and warranties that is not so qualified shall be true and
correct in all material respects at and as of the Effective Time as if made at
and as of the Effective Time, in each case except as contemplated or permitted
by this Agreement; and each of Parent and HIIC shall have received a certificate
signed on behalf of IEL by its President and its Treasurer to such effect.
(g) Material Adverse Change. Since the date of this Agreement, there
shall have been no Material Adverse Change with respect to IEL, except as
contemplated in the 1997 IEL Plan; and each of Parent and HIIC shall have
received a certificate signed on behalf of IEL by Gordon Stevenson, President,
and Laurence Geller, Vice President, to such effect.
(h) Continuing Services Agreement. Parent and HIEC shall as of the
Closing have entered into a Continuing Services Agreement regarding the
provision of certain administrative and support services by HIEC to Parent after
the Closing on terms reasonably satisfactory to the parties and terminable by
Parent upon sixty (60) days' notice; provided Parent bears the cost of
termination.
(i) Continued Listing of Parent Common Shares. There shall not be a
cease trading order in effect as to the trading of the Parent Common Shares
through the Nasdaq SmallCap Market, the Parent Common Shares shall be listed on
the Nasdaq SmallCap Market and Parent shall not have received a written or an
official oral notice of non-compliance from Nasdaq as to any applicable SmallCap
Market continued listing requirement and such notice shall not have been
rescinded or such non-compliance remedied.
(j) Receipt of Legal Opinion. HIIC, Parent and Sub shall have
received the legal opinion of Appleby, Spurling & Kempe addressed to each of
them in such form as is reasonably acceptable to each of HIIC, Parent and Sub.
Section 7.2 Conditions to Obligation of HIIC to Consummate the
Amalgamation. The obligation of HIIC to consummate the Amalgamation shall be
subject to the fulfillment at or prior to the Effective Time of the following
additional conditions:
(a) Approval of HIIC Board and HIIC. The Board of directors of HIIC
shall have approved this Agreement and the HIIC Ancillary Agreements and HIIC
shall have approved the Amalgamation and this Agreement as a shareholder of IEL.
(b) Performance of Obligations; Representations and Warranties. Each
of Parent and Sub shall have performed in all material respects each of its
agreements contained in this Agreement required to be performed at or prior to
the Effective Time, each of the representations and warranties of Parent and Sub
contained in this Agreement that is qualified by materiality shall be true and
correct at and as of the Effective Time as if made at and as of the Effective
Time and each of such representations and warranties that is not so qualified
shall be true and correct in all material respects at and as of the Effective
Time as if made at and as of the Effective Time, in each case except as
contemplated or permitted by this Agreement; and HIIC shall have received a
certificate signed on behalf of Parent by its Chief Executive Officer and its
Chief Financial Officer to such effect.
(c) Consents Under Agreements. HIIC shall have obtained the consent
or approval of each person (other than SAL and the Governmental Entities
referred to in Section 7.1(c)) whose consent or approval shall be required in
connection with the transactions contemplated hereby under any indenture,
mortgage, evidence of indebtedness, license, lease or other agreement or
instrument, except where the failure to obtain the same would not
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reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect on HIIC or upon the consummation of the transactions contemplated
hereby.
(d) Material Adverse Change. Since the date of this Agreement, there
shall have been no Material Adverse Change with respect to Parent, except as
contemplated in the 1997 IEL Plan or as a result of the write-down of real
estate assets owned by a Subsidiary of Parent; and HIIC shall have received a
certificate signed on behalf of Parent by its Chief Executive Officer and its
Chief Financial Officer to such effect.
(e) Delivery of Agreements. Parent and HIIC shall have entered into
the following agreements as of the Closing:
(i) a Shareholder Rights Agreement between HIIC and Parent, in
such form as is reasonably acceptable to HIIC and Parent, regarding
approval by HIIC and the Affiliates of HIIC for as long as they
collectively own:
(A) twenty percent (20%) or more of the outstanding voting
shares of Parent, on a fully diluted basis, as to:
(1) the sale of all or any material portion of the
assets of Parent together with its Subsidiaries;
(2) the incurrence, renewal, refinancing, prepayment
or amendment of the terms of indebtedness of Parent together with
its Subsidiaries in excess of $5 million in any one fiscal year;
(3) Parent or any of its Subsidiaries entering into
any material joint venture or partnership agreement outside of
its previously approved scope of business;
(4) any material acquisition of assets by Parent 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 Parent or any of its Subsidiaries of the stock of
another entity, in each case involving an acquisition valued at
$5 million or more;
(5) any material change in the nature of the business
conducted by Parent or any of its Subsidiaries;
(6) any material amendments to the management
incentive plan covering 4,070,105 Parent Common Shares (the
"MIP") for 12 months following the Closing;
(7) the adoption of any stock option plans for
greater than 5% of the then outstanding Parent Common Shares on a
fully diluted basis, other than the MIP, in any one fiscal year;
(8) material changes in accounting policies; and
(9) the creation or adoption of any shareholder
rights plan; and
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(B) 10% or more of the outstanding voting shares of Parent
on a fully diluted basis, as to (1) any change in or conduct of
Parent'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 such term is defined in the
bye-laws of Parent (as to be amended by the Bye-Law Amendments in
substantially the form attached hereto as Exhibit A) if such
Person held shares of Parent) that would constitute or result in,
or (2) any action or inaction of or by Parent or any of its
Subsidiaries' which HIIC or the Affiliates of HIIC determine in
their reasonable business judgment would result in, in the case
of either (1) or (2), 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
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 referred
to herein as a "Disqualifying Action"); provided, the reasonable
business judgment 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 Parent 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;
(ii) a Registration and Preemptive Rights Agreement on
substantially the following terms:
(A) HIIC would have two (2) demand registration rights to
cause Parent to register Parent Common Shares owned by HIIC
and/or the Affiliates of HIIC, provided, prior to June 30, 1998,
no such demand registration shall be brought for a number of
shares in excess of one million (1,000,000) unless Parent
receives the opinion of its investment banker that the trading
price of the Parent Common Shares would not fall by more than
twenty-five percent (25%) for more than fifteen (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 Parent
Common Shares as would not cause the market price to fall below
such level. Each such offering shall be underwritten on a firm
commitment basis by an underwriter chosen by Parent. The demand
rights would be subject to customary restrictions such as 120 day
blockage periods for corporate developments or registered
offerings by Parent, cut-backs and etc.;
(B) Parent would also agree pursuant to such registration
rights agreement that until HIIC and the Affiliates of HIIC
collectively own less than 5% of the outstanding voting shares of
Parent on a fully diluted basis, HIIC and the Affiliates of HIIC shall
have customary piggy-back rights to include their Parent Common Shares
in registered offerings by Parent;
(C) HIIC and the Affiliates of HIIC would bear the costs of
their legal counsel and any underwriting discounts, commissions or
allowances in connection with all sales pursuant to the foregoing, and
Parent would bear all other fees and expenses of such registrations;
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(D) HIIC and/or the Affiliates of HIIC would have the right
to purchase voting shares of Parent (or securities convertible
into voting shares of Parent) offered by Parent for as long as
HIIC and the Affiliates of HIIC collectively owned twenty percent
(20%) or more of the outstanding voting shares of Parent on a
fully diluted basis at the same price and terms such securities
are otherwise being offered. HIIC and/or the Affiliates of HIIC
would also have the right for as long as HIIC and the Affiliates
of HIIC collectively owned twenty percent (20%) or more of the
outstanding voting shares of Parent on a fully diluted basis to
participate on a proportionate basis in any non-pro rata stock
repurchases or redemptions conducted by Parent;
(E) at any time that HIIC and the Affiliates of HIIC
collectively own less than ten percent (10%) of the outstanding
voting shares of Parent, on a fully diluted basis, (1) Parent
shall have the right to cause HIIC and the Affiliates of HIIC to
sell their voting shares of Parent pursuant to a registered sale
and (2) HIIC shall have the right to cause Parent to file a
registration statement to sell its and its Affiliates' voting
shares of Parent, in each case of (1) and (2), in the event (x)
of any change in or conduct of the business or proposed business
of Parent or any of its Subsidiaries or any other action or
inaction of Parent or any of its Subsidiaries which would
constitute or result in a Disqualifying Action or (y) Parent does
not redeem a "Disqualified Holder" pursuant to Bye-law 4B of its
bye-laws (as to be amended by the Bye-Law Amendments in
substantially the form attached hereto as Exhibit A), and in each
case of (1) and (2), at Parent's expense (other than HIIC's and
the Affiliates of HIIC underwriting discounts, commissions or
allowances) without being subject to the limitations set forth in
the foregoing paragraph (A); and
(F) upon any conversion of any shares of convertible
redeemable preference shares of Parent issued to B/EA as part of
the B/E Conversion, Parent shall issue to HIIC and/or the
Affiliates of HIIC a number of Parent Common Shares upon payment
by HIIC of the par value thereof such that such number of shares
plus the number of Parent Common Shares into which HIIC's IEL
Common Shares are to be converted pursuant to Section 1.5 plus
the number of shares of Parent Common Shares issuable to HIIC
under the Funding Agreement collectively constitutes the same
percentage of the outstanding voting shares of Parent on a fully-
diluted basis as the number of Parent Common Shares into which
HIIC's IEL Common Shares are to be converted pursuant to Section
1.5 plus the number of shares of Parent Common Shares issuable to
HIIC under the Funding Agreement constituted of the outstanding
voting shares of Parent on a fully diluted basis prior to such
issuance; and
(iii) a License Agreement regarding use by HIIC and its of IEL
intellectual property on substantially the following terms: Parent
would grant a fully paid and perpetual worldwide license to Harrah's
to use IEL's gaming technology in non-competitive uses in traditional
casino venues which it or its Affiliates own, operate or manage. The
license would include source codes for all software, and neither party
would have any obligation to share or provide any improvements or
modifications with the other party. The license would contain
customary provisions regarding limitations on the use of and
protections regarding the IEL intellectual property.
(f) Escrow Shares. Parent shall have entered into binding written
agreements with the record holders of all 3,525,000 Parent Common Shares being
held in escrow by Montreal Trust Company of Canada under an Escrow Agreement
dated May 27, 1992 ("Performance Shares"), pursuant to which such holders have
agreed to allow Parent to redeem and/or cancel such Parent Common Shares. In
connection with such redemption and/or cancellation of the Performance Shares,
Parent shall not issue or agree to issue more than 1,175,000 Parent Common
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Shares, and HIIC shall have received a certificate signed on behalf of Parent by
its Chief Executive Officer to such effect. Each record holder of Performance
Shares shall have executed and delivered to a national banking association
selected by HIIC and acceptable to Parent (the "Proxy Holder") an irrevocable
proxy appointing the Proxy Holder proxy for such holder with respect to the
Performance Shares. The Proxy Holder shall have entered into an agreement with
Parent and HIIC regarding the Proxy Holder's agreement not to vote the
Performance Shares.
(g) Bye-Law Amendments. The Bye-Law Amendments substantially in the
form attached hereto as Exhibit A shall have been approved and adopted by
seventy-five percent (75%) of the votes cast at the Parent Shareholder Meeting
by the holders of shares entitled to vote thereon in accordance with applicable
law and the Bye-Laws of Parent.
(h) B/E Conversion. Parent shall have prior to or at the Effective
Time consummated the B/E Conversion.
(i) B.C. Securities Compliance Certificate. Parent shall have
delivered to HIIC a certificate of the British Columbia Securities Commission
certifying that Parent is in compliance with its filing obligations under the
British Columbia Securities Commission dated no more than ten (10) days prior to
the date of the Closing.
Section 7.3 Conditions to Obligations of Parent and Sub to Consummate the
Amalgamation. The obligation of Parent and Sub to consummate the Amalgamation
shall be subject to the fulfillment at or prior to the Effective Time of the
following additional conditions:
(a) Performance of Obligations; Representations and Warranties. HIIC
shall have performed in all material respects each of its agreements contained
in this Agreement required to be performed at or prior to the Effective Time,
each of the representations and warranties of HIIC contained in this Agreement
that is qualified by materiality shall be true and correct at and as of the
Effective Time as if made at and as of the Effective Time and each of such
representations and warranties that is not so qualified shall be true and
correct in all material respects at and as of the Effective Time as if made at
and as of the Effective Time, in each case except as contemplated or permitted
by this Agreement; and Parent shall have received a certificate signed on behalf
of HIIC by its President and its Treasurer to such effect.
(b) Consents Under Agreements. Parent and Sub shall have obtained the
consent or approval of each person (other than SAL and the Governmental Entities
referred to in Section 7.1(c)) whose consent or approval shall be required in
connection with the transactions contemplated hereby under any indenture,
mortgage, evidence of indebtedness, license, lease or other agreement or
instrument, except where the failure to obtain the same would not reasonably be
expected, in the good faith opinion of Parent, individually or in the aggregate,
to have a Material Adverse Effect on Parent or Sub or upon the consummation of
the transactions contemplated hereby.
ARTICLE VIII
TERMINATION; AMENDMENT AND WAIVER
---------------------------------
Section 8.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after any approval by the
stockholders of Parent of the matters presented in connection with the
Amalgamation:
(a) by mutual written consent of Parent and HIIC;
(b) by Parent, by written notice to HIIC, if (i) HIIC shall have
failed to comply in any material respect with any of its covenants or agreements
contained in this Agreement required to be complied with prior to the
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date of such termination, which failure to comply has not been cured within five
(5) business days of written notice of such failure to comply, (ii) the
shareholders of Parent shall not approve and adopt the Resolutions at the Parent
Shareholder Meeting or any adjournment thereof or by written consent or (iii)
the shareholders of Parent shall not approve and adopt the Bye-Law Amendments at
the Parent Shareholder Meeting or any adjournment thereof or by written consent;
(c) by HIIC, by written notice to Parent, if (i) Parent or Sub shall
have failed to comply in any material respect with any of its respective
covenants or agreements contained in this Agreement required to be complied with
prior to the date of such termination, which failure to comply has not been
cured within five (5) business days after written notice of such failure to
comply, (ii) the shareholders of Parent shall not approve and adopt the
Resolutions at the Parent Shareholder Meeting or any adjournment thereof or
(iii) the shareholders of Parent shall not approve and adopt the Bye-Law
Amendments at the Parent Shareholder Meeting or any adjournment thereof or by
written consent;
(d) by either Parent or HIIC, by written notice from the terminating
party to the other parties, if there has been (i) a material breach by the other
(and/or by Sub if HIIC is the terminating party) of any representation or
warranty that is not qualified as to materiality or (ii) a breach by the other
(and/or by Sub if HIIC is the terminating party) of any representation or
warranty that is qualified as to materiality, in each case which breach has not
been cured within five (5) business days after receipt by the breaching party of
written notice of the breach;
(e) by either Parent or HIIC, by written notice from the terminating
party to the other parties, if there has been (i) a failure by IEL to comply in
any material respect with any of its covenants or agreements contained in this
Agreement required to be complied with prior to the date of such termination,
which failure to comply has not been cured within five (5) business days of
written notice of such failure to comply, (ii) a material breach by IEL of any
representation or warranty that is not qualified as to materiality or (iii) a
breach by IEL of any representation or warranty that is qualified as to
materiality, in each case which breach has not been cured within five (5)
business days after receipt by the breaching party of written notice of the
breach;
(f) by either Parent or HIIC, by written notice from the terminating
party to the other parties, if: (i) the Amalgamation has not been effected on or
prior to the close of business on June 21, 1997; provided, however, that the
right to terminate this Agreement pursuant to this clause (e) shall not be
available to any party whose failure to fulfill any obligation of this Agreement
has been the cause of, or resulted in, the failure of the Amalgamation to have
occurred on or prior to such date or (ii) any court or other Governmental Entity
having jurisdiction over a party hereto shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and nonappealable.
The right of Parent or HIIC to terminate this Agreement pursuant to this
Section 8.1 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of such party, whether prior to or after
the execution of this Agreement. Notwithstanding Sections 7.1(f) and 8.1(e), in
the event a party has failed to fulfill a material obligation under this
Agreement and such failure is the direct or proximate cause of the failure by
IEL to satisfy any of the conditions set forth in Section 7.1(f), such party
shall not be released from its obligation to consummate the Amalgamation
pursuant to Section 7.1(f) and shall not have the right to terminate this
Agreement pursuant to Section 8.1(e).
Section 8.2 Effect of Termination. In the event of the termination of
this Agreement by either Parent or HIIC as provided in Section 8.1, this
Agreement shall forthwith become void without any liability hereunder on the
part of HIIC, IEL, Parent, Sub or their respective directors or officers, except
for Section 6.2 and Section 6.4, which shall survive any such termination;
provided, however, that nothing contained in this Section 8.2 shall relieve any
party hereto from any liability for any breach of this Agreement.
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Section 8.3 Amendment. This Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
at any time before or after approval by the stockholders of Parent of the
matters presented to them in connection with the Amalgamation; provided,
however, that after any such approval, no amendment shall be made if applicable
law would require further approval by such stockholders, unless such further
approval shall be obtained. This Agreement shall not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 8.4 Waiver. At any time prior to the Effective Time, the parties
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any instrument delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein which may legally be waived. Any agreement on the
part of any party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
ARTICLE IX
GENERAL PROVISIONS
------------------
Section 9.1 Survival of Representations and Warranties. The
representations and warranties in this Agreement and in each instrument
delivered pursuant hereto shall survive the Effective Time (i) for a period of
thirty-six (36) months solely with respect to the representations and warranties
set forth in Section 2.5 and for (ii) the period terminating on the date of the
first report of Parent's independent auditors on the audited financial
statements of Parent for the period ending December 31, 1997, with respect to
all other representations and warranties in this Agreement and in each
instrument delivered pursuant hereto.
Section 9.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given when delivered personally, one day after
being delivered prepaid to an overnight courier or when telecopied (with a
confirmatory copy sent by overnight courier) to the other parties hereto at the
following addresses (or at such other address for any party as shall be
specified by like notice):
(a) if to Parent or Sub, to:
Sky Games International Ltd.
1115-595 Howe Street
Vancouver, British Columbia V6C 2T5
Attention: Malcolm P. Burke
Facsimile: (604) 689-8678
with a copy to:
Laurence Geller
10 S. Wacker Drive, Suite 4000
Chicago, Illinois 60606
Facsimile: (312) 715-4212
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and to:
Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606
Attention: Phillip Gordon, Esq.
Facsimile: (312) 715-4800
(b) if to IEL, to:
Interactive Entertainment Limited
1023 Cherry Road
Memphis, Tennessee 38117
Attention: Gordon Stevenson
Facsimile: (901) 537-3801
(c) if to HIIC, to:
Harrah's Interactive Investment 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, Esq.
Facsimile: (901) 762-8735
and to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
Attention: Harry Boadwee, Esq.
Facsimile: (415) 494-1417
Section 9.3 Interpretation. When reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
Section 9.4 Counterparts. This Agreement may be executed in any number of
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts shall have been signed by
each of the parties hereto and delivered to the other parties.
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Section 9.5 Entire Agreement; No Third-Party Beneficiaries. This
Agreement (and the schedules and attachments to the foregoing) constitutes the
entire agreement of the parties hereto and supersede all prior agreements and
understandings, both written and oral, among such parties with respect to the
subject matter hereof.
Section 9.6 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.
Section 9.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by operation of law or
otherwise by any of the parties hereto without the prior written consent of the
other parties.
Section 9.8 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 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.
Section 9.9 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 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.
Section 9.10 Indemnification Obligations of Parent. From and after the
Closing, Parent shall indemnify, defend, save and keep HIIC, HIEC and the
Affiliates of HIIC (including their respective directors, officers, employees
and agents) (each, an "Indemnitee") forever harmless against and from all loss,
cost, damage, liability and expense, including reasonable attorney's fees and
expenses (collectively, "Damages"), sustained or incurred by any Indemnitee as a
result of or arising out of or by virtue of or in connection with any inaccuracy
in or breach of any representation or warranty made by Parent or Sub in Article
II of this Agreement.
(a) Limitations on Parent's Indemnification Obligations. Parent shall
not have any indemnification obligation and no Indemnitee shall be entitled to
recover under this Section 9.10, unless a claim for indemnification has been
asserted by written notice, specifying the details of the alleged inaccuracy in
or breach of any representation or warranty, delivered to Parent on or prior to
the end of the period terminating on the date of the first report of Parent's
independent auditors on the audited financial statements of Parent for the
period ending December 31, 1997; provided, however, that claims under this
Section 9.10 with respect to any alleged inaccuracy in or breach of any
representation or warranty in Section 2.5 may be asserted by such written
notice, delivered to Parent on or prior to the end of the period terminating
thirty-six (36) months after the date of the Closing.
(b) Third Party Claims. Within thirty (30) days following the receipt
of notice of a Third Party Claim, and in any event within the period necessary
to respond to such pleading, if applicable, the party receiving the notice of
the Third Party Claim shall (i) notify Parent of the existence of such Third
Party Claim setting forth with reasonable specificity the facts and
circumstances of which such party has received notice, and (ii) specifying the
basis hereunder upon which the Indemnitee's claim for indemnification is
asserted. As used herein, "Third Party Claim"
25
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shall mean any claim, action, suit, proceeding, investigation, or like matter
which is asserted or threatened by any party other than the parties hereto,
their successors and permitted assigns, against an Indemnitee. The failure to
deliver the notice described in the first sentence of this Section 9.10(b)
within the time frame required shall relieve Parent of any liability with
respect to such Third Party Claim. Each Indemnitee shall, upon reasonable
notice, tender the defense of a Third Party Claim to Parent if so requested by
Parent in writing. Then, except as hereinafter provided, such Indemnitee shall
not, and Parent shall, have the right to contest, defend, litigate or settle
such Third Party Claim. Each Indemnitee shall have the right to be represented
by counsel and to participate at its own expense in any such contest, defense,
litigation or settlement conducted by Parent. Parent shall have the exclusive
right to contest and defend the Third Party Claim and shall have the right, upon
receiving the prior written approval of such Indemnitee (which shall not be
unreasonably withheld) and which shall be deemed automatically given if a
response has not been received within the ten (10) day period following a
written request for such consent), to settle any such matter, either before or
after the initiation of litigation, at such time and upon such terms as it deems
fair and reasonable. If an Indemnitee is entitled to indemnification against a
Third Party Claim, and Parent fails to accept a tender of, or assume, the
defense of a Third Party Claim pursuant to this Section 9.10(b), such Indemnitee
shall have the right, without prejudice to its right of indemnification
hereunder, in its discretion exercised in good faith and upon the advice of
counsel, to contest, defend, litigate and settle such Third Party Claim, either
before or after the initiation of litigation, at such time and upon such terms
as such Indemnitee deems fair and reasonable, provided that written notice of
its intention to settle is given to Parent at least ten (10) days prior to
settlement. If, pursuant to this Section 9.10(b), such Indemnitee so contests,
defends, litigates or settles a Third Party Claim for which it is entitled to
indemnification hereunder as hereinabove provided, such Indemnitee shall be
reimbursed by Parent for the reasonable attorneys' fees and other expenses of
defending, contesting, litigating and/or settling the Third Party Claim which
are incurred from time to time, forthwith following the presentation to Parent
of itemized bills for said attorneys' fees and other expenses.
(c) Tax and Insurance Benefits. All indemnification or reimbursement
payments required pursuant to this Agreement shall be made net of all cash, tax
and insurance benefits received by HIIC, HIEC or their Affiliates. In the event
that any claim for indemnification asserted hereunder is, or may be, the subject
of any insurance coverage or other right to indemnification or contribution from
any third person, HIIC, HIEC and their Affiliates shall be required to, and HIIC
expressly agrees that it shall, promptly notify the applicable insurance
carrier of any such claim or loss and tender defense thereof to such carrier,
and shall also promptly notify any potential third party indemnitor or
contributor which may be liable for any portion of such losses or claims. HIIC,
HIEC and their Affiliates shall be required to, and HIIC expressly agrees that
it shall, promptly pursue, at the cost and expense of Parent, such claims
diligently and to reasonably cooperate, at the cost and expense of Parent, with
each applicable insurance carrier and third party indemnitor or contributor.
Notwithstanding Section 9.10(b) and this Section 9.10(c), no Indemnitee shall be
required to tender the defense of a Third Party Claim more than once unless so
requested by Parent and Parent has acknowledged in writing its liability
pursuant to Section 9.10(b) for such Third Party Claim.
(d) Remedies and Undertakings. Except as otherwise specifically
provided in this Agreement, the sole and exclusive remedy after the Closing of
HIIC, HIEC and their Affiliates under this Agreement for an inaccuracy in or
breach of any representation or warranty made by Parent or Sub in Article II of
this Agreement shall be restricted to the indemnification rights set forth in
this Section 9.10. Prior to the assertion of any claims for indemnification
under this Agreement, each Indemnitee shall utilize all reasonable efforts,
consistent with normal practices and policies and good commercial practice, to
mitigate such Damages. Notwithstanding anything to the contrary contained
herein, the foregoing limitations set forth in this Section 9.10(d) shall not
apply to actions arising from a default or an alleged default in the performance
of any provision of this Agreement (other than a representation or warranty in
Article II of this Agreement), and the parties hereto shall have all remedies
available to them at law and equity with respect to any such default or alleged
default.
Section 9.11 Limitation of Liability. Notwithstanding Section 8.2 and
Section 9.10, no party to this Agreement or any of its Affiliates shall be
liable to any other party for such damage, loss or injury due to a breach of
this Agreement which does not flow directly and immediately from the act or
omission of the party or any of its
26
<PAGE>
Affiliates and each party hereto hereby waives all rights to bring any action in
respect of such liability. Such limitation of liability shall apply to, among
other things, liability arising from tort (including negligence) and liability
for lost revenues or profits, and such limitation of liability shall apply even
if the party or its Affiliates causing damage, loss or liability to which this
limitation of liability applies have been advised of the possibility of such
damage, loss or liability.
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<PAGE>
IN WITNESS WHEREOF, Parent, Sub, IEL and HIIC have caused this Agreement to
be executed and attested by their respective officers thereunto duly authorized,
all as of the date first written above.
SKY GAMES INTERNATIONAL LTD.
By:/s/ Malcolm Burke
Its: President
Attest:/s/ P.J. Lawless
------------
SGI HOLDING CORPORATION LIMITED
By: /s/ Malcolm Burke
Its:President
Attest:/s/ P.J. Lawless
------------
INTERACTIVE ENTERTAINMENT LIMITED
By:/s/ Malcolm Burke
Its: President
Attest:/s/ P.J. Lawless
------------
HARRAH'S INTERACTIVE INVESTMENT COMPANY
By:/s/ John Boushy
Its:Sr. Vice President
Attest:/s/ P.J. Lawless
------------
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Exhibit A
---------
Form of Bye-Law Amendments
29
<PAGE>
SCHEDULE OF
PROPOSED AMENDMENTS TO THE BYE-LAWS OF
SKY GAMES INTERNATIONAL LTD.
The Board of Directors is recommending the following Bye-law amendments to
the shareholders for approval at the Special General Meeting:
Bye-Law 1
- - ---------
The following definitions are inserted in alphabetical order in Bye-law 1:
"Affiliates" means, with respect to any person or entity, any person or entity
that directly or indirectly Controls such person or entity, or any person or
entity which is Controlled by or under common Control with such person or
entity.
"Common Shares" has the meaning set forth in Bye-law 3(B).
"Control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of a person or entity,
whether through the ownership of voting securities, by contract or otherwise.
"Director" means a director of the Company.
"fully diluted basis" means at any time that number of (A) Common Shares equal
to the sum, without duplication, of (i) the total number of Common Shares then
outstanding (other than 3,525,000 shares of Common Shares held in escrow
pursuant to that Escrow Agreement dated May 27, 1992, as amended, among Montreal
Trust Company of Canada, the Company and certain shareholders), plus (ii) the
total number of Common Shares into which all then outstanding Preference Shares
or any other shares of the Company are then convertible directly or indirectly,
provided that Common Shares issuable upon conversion of Class A Preference
Shares shall not be included until such conversion occurs, plus (iii) the total
number of Common Shares then issuable directly or indirectly upon exercise of
all then outstanding options, warrants (including the warrant for 650,000 Common
Shares exercisable at $1 per Common Share issued to Harrah's Interactive
Investment Company, a Nevada corporation, and exercisable at the option of the
Company), unexercised stock subscriptions, convertible debentures and other
convertible securities, plus (B) Other Voting Shares equal to the sum, without
duplication (including without duplication of any Common Shares) of (i) the
total number of Other Voting Shares then outstanding, plus (ii) the total number
of Other Voting Shares into which all then outstanding Preference Shares or any
other shares of the Company are then convertible directly or indirectly, plus
(iii) the total number of Other Voting Shares then issuable directly or
indirectly upon exercise of all then outstanding options, warrants, unexercised
stock subscriptions, convertible debentures and other convertible securities.
"HIIC Entities" means Harrah's Interactive Investment Company, a Nevada
corporation, and any of its Affiliates owning shares in the Company.
"HIIC Directors" means the Directors appointed pursuant to Bye-law 54(B) or the
second sentence of Bye-law 55.
"Other Voting Shares" means shares of the Company having the right to vote for
election of directors other than Common Shares or securities convertible into
Common Shares.
"Preference Shares" has the meaning set forth in Bye-law 3(B).
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"Special Board Majority" means (i) a majority of the Directors voting at a
meeting of the Board which also includes a majority of the HIIC Directors then
in office or (ii) a written resolution executed by all the members of the Board.
"Special Shareholders Majority" means a majority of the votes cast at a general
meeting which also includes the votes attaching to a majority of the Voting
Shares of the Company on a fully diluted basis then heir by the HIIC Entities.
"Voting Shares" means Common Shares having the right to vote for election of or
to appoint Directors and any shares convertible directly or indirectly into such
Common Shares and Other Voting Shares and any shares convertible directly or
indirectly into Other Voting Shares.
Bye-Law 3(B)
- - ------------
Bye-law 3(B) is replaced with the following:
"The authorised share capital of the Company at the date of the adoption of
these Bye-laws is US$550,030 divided into 50,000,000 common shares of par value
US$0.01 each (the "Common Shares"), 3,000 non-voting convertible redeemable
preference shares of par value US$0.01 each (the "Class A Preference Shares")
and 5,000,000 redeemable preference shares of par value US$0.01 each (the "Class
B Preference Shares" and together with the Class A Preference Shares, the
"Preference Shares")."
Bye-Law 4
- - ---------
Delete paragraph (c) and the word "and" immediately preceding it.
Delete the last sentence of Bye-law 4 and insert the following as Bye-law 4A:
The Board shall be authorised to issue from time to time in one or more series
the Preference Shares on such terms as it deems appropriate, including, without
limitation, the following:
(a) the number of shares of the Preference Shares, less than or equal to
the total number of Preference Shares authorised in Bye-law 3(B) for each class
of Preference Shares, respectively;
(b) whether dividends, if any, shall be cumulative or noncumulative and the
dividend rate of the Preference Shares;
(c) the dates at which dividends, if any, shall be payable;
(d) the redemption rights of the Preference Shares;
(e) the terms and amount of any sinking fund provided for the purchase or
redemption of shares of the Preference Shares;
(f) the amounts payable on shares of the Preference Shares in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Company;
(g) whether the shares of the Preference Shares shall be convertible into
shares of any other class or preference shares, or any other equity security, of
the Company or any other company, and, if so, the specification of such other
class or preference shares or such other equity security, the conversion price
or prices or rate or rates, any adjustments thereof, the date or dates as of
which such shares shall be convertible and all other terms and conditions upon
which such conversion may be made; and
2
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(h) the voting rights, if any, of the holders of shares of the Preference
Shares; provided that the Class A Preference Shares shall be not-voting.
Insert the following as Bye-law 4B:
"(A) Any Common Shares, Preference Shares or shares of any other class shall
always (i) be redeemed whenever the HIIC Entities own 10% or more of the Voting
Shares on a fully diluted basis and (ii) be subject to redemption by the Company
in accordance with the Companies Act, by action of the Board whenever the HIIC
Entities own less than 10% of the Voting Shares on a fully diluted basis, if any
holder of such shares is a Disqualified Holder or if such action otherwise
should be taken pursuant to any applicable provision of law, to the extent
necessary to avoid any regulatory sanctions against, or to prevent the loss of,
inability to obtain or secure the reinstatement of any license, franchise or
entitlement from any governmental agency held by, the Company, any Affiliate of
the Company, any entity in which the Company or such Affiliate is an owner or
the HIIC Entities or their Affiliates which license, franchise or entitlement
is (i) conditioned upon some or all of the holders of the Company's shares of
any class or series possessing prescribed qualifications, or (ii) needed to
allow the conduct of any portion of the business of the Company or any such
Affiliate or other entity or the HIIC Entities or their Affiliates.
The terms and conditions of such redemption shall be as follows:
(a) the redemption price of the Common Shares and the shares convertible
into Common Shares to be redeemed pursuant to this Bye-law shall be equal to the
Fair Market Value of such shares, and as to such convertible shares, as if any
such convertible shares were converted into Common Shares, (or such other
redemption price as required by any applicable law, regulation or rule) and the
redemption price of shares of the Company of any class (or classes) or series
other than Common Shares or shares convertible into Common Shares shall be the
Fair Market Value of such shares; provided that in both of the previous cases
there shall be excluded any dividends thereon not entitled to be received
pursuant to paragraph (e) of this Bye-law;
(b) the redemption price of such shares may be paid only in cash;
(c) if less than all the shares held by Disqualified Holders are to be
redeemed, the shares to be redeemed shall be selected in such manner as shall be
determined by the Board, which may include selection first of the most recently
purchased shares thereof, selection by lot or selection in any other manner
determined by the Board;
(d) at least 30 days' written notice of the Redemption Date shall be given
to the record holders of the shares selected to be redeemed pursuant to this
Bye-law (unless waived in writing by any such holder), provided that the
Redemption Date may be the date on which written notice shall be given to record
holders if the cash necessary to effect the redemption shall have been deposited
in trust for the benefit of such record holders and subject to immediate
withdrawal by them upon surrender of the share certificates for their shares to
be redeemed together with any other documentation required to effect such
redemption; and
(e) from and after the Redemption Date or such earlier date as required by
any applicable law, regulation or rule, any and all rights of whatever nature,
which may be held by the owners of shares selected for redemption (including
without limitation any rights to vote or participate in dividends declared on
stock of the same class or series as such shares), shall cease and terminate and
they shall thenceforth be entitled only to receive the cash upon redemption.
As used in these Bye-laws:
(i) "Disqualified Holder" shall mean any holder of shares of the Company of
any class (or classes) or series: (1) who, either individually or when taken
together with any other holders of shares of the Company of any class (or
classes) or series is or would reasonably be expected to be determined by any
gaming regulatory agency to be unsuitable, or has or would reasonably be
expected to have an application for a gaming license, permit or other
3
<PAGE>
necessary regulatory approval rejected, or has or would reasonably be expected
to have a previously issued gaming license, permit or other necessary regulatory
approval rescinded, suspended, revoked, not renewed or not reinstated, as the
case may be, whether or not any of the foregoing is or would reasonably be
expected to be final and nonappealable; or (2) whose holding of such shares,
either individually or when taken together with the holding of shares of the
Company of any class (or classes) or series by any other holder could reasonably
be expected to cause the Company (or any other company engaged in the gaming
business in any jurisdiction if such holder of shares were a shareholder of that
company) to be denied a licence, permit or other necessary regulatory approval
to engage in any aspect of the gaming business or the serving or sale of
alcoholic beverages in connection with the operation of a gaming business.
(ii) "Fair Market Value" of a share of (1) the Common Shares shall mean the
average Closing Price for such share for each of the 45 most recent days of
which Common Shares shall have been traded preceding the day on which notice of
redemption shall be given pursuant to paragraph (d) of this Bye-law; provided,
however, that "Fair Market Value" as to any shareholder who purchased any Common
Shares subject to redemption within 120 days of a Redemption Date need not
(unless otherwise determined by the Board) exceed the purchase price paid by him
for any Common Shares purchased within such 120 days and (2) shares of the
Company of any class (or classes) or series other than Common Shares or shares
convertible into Common Shares (including, Other Voting Shares) shall be
determined by the Board in good faith; provided, however, that "Fair Market
Value" as to any shareholder who purchased any such shares subject to redemption
within 120 days of the Redemption Date need not (unless otherwise determined by
the Board) exceed the purchase price paid by him for any such shares of the
Company purchased within such 120 days.
(iii) "Closing Price" on any day means the reported closing sales price
or, in case no such sale takes place, the average of the reported closing bid
and asked prices on the Composite Tape for the New York Stock Exchange-Listed
Stocks, or, if such stock is not listed on such Exchange, on the principal
United States securities exchange registered under the Securities Exchange Act
of 1934 on which such shares are listed, or, if such shares are not listed on
any such exchange, the highest closing sales price or bid quotation for such
shares on the National Association of Securities Dealers, Inc. Automated
Quotations System or any system then in use, or if no such prices or quotations
are available, the fair market value on the day in question as determined by the
Board in good faith.
(iv) "Redemption Date" shall mean the date fixed by the Board for the
redemption of any shares of the Company pursuant to this Bye-law; provided,
however, with respect to any redemption pursuant to Bye-law 4B(A)(i), the
Redemption Date shall not be more than 90 days after the date the Board first
learned of the existence of a Disqualified Holder.
(v) "Subsidiary" shall mean any company (wherever incorporated),
association, partnership or other business entity more than 50% of whose
outstanding stock or other ownership interests entitled to vote generally in the
election of directors (or their equivalent in such form of entity and under the
laws of the jurisdiction of organisation of such entity) is owned by the
Company, by one or more Subsidiaries or by the Company and one or more
Subsidiaries.
(B) So long as a holder of Preference Shares is not a Disqualified Holder, such
Preference Shares shall be redeemed in accordance with the terms set forth
in the resolutions adopted by the Board."
Bye-Law 17
- - ----------
Bye-law 17 is amended by deleting the words "within three months" and inserting
the words "within three days".
4
<PAGE>
Bye-Law 49
- - ----------
Bye-law 49 is renumbered as "Bye-law 49(A)", and the following words are
inserted at the beginning of the second sentence thereof:
"Subject to Bye-law 49(B),".
A new Bye-law 49(B) is inserted as follows:
"Any Shareholder may irrevocably appoint a proxy, and in such case, such proxy
shall be irrevocable in accordance with the instrument of appointment and the
Shareholder may not vote at any meeting at which the proxy holder is present
either in person or pursuant to s. 75A of the Companies Acts."
Bye-Law 52
- - ----------
In Bye-law 52, insert the following words immediately after the words "provided
that":
", subject to Bye-law 49(B),".
Bye-Law 53
- - ----------
In Bye-law 53, insert the words "Bye-law 49(B) and" immediately before the words
"the Companies Acts".
Bye-Laws 54-56
- - --------------
Bye-laws 54, 55 and 56 are deleted in their entirety and are replaced with the
following:
"54(A) Until the HIIC Entities own less than 5% of the Voting Shares on a
fully diluted basis, the Board shall consist of 10 Directors who shall, subject
to Bye-law 54(B), be elected or appointed, except in the case of a casual
vacancy filled pursuant to Bye-law 55, at the annual general meeting or at any
special general meeting called for the purpose of electing or appointing
Directors and who shall hold office for such term as the Shareholders may
determine or, in the absence of such determination, until the next annual
general meeting or until their successors are elected or appointed or their
office is otherwise vacated. At such time as the HIIC Entities own less than 5%
of the Voting Shares on a fully diluted basis, the Board shall consist of such
number not less than three as the Company by Resolution may from time to time
determine. At least two of the Directors, other than the Directors appointed
pursuant to Bye-law 54(B), shall be individuals who are not otherwise officers
or employees of the Company.
54(B) At any time at which the HIIC Entities own 10% or more of the Voting
Shares on a fully diluted basis, the HIIC Entities shall be entitled to appoint
a percentage of Directors which is the same percentage of the size of the entire
Board as the number of Voting Shares held by the HIIC Entities is of the total
number of Voting Shares on a fully diluted basis (such percentage of Voting
Shares owned by and such number of Directors appointed by the HIIC Entities
shall be determined as follows: the fractional portion of any percentage of
ownership shall be disregarded and whole numbers ending in 5 through 9 shall be
rounded up to the next highest multiple of 10 and whole numbers ending 1 through
4 shall be rounded down to the next lowest multiple of 10 (e.g., 24.9% shall be
rounded down to 20% and 25.1% shall be rounded up to 30%) (and the resulting
percentage shall be multiplied by 10). At any time at which the HIIC Entities
own 5% or more, but less than 10%, of the Voting Shares on a fully diluted
basis, the HIIC Entities shall be entitled to appoint one Director.
55. The Company in general meeting may authorise the Board to fill any vacancy
on the Board other than a vacancy in the office of a Director who was appointed
pursuant to Bye-law 54(B). Any vacancy in the office of a Director appointed
pursuant to Bye-law 54(B) may be filled by a written resolution deposited at the
Registered Office, signed by each of the HIIC Entities holding Voting Shares.
5
<PAGE>
56. The Company may in a Special General Meeting called for that purpose remove
a Director provided notice of any such meeting shall be served upon the Director
concerned not less than 14 days before the meeting and he shall be entitled to
be heard at that meeting and provided further that only the HIIC Entities shall
be entitled to vote on any resolution for the removal of an HIIC Director unless
the reason for removal is disqualification of such Director under Bye-law 58(f)
in which case such Director shall be subject to removal by the Company in
accordance with the foregoing provisions of this Bye-law 56. Any vacancy
created by the removal of a Director at a Special General Meeting may be filled
at the Meeting pursuant to Bye-law 54 by the election of another Director in his
place or, in the absence of such election, pursuant to Bye-law 55."
Bye-Law 58
- - ----------
Insert the words "and Officers" after the word "Director" in the heading.
Rename Bye-Law 58 as "Bye-law 58A"
- - ----------------------------------
In paragraph (e) of Bye-law 58, replace the words "a Special Resolution of the
Company"' with the words "Bye-law 56", and replace the period with a semi-colon.
Insert a new paragraph (f) as follows:
"(f) if he would be a Disqualified Holder if he were to own any shares of the
Company".
Insert a new Bye-law "58B" as follows:
The office of any officer shall be vacated upon the happening as to such officer
of the events set out in Bye-law 58A (except the events described in paragraph
(d) and (e)).
Bye-Law 59
- - ----------
In the first sentence of Bye-law 59, immediately after the words "of the
Directors" insert the words, ", other than the HIIC Directors,"; replace the
words "a Director may appoint" with the words "an HIIC Director may appoint" and
in the second sentence thereof replace the words "may be removed by Resolution
of the Company" with the words "may be removed in the same manner as the
Director in respect of whom he is appointed in the alternative".
Bye-Law 64
- - ----------
At the beginning of the third sentence of Bye-law 64, insert the words "Subject
to Bye-law 71,", and in the fourth sentence insert the words ", subject to Bye-
Law 71," immediately after the words "PROVIDED that".
Bye-Law 70
- - ----------
At the beginning of Bye-Law 70(A) and the beginning of the first sentence of
Bye-law 70(B) insert the words "Subject to Bye-law 71(B).".
Bye-law 70(B) is amended by the insertion of the following at the end thereof:
Notwithstanding the first sentence of this paragraph and Bye-law 70(C), for so
long as the HIIC Entities hold at least 5% but less than 10% of the Voting
Shares on a fully diluted basis, the HIIC Directors shall be entitled to elect
one member to each of the Board's executive committee, compensation committee
and audit committee (or any other committee with powers similar thereto); for
such time as the HIIC Entities hold 10% or more of the Voting Shares on a fully
diluted basis, the HIIC Directors shall be entitled to appoint a percentage of
members to each of the Board's executive committee, compensation committee and
audit committee (or any other committee with powers similar
6
<PAGE>
thereto) which is the same percentage of the total number of members of such
committee as the percentage of Voting Shares so held by the HIIC Entities is of
the total number of Voting Shares on a fully diluted basis (such number to be
determined follows: the fractional portion of any percentage of ownership shall
be disregarded and whole numbers ending in 5 through 9 shall be rounded up to
the next highest multiple of 10 and whole numbers ending 1 through 4 shall be
rounded down to the next lowest multiple of 10 (e.g., 24.9% shall be rounded
down to 20% and 25.1% shall be rounded up to 30%) and the fractional portion of
the number of members shall be rounded up to the nearest whole number (e.g., 30%
of a committee of 4 members would result in the right to appoint 2 members of
such committee)).
Bye-law 70(C) is amended by the substitution of the word "Affiliate" for the
word "affiliate".
Bye-Law 71
- - ----------
Bye-law 71 is renumbered "Bye-law 71(A)", and at the beginning of the second
sentence thereof, the following shall be inserted: "Save as otherwise provided
in these Bye-laws,".
Insert a new Bye-law "71(B)" as follows:
At any time that the HIIC Entities own 20% or more of the Voting Shares on a
fully diluted basis, any of the following actions by the Company would require
the approval by a Special Board Majority and a Resolution:
(i) the amalgamation, merger or consolidation of the Company; and
(ii) the amendment of these Bye-laws, including, without limitation, Bye-
laws 4B, 54, 55, 56, 58A, 58B, 71(B) or 71(C), in a manner that would have
a material adverse effect on the rights of the HIIC Entities hereunder.
Insert a new Bye-law "71(C)" as follows:
At any time that the HIIC Entities own 20% or more of the Voting Shares of the
Company on a fully diluted basis, any of the following actions by the Company
would require the approval by a Special Shareholder Majority:
(i) the winding-up or dissolution of the Company; and
(ii) appointment of the Company's independent auditors.
Bye-Law 72
- - ----------
Bye-law 72 is amended by deleting the words "word of mouth" and substituting
therefor the word "verbally".
Bye-Law 73
- - ----------
Bye-Law 73 is amended by the deletion of the words "may be fixed by the Board
and, unless so fixed at any other number".
Bye-Law 95
- - ----------
In Bye-law 95 insert the words: "or to vote at" before the words "general
meetings".
7
<PAGE>
Bye-Law 107
- - -----------
Bye-law 107 is amended by the insertion of the words "Subject to Bye-law 71(B),"
at the beginning thereof and by the deletion of the words "by Special Resolution
at which time" and substituting therefor the words ", and upon such
confirmation".
8
<PAGE>
EXHIBIT 4(a)
EXECUTION COPY
--------------
REGISTRATION AND PREEMPTIVE RIGHTS AGREEMENT
THIS REGISTRATION AND PREEMPTIVE RIGHTS AGREEMENT (this "Agreement"), dated
as of June 17, 1997, is entered into among Sky Games International Ltd., a
Bermuda exempted company (the "Company"), and Harrah's Interactive Investment
Company, a Nevada corporation ("HIIC").
R E C I T A L S:
---------------
WHEREAS, pursuant to a Plan and Agreement of Merger and Amalgamation dated
as of May 13, 1997 (the "Amalgamation Agreement") and the conversion of amounts
owed under a Funding Agreement dated as of May 13, 1997 (the "Funding
Agreement"), HIIC has acquired from the Company shares of Company Common Stock
(as defined in Section 1(e)) and may acquire certain additional shares of
Company Common Stock; and
WHEREAS, the Company and HIIC desire to provide a mechanism for the
registration of the Company Common Stock on the terms and conditions set forth
herein;
A G R E E M E N T:
-----------------
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements contained herein and intending to be legally bound
hereby, the parties hereto agree as follows:
SECTION 1. Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
(a) the term "Additional Piggyback Sellers" shall have the meaning
assigned thereto in Section 3(b) of the Agreement;
(b) the term "Affiliate" means any Person which Controls a party to
this Agreement, which that party Controls or which is under common Control with
that party;
(c) the term "Amalgamation Shares" means the shares of Company Common
Stock issuable to HIIC and/or its Affiliates under the Amalgamation Agreement;
(d) the term "B/EA" shall have the meaning assigned thereto in
Section 8(d) of this Agreement;
(e) the term "Commission" shall have the meaning assigned thereto in
Section 2(c) of this Agreement;
(f) the term "Company Common Stock" means the common stock, par value
US$.01 per share, of the Company;
(g) the term "Control" means the power, direct or indirect, to direct
or cause the direction of the management and policies of a Person through voting
securities, contract or otherwise;
(h) the term "Conversion Shares" means the shares of Company Common
Stock issuable upon conversion of indebtedness under the Funding Agreement;
<PAGE>
(i) the term "Demand" shall have the meaning assigned thereto in
Section 2(a) of this Agreement;
(j) the term "Demand Registration" shall have the meaning assigned
thereto in Section 2(a) of this Agreement;
(k) the term "Demanding Sellers" shall have the meaning assigned
thereto in Section 2(e) of this Agreement;
(l) the term "Disqualifying Action" means (1) any change in or
conduct of the 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 (if such Person held shares of the Company)) that would constitute or
result in, or (2) any action or inaction of or by the Company or any of its
Subsidiaries' which HIIC or the Affiliates of HIIC determine in their reasonable
business judgment would result in, in the case of either (1) or (2), 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
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; provided, the reasonable business
judgment to be exercised by HIIC and its Affiliates 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 Company, alone or
together with any of 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 its Affiliates;
(m) the term "Disqualified Holder" means any holder of shares of the
Company of any class (or classes) or series (1) who, either individually or when
taken together with any other holders of shares of the Company of any class (or
classes) or series is or would reasonably be expected to be determined by any
gaming regulatory agency to be unsuitable, or has or would reasonably be
expected to have an application for a gaming license, permit or other necessary
regulatory approval rejected, or has or would reasonably be expected to have a
previously issued gaming license, permit or other necessary regulatory approval
rescinded, suspended, revoked, not renewed or not reinstated, as the case may
be, whether or not any of the foregoing is or would reasonably be expected to be
final and nonappealable or (2) whose holding of such shares, either individually
or when taken together with the holding of shares of the Company of any class
(or classes) or series by any other holder could reasonably be expected to cause
the Company (or any other company engaged in the gaming business in any
jurisdiction if such holder of shares were a shareholder of that company) to be
denied a licence, permit or other necessary regulatory approval to engage in any
aspect of the gaming business or the serving or sale of alcoholic beverages in
connection with the operation of a gaming business;
(n) the term "fully diluted basis" means, at any time, that number of
(A) shares of Company Common Stock equal to the sum, without duplication, of (i)
the total number of shares of Company Common Stock then outstanding (other than
3,525,000 shares of shares of Company Common Stock held in escrow pursuant to
that Escrow Agreement dated May 27, 1992, as amended, among Montreal Trust
Company of Canada, the Company and certain shareholders), plus (ii) the total
number of shares of Company Common Stock into which all then outstanding
Preference Shares (as defined in the Bye-Laws) of the Company or any other
shares of the Company are then convertible directly or indirectly, provided that
shares of Company Common Stock issuable upon conversion of Class A Preference
Shares of the Company shall not be included
2
<PAGE>
until such conversion occurs, plus (iii) the total number of shares of Company
Common Stock then issuable directly or indirectly upon exercise of all then
outstanding options, warrants (including the commitment for 650,000 shares of
Company Common Stock exercisable at $1 per share of Company Common Stock issued
to HIIC and exercisable at the option of the Company), unexercised stock
subscriptions, convertible debentures and other convertible securities, plus (B)
Other Voting Shares equal to the sum, without duplication (including without
duplication of any shares of Company Common Stock) of (i) the total number of
Other Voting Shares then outstanding, plus (ii) the total number of Other Voting
Shares into which all then outstanding preference shares of the Company or any
other shares of the Company are then convertible directly or indirectly, plus
(iii) the total number of Other Voting Shares then issuable directly or
indirectly upon exercise of all then outstanding options, warrants, unexercised
stock subscriptions, convertible debentures and other convertible securities;
(o) the term "HIIC Piggyback Seller" shall have the meaning assigned
thereto in Section 3(b) of this Agreement;
(p) the term "Internal Expenses" shall have the meaning assigned
thereto in Section 7 of this Agreement;
(q) the term "Maximum Demand Number" shall have the meaning assigned
thereto in Section 2(e) of this Agreement;
(r) the term "Maximum Piggyback Number" shall have the meaning
assigned thereto in Section 3(b) of this Agreement;
(s) the term "Other Demand Rights" shall have the meaning assigned
thereto in Section 3(b) of this Agreement;
(t) the term "Other Demanding Sellers" shall have the meaning
assigned thereto in Section 3(b) of this Agreement;
(u) the term "Other Voting Shares" means shares of the Company having
the right to vote for election of directors other than Company Common Stock or
securities convertible into Company Common Stock;
(v) the term "Person" means any individual, partnership, limited
partnership, corporation, limited liability company, association, joint stock
company, trust, joint venture or unincorporated organization, or the United
States of America, Bermuda or any other nation, any state or other political
subdivision thereof, or any entity exercising executive, legislative, judicial,
regulatory or administrative functions of government or other entity, and shall
include any successor (by merger or otherwise) of such entity;
(w) the term "Piggyback Notice" shall have the meaning assigned
thereto in Section 3(a) of this Agreement;
(x) the term "Piggyback Registration" shall have the meaning assigned
thereto in Section 3(a) of this Agreement;
3
<PAGE>
(y) the term "Primary Offering" shall have the meaning assigned
thereto in Section 3(b) of this Agreement;
(z) the term "Registrable Securities" means (i) the Amalgamation
Shares, the Conversion Shares, the Warrant Shares and shares received pursuant
to Section 8 of this Agreement and (ii) securities issued or issuable with
respect to the Amalgamation Shares, the Conversion Shares and the Warrant Shares
(or other Registrable Securities by virtue of this clause (ii)) by way of a
dividend, other distribution, stock split, combination of shares,
recapitalization, reorganization, reclassification, merger, consolidation,
compulsory share exchange or any transaction or series of related transactions
in which shares of Company Common Stock or Registrable Securities are changed
into, converted into or exchanged for other securities; provided, as to any
particular Registrable Securities, such securities shall cease to be Registrable
Securities when (i) a registration statement registering such securities under
the Securities Act has been declared effective and such securities have been
sold or otherwise transferred by the holder thereof pursuant to such
registration statement, (ii) such securities are sold in compliance with Rule
144 or (iii) such securities are transferred to any Person which is not an
Affiliate of HIIC;
(aa) the term "Registration Expenses" shall have the meaning assigned
thereto in Section 7 of this Agreement;
(bb) the term "Rule 144" means Rule 144 (or any successor provisions)
promulgated under the Securities Act;
(cc) the term "Securities Act" shall have the meaning assigned thereto
in Section 2(a) of this Agreement;
(dd) the term "Subsidiary" means any corporation, partnership, joint
venture or other legal entity of which the Company or HIIC, as the case may be
(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 interests 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;
(ee) the term "Trading Price" means the average of the mean of the bid
and ask prices of the Company Common Stock on a single trading day as reported
on the NASDAQ SmallCap Market or any other securities exchange or over-the-
counter market on which or through which Company Common Stock may then be listed
or quoted;
(ff) the term "Voting Shares" means Company Common Stock having the
right to vote for election of or to appoint Directors and any shares
convertible, directly or indirectly, into such Company Common Stock and Other
Voting Shares and any shares convertible directly or indirectly into Other
Voting Shares; and
(gg) the term "Warrant Shares"means the shares of Company Common Stock
issuable to HIIC and/or its Affiliates under the Warrant Agreement dated May 13,
1997 and the exercise by the Company of the equity purchase commitment by HIIC
in the Funding Agreement.
SECTION 2. Demand Registrations.
4
<PAGE>
(a) Requests for Registration. Subject to the limitations set forth
in paragraph (d) below, at any time and from time to time after the date hereof
HIIC and its Affiliates shall be entitled to make written requests of the
Company (each such request being a "Demand") for registration under the
Securities Act of 1933, as amended (the "Securities Act"), of all or part of the
Registrable Securities (a "Demand Registration"). Such Demand shall specify the
aggregate number and kind of Registrable Securities requested to be registered.
(b) Number of Demand Registrations. HIIC and its Affiliates shall be
entitled to two (2) Demand Registrations.
(c) Satisfaction of Obligations. Subject to Section 4, a
registration shall not be treated as a Demand Registration until (i) the
applicable registration statement under the Securities Act has been filed with
the Securities and Exchange Commission (the "Commission") with respect to such
Demand Registration, (ii) such registration statement shall have been maintained
continuously effective for a period of at least thirty (30) days (ninety (90)
days in the event of a best efforts underwriting pursuant to Section 2(d)(ii))
or such shorter period as when all Registrable Securities included therein have
been sold thereunder in accordance with the manner of distribution set forth in
such registration statement and (iii) the number or amount of Registrable
Securities sold pursuant to such registration shall equal or exceed eighty
percent (80%) of the Registrable Securities as to which HIIC and/or its
Affiliates requested registration.
(d) Restrictions on Demand Registrations. The Company shall not be
obligated to file any Demand Registration:
(i) prior to June 30, 1998 for an aggregate number of
Registrable Securities in excess of one million (1,000,000) shares (as
adjusted for stock splits, dividends, reclassifications, etc.), unless
the Company receives the written opinion of its investment bank at the
time that the Trading Price of the Company Common Stock would not fall
by more than twenty-five percent (25%) for more than fifteen (15)
consecutive trading days as a result of such sale, in which case, a
Demand could be brought for such aggregate number of Registrable
Shares as would not, in such investment bank's opinion, cause the
Trading Price to fall below such level;
(ii) unless the method of distribution is pursuant to a so-
called "firm commitment" underwritten registration to be managed and
administered by an underwriter selected by the Board of Directors of
the Company; provided, however, in the event the Company cannot reach
an agreement with an underwriter to underwrite a registration on a
firm commitment basis, in such circumstance only, the method of
distribution may be a "best efforts" underwritten registration to be
managed and administered by an underwriter selected by the Board of
Directors of the Company; or
(iii) within one hundred eighty (180) days after the effective
date of a so-called "firm commitment" underwritten registration in
which all holders of Registrable Securities were given so-called
"piggyback" rights pursuant to Section 3 hereof, unless the number or
amount of Registrable Securities sold pursuant to such registration is
less than eighty percent (80%) of the Registrable Securities as to
which HIIC and/or its Affiliates requested registration.
In addition, the Company shall be entitled to postpone (upon written notice to
HIIC) the filing or the effectiveness of a registration statement in respect of
a Demand for up to one hundred twenty (120) days (but
5
<PAGE>
no more than once in any consecutive eight (8) months) after the date of receipt
of a Demand Notice if the Company's Board of Directors determines that effecting
the Demand Registration in respect of such Demand would (i) have a material
adverse effect on any proposal or plan by the Company to engage in any public
debt or equity financing, acquisition or disposition of assets or any merger,
consolidation, tender offer or other similar transaction or (ii) require
disclosure of a previously undisclosed material development involving the
Company which disclosure would have a material adverse effect on the Company or
its prospects. In the event the Company receives a request prior to June 30,
1998 to file a Demand Registration for an aggregate number of Registrable
Securities in excess of one million (1,000,000) shares (as adjusted for stock
splits, dividends, reclassifications, etc.), the Company shall request its
investment bank to conduct the analysis set forth in paragraph (d)(i) above, and
in the event such investment bank does not issue within fifteen (15) business
days after the date of receipt of a Demand Notice by the Company its written
opinion that the sale would cause the Trading Price of the Company Common Stock
to fall by more than twenty-five percent (25%) for more than fifteen (15)
consecutive trading days, then it shall be presumed for purposes of this
paragraph (d) that such investment bank was of the opinion that the sale would
not cause the Trading Price of the Company Common Stock to fall by more than
twenty-five percent (25%) for more than fifteen (15) consecutive trading days
(e) Participation in Demand Registrations. If, in connection with a
Demand Registration, the managing underwriter advises the Company and the
holders of the Registrable Securities sought to be included in such Demand
Registration in writing that, in its opinion, the marketability of the
Registrable Securities sought to be sold pursuant thereto would be adversely
affected by the inclusion of both the Registrable Securities and, if authorized
pursuant to this paragraph, other securities of the Company, in each case,
sought to be registered in connection with such Demand Registration, then the
Company shall include in the registration statement applicable to such Demand
Registration only such securities as the Company and the holders of Registrable
Securities sought to be registered therein ("Demanding Sellers") are advised in
writing by such underwriter can be sold without such an effect (the "Maximum
Demand Number"), as follows and in the following order of priority:
(i) first, the number of Registrable Securities sought to be
registered by each Demanding Seller, pro rata in proportion to the
number of Registrable Securities sought to be registered by all
Demanding Sellers; and
(ii) second, if the number of Registrable Securities to be
included under clause (i) next above is less than the Maximum Demand
Number, the number of securities sought to be included by each other
seller, pro rata in proportion to the number of securities sought to
be sold by all such other sellers, which in the aggregate, when added
to the number of securities to be included pursuant to clause (i) next
above, equals the Maximum Demand Number.
SECTION 3. Piggyback Registrations.
(a) Right to Piggyback. At any time from and after the date hereof
for so long as HIIC and its Affiliates collectively own five percent (5%) or
more of the outstanding Voting Shares of the Company, on a fully diluted basis,
whenever the Company proposes to register any of its equity securities under the
Securities Act (other than pursuant to a Demand Registration or on a Form S-4 or
S-8 (or any successor form)) (a "Piggyback Registration"), the Company shall
give all holders of Registrable Securities prompt written notice thereof (but
not less than thirty (30) days prior to the filing by the Company with the
Commission of any registration statement with respect thereto). Such notice (a
"Piggyback Notice") shall specify, at a minimum, to the extent known, the number
and kind of securities proposed to be registered, the proposed date
6
<PAGE>
of filing of such registration statement with the Commission, the proposed means
of distribution, the proposed managing underwriter or underwriters (if any and
if known), and a good faith estimate by the Company of the proposed minimum
offering price of such securities, as such price is proposed to appear on the
facing page of such registration statement. Upon the written request of a holder
of Registrable Securities given within ten (10) business days of such holder's
receipt of the Piggyback Notice (which written request shall specify the number
and kind of Registrable Securities intended to be disposed of by such holder and
the intended method of distribution thereof), the Company shall include in such
registration all Registrable Securities with respect to which the Company has
received such written requests for inclusion; provided that such holder sells
such Registrable Securities only in accordance with the method of distribution
selected by the Company or in accordance with any other method of distribution
which may be approved by the managing underwriter of such offering.
(b) Priority on Piggyback Registrations. If, in connection with a
Piggyback Registration, any managing underwriter (or, if such Piggyback
Registration is not an underwritten offering, a nationally recognized
independent underwriter approved by the Board of Directors of the Company)
advises the Company and the holders of the Registrable Securities to be included
in such Piggyback Registration, that, in its opinion, the inclusion of all the
securities sought to be included in such Piggyback Registration by the Company,
any Persons who have sought to have shares registered thereunder pursuant to
rights to demand (other than pursuant to so-called "piggyback" or other
incidental or participation registration rights) such registration (such demand
rights being "Other Demand Rights" and such Persons being "Other Demanding
Sellers"), any holders of Registrable Securities seeking to sell such securities
in such Piggyback Registration ("HIIC Piggyback Sellers") and any other proposed
sellers ("Additional Piggyback Sellers"), in each case, if any, would adversely
affect the marketability of the securities sought to be sold pursuant thereto,
then the Company shall include in the registration statement applicable to such
Piggyback Registration only such securities as the Company and the HIIC
Piggyback Sellers are so advised by such underwriter can be sold without such an
effect, which may exclude any class of Registrable Securities if, in the
judgment of such underwriter, the inclusion of such Registrable Securities would
adversely affect the marketability of the securities sought to be sold pursuant
thereto (the "Maximum Piggyback Number"), as follows and in the following order
of priority:
(i) if the Piggyback Registration is an offering on behalf of
the Company and not any Person exercising Other Demand Rights (whether
or not other Persons seek to include securities therein pursuant to
so-called "piggyback" or other incidental or participatory
registration rights) (a "Primary Offering"), then (A) first, such
number of securities to be sold by the Company as the Company shall
have determined, (B) second, if the number of securities to be
included under clause (A) next above is less than the Maximum
Piggyback Number, the number of Registrable Securities of each HIIC
Piggyback Seller, pro rata in proportion to the number of securities
sought to be registered by all HIIC Piggyback Sellers, which in the
aggregate, when added to the number of securities to be registered
under clause (A) next above, equals the Maximum Piggyback Number and
(C) third, if the number of securities to be included under clauses
(A) and (B) next above is less than the Maximum Piggyback Number, the
number of securities of each Additional Piggyback Seller, pro rata in
proportion to the number of securities sought to be registered by all
such Additional Piggyback Sellers, which in the aggregate, when added
to the number of securities to be registered under clauses (A) and (B)
next above, equals the Maximum Piggyback Number;
(ii) if the Piggyback Registration is an offering other than
pursuant to a Primary Offering, then (A) first, such number of
securities sought to be registered by each Other
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Demanding Seller, pro rata in proportion to the number of securities
sought to be registered by all such Other Demanding Sellers, (B)
second, if the number of securities included under clause (A) next
above is less than the Maximum Piggyback Number, the number of
securities sought to be registered by each HIIC Piggyback Seller, pro
rata in proportion to the number of securities sought to be registered
by all HIIC Piggyback Sellers, which in the aggregate, when added to
the number of securities to be registered pursuant to clause (A) next
above, equals the Maximum Piggyback Number and (C) third, if the
number of securities to be included under clauses (A) and (B) next
above is less than the Maximum Piggyback Number, the number of
securities of each Additional Piggyback Seller, pro rata in proportion
to the number of securities sought to be included by all such
Additional Piggyback Sellers, which in the aggregate, when added to
the number of securities to be registered under clauses (A) and (B)
next above, equals the Maximum Piggyback Number.
(c) Withdrawal by the Company. If, at any time after giving written
notice of its intention to register any of its securities as set forth in
Section 3(a) and prior to the time the registration statement filed in
connection with such registration is declared effective, the Company shall
determine for any reason not to register such securities, the Company may, at
its election, give written notice of such determination to each holder of
Registrable Securities and thereupon shall be relieved of its obligation to
register any Registrable Securities in connection with such particular withdrawn
or abandoned registration.
SECTION 4. Withdrawal Rights. Any holder of Registrable Securities having
notified or directed the Company to include any or all of its Registrable
Securities in a registration statement under the Securities Act (whether
pursuant to Section 2 or 3 hereof) shall have the right to withdraw any such
notice or direction with respect to any or all of the Registrable Securities
designated for registration thereby by giving written notice to such effect to
the Company prior to the effective date of such registration statement. In the
event of any such withdrawal, the Company shall not include such Registrable
Securities in the applicable registration and such Registrable Securities shall
continue to be Registrable Securities hereunder. No such withdrawal shall affect
the obligations of the Company with respect to the Registrable Securities not so
withdrawn. Any registration statement not filed or withdrawn in accordance with
an election by the Company or the holders of Registrable Securities shall not be
counted as a Demand for purposes of Section 2 hereof.
SECTION 5. Holdback Agreements. Each holder of Registrable Securities
agrees, at all times the holders of Registrable Securities have piggyback rights
pursuant to Section 3 hereof, not to effect any public sale or distribution
(including sales pursuant to Rule 144) of equity securities of the Company, or
any securities convertible into or exchangeable or exercisable for such
securities, during (a) the seven (7) days immediately prior to the effective
date of any Demand Registration or Piggyback Registration and (b) the one
hundred twenty (120)-day period beginning on the effective date of any (i)
Primary Offering in which holders of Registrable Securities had piggyback rights
pursuant to Section 3 hereof (provided, no holder of Registrable Securities
shall be subject to the restrictions pursuant to this clause (i) for any more
than one hundred twenty (120) days in any one hundred eighty (180) day period
and whether or not, in the case of a Piggyback Registration, any Registrable
Securities are included therein), (ii) Demand Registration or (iii) any
Piggyback Registration (other than a Primary Offering), unless the number or
amount of Registrable Securities sold pursuant to such Piggyback Registration is
less than eighty percent (80%) of the Registrable Securities as to which HIIC
and/or its Affiliates requested registration (in each case, except as part of
such registration and, or, in each case of clauses (i), (ii) and (iii), if
later, the date of any underwriting agreement with respect thereto. The Company
agrees to use it best efforts to cause a provision identical to the foregoing to
be included in all registration rights which it grants in the future.
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SECTION 6. Registration Procedures. Whenever the holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement (whether pursuant to Section 2 or Section 3 of this
Agreement), the Company shall use its best efforts to effect the registration
and the sale of such Registrable Securities in accordance with the intended
method of disposition thereof and, in connection therewith, the Company shall as
expeditiously as possible:
(a) prepare and file with the Commission a registration statement
with respect to such Registrable Securities, on any form for which the Company
then qualifies and which counsel for the Company shall deem appropriate for the
sale of such Registrable Securities in accordance with the intended method of
distribution thereof, and use its best efforts to cause such registration
statement to become effective;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a continuous period of not less than thirty (30) days (ninety (90) days in the
event of a best efforts underwriting pursuant to Section 2(d)(ii)) (or, if
earlier, until all Registrable Securities included in such registration
statement have been sold thereunder in accordance with the manner of
distribution set forth therein) and comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by such
registration statement during such period in accordance with the intended
methods of disposition by the sellers thereof as set forth in such registration
statement (including, without limitation, by incorporating in a prospectus
supplement or post-effective amendment, at the request of a seller of
Registrable Securities, the terms of the sale of such Registrable Securities);
(c) before filing with the Commission any such registration statement
or prospectus or any amendments or supplements thereto, the Company shall
furnish to counsel selected by HIIC and/or its Affiliates drafts of all such
documents proposed to be filed and provide such counsel with a reasonable
opportunity for review thereof, such review to be conducted with reasonable
promptness;
(d) promptly (i) notify the selling holders of Registrable Securities
of each of (x) the filing and effectiveness of the registration statement and
prospectus and any amendments or supplements thereto, (y) the receipt of any
comments from the Commission or any state securities law authorities or any
other governmental authorities with respect to any such registration statement
or prospectus or any amendments or supplements thereto and (z) any oral or
written stop order with respect to such registration, any suspension of the
registration or qualification of the sale of such Registrable Securities in any
jurisdiction or any initiation or threatening of any proceedings with respect to
the foregoing and (ii) use its best efforts to obtain the withdrawal of any
order suspending the registration or qualification (or the effectiveness
thereof) or suspending or preventing the use of any related prospectus in any
jurisdiction with respect thereto;
(e) furnish to each seller of Registrable Securities and counsel for
the foregoing, a conformed copy of such registration statement and each
amendment and supplement thereto (in each case, including all exhibits thereto
and documents incorporated by reference therein) and such additional number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus (including each preliminary prospectus) included in such
registration statement and prospectus supplements and all exhibits thereto and
documents incorporated by reference therein and such other documents as such
seller or counsel may reasonably request in order to facilitate the disposition
of the Registrable Securities owned by such seller, the use of each of which
thereby and therefor to which the Company hereby consents;
(f) use its best efforts to register or qualify such Registrable
Securities under such securities or "blue sky" laws of such jurisdictions as any
seller reasonably requests and do any and all other
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acts and things which may be reasonably necessary or advisable to enable such
seller to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller and keep such registration or qualification in
effect for so long as the registration statement remains effective under the
Securities Act (provided that the Company shall not be required to (i) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this paragraph or (ii) subject itself to taxation in
any such jurisdiction where it would not otherwise be subject to taxation but
for this paragraph);
(g) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, upon the discovery that, or of the happening of any event as a
result of which, the registration statement covering such Registrable
Securities, as then in effect, contains an untrue statement of a material fact
or omits to state any material fact required to be stated therein or any fact
necessary to make the statements therein not misleading, and promptly prepare
and furnish to each such seller a supplement or amendment to the prospectus
contained in such registration statement so that such Registration Statement
shall not, and such prospectus as thereafter delivered to the purchaser of such
Registrable Securities shall not, contain an untrue statement of a material fact
or omit to state any material fact required to be stated therein or any fact
necessary to make the statements therein not misleading;
(h) cause all such Registrable Securities to be listed on each
securities exchange and included in each established over-the-counter market on
which or through which securities of the same class of the Company are then
listed or traded and, if not so listed or traded, to be listed on the National
Association of Securities Dealers Automated Quotation system ("NASDAQ");
(i) provide a transfer agent, registrar and CUSIP number for all of
such Registrable Securities not later than the effective date of such
registration statement;
(j) make available for inspection by any seller of Registrable
Securities and any attorney, accountant or other agent retained by any such
seller, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors,
employees, attorneys and independent accountants to supply all information, in
each case reasonably requested by any such sellers, attorneys, accountants or
agents in connection with such registration statement, subject to the right of
the Company to limit access to any such information to the extent that (i) the
Company is restricted from providing such information pursuant to any bona fide
confidentiality agreement to which the Company or any of its Subsidiaries is a
party and (ii) the Company shall have delivered to each seller of the
Registrable Securities a certificate duly executed by the chief executive or
chief financial officer of the Company stating that such information does not
contain any material information which would be required to be disclosed in, or
which would materially affect any information required to be disclosed in, such
registration statement;
(k) use its best efforts to comply with all applicable laws related
to such registration statement and offering and sale of securities and all
applicable rules and regulations of governmental authorities in connection
therewith (including, without limitation, the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) and the rules and
regulations promulgated by the Commission) and make generally available to its
security holders as soon as practicable (but in any event not later than fifteen
(15) months after the effectiveness of such registration statement) an earnings
statement of the Company and its subsidiaries complying with Section 11(a) of
the Securities Act;
(l) use its best efforts to furnish to each seller of Registrable
Securities a signed counterpart of (i) an opinion of counsel for the Company
(which counsel shall be reasonably acceptable to
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HIIC and/or its Affiliates) and (ii) a "comfort" letter signed by the
independent public accountants who have certified the Company's financial
statements included or incorporated by reference in such registration statement,
covering such matters with respect to such registration statement and, in the
case of the accountants' comfort letter, with respect to events subsequent to
the date of such financial statements, as are customarily covered in opinions of
issuer's counsel and in accountants' comfort letters delivered to the
underwriters in underwritten public offerings of securities for the account of,
or on behalf of, an issuer of common stock, such opinion and comfort letters to
be dated the date such opinions and comfort letters are customarily dated in
such transactions and to be addressed to and reasonably acceptable to the
underwriter and each seller of Registrable Securities; and
(m) take all such other actions as HIIC and/or its Affiliates
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities.
Without limiting any of the foregoing, the Company shall enter into an
underwriting agreement with a managing underwriter or underwriters containing
representations, warranties, indemnities and agreements customarily included
(but not inconsistent with the agreements contained herein) by an issuer of
common stock in underwriting agreements with respect to offerings of common
stock for the account of, or on behalf of, selling shareholders. Each seller of
Registrable Securities pursuant to the terms of this Agreement shall be required
to make such representations and warranties to, and agreements with, the Company
and/or underwriter or underwriters as are customary in similar transactions or
are contemplated by the terms of this Agreement. In connection with any offering
of Registrable Securities registered pursuant to this Agreement, the Company
shall (i) furnish to the underwriter unlegended certificates representing
ownership of the Registrable Securities being sold, in such denominations as
requested for sale pursuant to such registration and (ii) instruct any transfer
agent and registrar of the Registrable Securities to release any stop transfer
order with respect thereto.
Each seller of Registrable Securities hereunder agrees that upon receipt of
any notice from the Company of the happening of any event of the kind described
in paragraph (g) of this Section 6, such seller shall forthwith discontinue such
seller's disposition of Registrable Securities pursuant to the applicable
registration statement and prospectus relating thereto until such seller's
receipt of the copies of the supplemented or amended prospectus contemplated by
paragraph (g) of this Section 6 and, if so directed by the Company, deliver to
the Company (at the Company's sole cost and expense) all copies then in such
seller's possession of the prospectus current at the time of receipt of such
notice relating to such Registrable Securities. In the event the Company shall
give such notice, the thirty (30) day period during which such registration
statement must remain effective pursuant to this Agreement shall be extended by
the number of days during the period from the date of giving of a notice
regarding the happening of an event of the kind described in paragraph (g) of
this Section 6 to the date when all such sellers shall receive such a
supplemented or amended prospectus and such prospectus shall have been filed
with the Commission.
SECTION 7. Registration Expenses. All expenses incident to the Company's
performance of, or compliance with, its obligations under this Agreement
including, without limitation, all registration and filing fees, all fees and
expenses of compliance with securities and "blue sky" laws (including, without
limitation, the fees and expenses of counsel for underwriters or placement or
sales agents in connection therewith to the extent provided for in the
underwriting agreement), all printing and copying expenses, all messenger and
delivery expenses, all fees and expenses of underwriters and sales and placement
agents in connection therewith (excluding discounts, commissions and
allowances), all fees and expenses of the Company's independent certified public
accountants (except as otherwise provided in Section 2(d)) and counsel
(including, without limitation, with respect to "comfort" letters and opinions)
and other Persons retained by the Company in connection therewith (collectively,
the "Registration Expenses") shall be borne by the Company unless
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otherwise provided in this Agreement except that the Company will, in any event
(and without implication that the contrary would otherwise be true), pay its
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties, and the
expense of any annual audit) (collectively, "Internal Expenses") and the
expenses and fees for listing the securities to be registered on each securities
exchange and included in each established over-the-counter market on which
securities of the same class issued by the Company are then listed or traded or
for listing on the NASDAQ pursuant to paragraph (i) of Section 6 of this
Agreement. The sellers of Registrable Shares shall be responsible for their own
underwriting discounts, commissions and allowances and legal fees and expenses.
SECTION 8. Preemptive Rights.
(a) Preemptive Rights. Except for the issuance of securities of the
Company (i) to the Company's or its Affiliates' employees, directors or
consultants (or pursuant to options or rights granted to Persons who were
employees, directors or consultants of the Company or its Affiliates as of the
date of grant) pursuant to a stock purchase or option plan adopted by the Board
of Directors of the Company, (ii) in connection with an acquisition by the
Company or its Affiliates of the assets or capital stock of a third party, (iii)
pursuant to a stock split, dividend, etc., (iv) except as provided in paragraph
(d) below, upon the conversion of any preference shares into Common Stock, or
(v) to any lender in connection with the extension, renewal, modification or
renegotiation of any credit or indebtedness to the Company or its Affiliates
(provided, it being the understanding of the parties that the exception set
forth in this clause (v) shall not apply to any issuance of securities of the
Company in settlement or repayment of any credit or indebtedness to the Company
or its Affiliates), if the Company authorizes the issuance or sale of any Voting
Shares, including options, warrants or rights to acquire Voting Shares or
securities convertible into Voting Shares, (other than as a dividend on the
outstanding Voting Shares) to any Person, the Company shall first offer to sell
to HIIC and its Affiliates a portion of such securities equal to the quotient
determined by dividing (A) the number of shares of Voting Shares held by HIIC
and its Affiliates at the time of the proposed issuance of such securities, on a
fully diluted basis, by (B) the total number of outstanding shares of Voting
Shares outstanding at such time, on a fully diluted basis. The exception set
forth in clauses (i) through (v), inclusive, of this Section 8(a) shall not
apply to any issuance of securities of the Company in a transaction of the type
set forth in clauses (i) through (v), inclusive, to the extent, and solely to
the extent, any such individual issuance would result in the aggregate
ownership, on a fully diluted basis, of Voting Shares by HIIC and its Affiliates
being less than twenty percent (20%) of the outstanding Voting Shares of the
Company, on a fully diluted basis; provided, however, in the event a valuation
of the securities of the Company being issued in such transaction is required in
connection with the exercise of the preemptive rights hereunder, HIIC and its
Affiliates shall retain and be solely responsible for the payment of all fees
and expenses of the investment bank or valuation firm hired to conduct such
valuation and any such investment bank or valuation firm shall be reasonably
acceptable to the Company. If such securities are being offered in a manner such
that each offeree purchasing such stock or securities is required to purchase a
"strip" or more than one type of stock and/or securities, HIIC shall likewise be
required to purchase each of the shares of stock and/or securities included in
the strip if any are purchased.
(b) Procedure. In order to exercise its purchase rights under this
Section 8, HIIC and its Affiliates shall, within fifteen (15) days after receipt
of written notice from the Company describing in reasonable detail the
securities being offered, the purchase price thereof, the payment terms and its
percentage allotment, deliver a written notice to the Company describing its
election hereunder. During the ninety (90) days following the expiration of the
fifteen (15) day period described above, the Company shall be entitled to sell
such securities which HIIC and its Affiliates have not elected to purchase on
terms and conditions no more favorable to the purchasers thereof than those
offered to HIIC and its Affiliates; provided, if the Company does not sell
within the ninety (90) day period the securities which were the subject of the
notice pursuant this
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Section 8, it must send another notice and repeat the procedure pursuant to this
Section 8 before it could sell such securities after such ninety (90) day
period.
(c) Termination. The provisions of this Section 8 shall terminate
when HIIC and its Affiliates collectively own less than twenty percent (20%) of
the outstanding Voting Shares of the Company on a fully diluted basis.
(d) Special Preemptive Right. Notwithstanding paragraph (c) above
and in addition to the rights set forth in paragraph (a) above, upon any
conversion of any shares of convertible redeemable preference shares of the
Company issued to B E Aerospace, Inc., a Delaware corporation ("B/EA"), as part
of the issuance of up to three thousand (3,000) shares of convertible redeemable
preference shares of the Company to B/EA which are convertible into Parent
Common Shares at a percentage of the trading price of the Parent Common Shares
as previously disclosed to HIIC, the Company shall issue to HIIC and/or the
Affiliates of HIIC a number of the Company Common Shares upon payment by HIIC of
the par value thereof such that such number of shares plus the number of the
Amalgamation Shares, Conversion Shares and Warrant Shares collectively
constitutes the same percentage of the outstanding Voting Shares of the Company
on a fully diluted basis as the number of Amalgamation Shares, Conversion Shares
and Warrant Shares constituted of the outstanding Voting Shares of the Company
on a fully diluted basis prior to such issuance.
SECTION 9. Non-Pro Rata Redemptions. HIIC and/or the Affiliates of HIIC
shall have the right for as long as HIIC and the Affiliates of HIIC collectively
own twenty percent (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 of Voting Shares conducted by the Company, other than
repurchases or redemptions in connection with the termination of employment of
any employee of the Company or any of its Affiliates or pursuant to a
contractual right or obligation of the Company entered into in connection with
the issuance of such Voting Shares.
SECTION 10. Special Sale Obligations/Rights. At any time that HIIC and the
Affiliates of HIIC collectively own less than ten percent (10%) of the
outstanding Voting Shares of the Company, on a fully diluted basis, (i) the
Company shall have the right to cause HIIC and the Affiliates of HIIC to sell
all of their Voting Shares of the Company pursuant to a sale registered under
the Securities Act and (ii) HIIC shall have the right to cause the Company to
file a registration statement under the Securities Act in accordance with the
terms of Section 2 to sell all of its and its Affiliates' Voting Shares of the
Company, in each case of (i) and (ii), in the event (x) 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 constitute or result in a Disqualifying Action or (y)
the Company does not redeem a Disqualified Holder pursuant to Bye-law 4B of its
bye-laws, and in each case of (i) and (ii), at the Company's expense (other than
HIIC's and the Affiliates of HIIC underwriting discounts, commissions or
allowances and legal fees and expenses) without being subject to the limitations
set forth in Sections 2(b) and (d) and Section 5.
SECTION 11. Indemnification.
(a) By the Company. The Company agrees to indemnify, defend and
hold harmless each holder of Registrable Securities, its officers, directors,
employees and agents and each Person who controls (within the meaning of the
Securities Act or the Exchange Act) such holder or such an other indemnified
Person against all losses, claims, damages, liabilities and expenses caused by
(i) any untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to
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be stated therein or of a fact necessary to make the statements therein not
misleading, except insofar as the same are caused by and contained in any
information furnished in writing to the Company by such holder for use therein
by the Company or (ii) any violation by the Company of any applicable federal or
state securities laws.
(b) By Holders. In connection with any registration statement in
which a holder of Registrable Securities is participating, each such holder will
furnish to the Company in writing information regarding such holder's ownership
of Registrable Securities and shall indemnify, defend and hold harmless the
Company, its directors, officers, employees and agents and each Person who
controls (within the meaning of the Securities Act or the Exchange Act) the
Company or such an other indemnified Person against any losses, claims, damages,
liabilities and expenses (including with respect to any claim for
indemnification hereunder asserted by any other indemnified Person) resulting
from (i) any untrue or alleged untrue statement of material fact contained in
such information so furnished by such holder which is contained in the
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto, or any omission or alleged omission of a material
fact omitted from the information so furnished by holder which is required to be
stated therein or necessary to make the statements therein not misleading and is
omitted from the registration statement, prospectus or preliminary prospectus or
any amendment or supplement thereto, or (ii) any violation by such holder of any
applicable federal or state securities laws; provided that the liability of each
such holder of Registrable Securities will be in proportion to and limited to
the net amount received by such holder from the sale of Registrable Securities
pursuant to such registration statement.
(c) Notice. Any Person entitled to indemnification hereunder shall
give prompt written notice to the indemnifying party of any claim with respect
to which it seeks indemnification; provided, however, the failure to give such
notice shall not release the indemnifying party from its obligation under this
Section 11, except to the extent that the indemnifying party has been materially
prejudiced by such failure to provide such notice.
(d) Defense of Actions. In any case in which any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not (so long as it shall
continue to have the right to defend, contest, litigate and settle the matter in
question in accordance with this paragraph) be liable to such indemnified party
hereunder for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof (unless such
indemnified party presents a written legal opinion of counsel to the effect that
there are defenses available to the indemnified party which are different from
or in addition to the defenses available to such indemnifying party, in which
event the indemnified party shall be reimbursed by the indemnifying party for
the expenses incurred in connection with retaining separate legal counsel;
provided that the indemnifying party shall not be obligated to reimburse the
indemnified parties for the fees and expenses of more than one counsel for all
indemnified parties who do not have different or additional defenses among
themselves). An indemnifying party shall not be liable for any settlement of an
action or claim effected without its consent. The indemnifying party shall lose
its right to defend, contest, litigate and settle a matter if it shall fail to
diligently contest such matter (except to the extent settled in accordance with
the next following sentence). No matter shall be settled by an indemnifying
party without the consent of the indemnified party (which consent shall not be
unreasonably withheld).
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(e) Survival. The indemnification provided for under this Agreement
shall remain in full force and effect regardless of any investigation made by or
on behalf of the indemnified Person and will survive the transfer of the
Registrable Securities.
(f) Contribution. If recovery is not available under the foregoing
indemnification provisions for any reason or reasons other than as specified
therein, any Person who would otherwise be entitled to indemnification by the
terms thereof shall nevertheless be entitled to contribution with respect to any
losses, claims, damages, liabilities or expenses with respect to which such
Person would be entitled to such indemnification but for such reason or reasons.
In determining the amount of contribution to which the respective Persons are
entitled, there shall be considered the Persons' relative knowledge and access
to information concerning the matter with respect to which the claim was
asserted, the opportunity to correct and prevent any statement or omission, and
other equitable considerations appropriate under the circumstances. It is hereby
agreed that it would not necessarily be equitable if the amount of such
contribution were determined by pro rata or per capita allocation. The liability
of each holder of Registrable Securities will be in proportion to and limited to
the net amount received by such holder from the sale of Registrable Securities
pursuant to such registration statement. No party shall be entitled to
contribution hereunder if such party is found guilty of having committed
fraudulent misrepresentation except insofar as the same is caused by a
fraudulent misrepresentation by any holder of Registrable Securities for use
therein by the Company.
SECTION 12. Participation in Underwritten Registrations. No Person may
participate in any underwritten registration hereunder unless such Person (a)
agrees to sell such Person's securities on the basis provided in any
underwriting arrangements and (b) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements.
SECTION 13. Miscellaneous.
(a) Rule 144. The Company shall timely file the reports, if any,
required to be filed by it under the Securities Act or the Exchange Act
(including, if required, the reports under Sections 13 and 15(d) of the Exchange
Act referred to in subparagraph (c)(1) of Rule 144). Upon the request of any
holder of Registrable Securities, the Company shall: (i) deliver to such holder
a written statement as to its compliance with the reporting requirements of Rule
144, as such rule may be amended from time to time, and (ii) take such further
action, including, without limitation, supply and make publicly available any
other information in the possession of or reasonably obtainable by the Company,
with the purpose of allowing such holder to avail itself of Rule 144 or any
other rule or regulation of the Commission allowing it to sell securities
without registration under the Securities Act.
(b) Amendments and Waivers. Except as otherwise provided herein,
the provisions of this Agreement may be amended or waived and the Company may
take any action herein prohibited, or omit to perform any act herein required to
be performed by it, only if the Company has obtained the written consent of
HIIC. The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any other provision
of this Agreement or of any further breach of the provision so waived or of any
other provision of this Agreement. No extension of time for the performance of
any obligation or act hereunder shall be deemed an extension of time for the
performance of any other obligation or act. The waiver by any party of any of
the conditions precedent to its obligations under this Agreement shall not
preclude it from seeking redress for breach of this Agreement.
15
<PAGE>
(c) Successors and Assigns. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities; provided that
securities shall cease to be Registrable Securities under the circumstances
provided in Section 1(z).
(d) Remedies. If any party to this Agreement obtains a judgment
against any other party hereto by reason of any breach of this Agreement or the
failure of such other party to comply with the provisions hereof, reasonable
attorneys' fees and court costs shall be included in such judgment.
(e) Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, and the remaining provisions of
this Agreement shall continue to be binding and in full force and effect.
(f) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be effective only upon delivery and thereafter
shall be deemed to be an original, and all of which shall be taken to be one and
the same instrument with the same effect as if each of the parties hereto had
signed the same signature page. Any signature page of this Agreement may be
detached from any counterpart of this Agreement without impairing the legal
effect of any signature thereon and may be attached to another counterpart of
this Agreement identical in form hereto and having attached to it one or more
additional signature pages.
(g) Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and shall not be deemed to limit, characterize
or interpret any provision of this Agreement.
(h) Governing Law. All questions concerning the construction,
validity and interpretation of this Agreement and the exhibits and schedules
hereto will be governed by the internal law, and not the law of conflicts, of
Bermuda.
(i) Notices. All notices and other communications which are required
or permitted to be given or delivered under or by reason of the provisions of
this Agreement shall be in writing and shall be delivered personally, mailed by
certified or registered mail, return receipt requested, sent by reputable
overnight courier or sent by confirmed telecopier, addressed as follows:
(i) if to the Company, at:
Sky Games International, Ltd.
845 Crossover Lane, Suite D-215
Memphis, Tennessee 38117
Facsimile No.: 901-537-3801
Attention: President
with a copy to:
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<PAGE>
Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606
Facsimile No.: 312-715-4800
Attention: Andrew W. McCune
(ii) if to HIIC, at:
Harrah's Interactive Investment Company
1023 Cherry Road
Memphis, Tennessee 38117
Facsimile No.: 901-762-8914
Attention: John M. Boushy
with a copy to:
Harrah's Entertainment, Inc.
1023 Cherry Road
Memphis, Tennessee 38117
Facsimile No.: 901-762-8735
Attention: John W. McConomy
or to such other address and/or such other addressee as any of the above shall
have specified by notice hereunder. Each notice or other communication which
shall be delivered personally, mailed or telecopied in the manner described
above shall be deemed sufficiently given, served, sent, received or delivered
for all purposes at such time as it is delivered to the addressee (with the
return receipt, the delivery receipt or the affidavit of messenger being deemed
conclusive, but not exclusive, evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation. The parties hereto
agree that any notice or other communication required or permitted to be given
or delivered hereunder to HIIC and/or its Affiliates shall be deemed properly
given to HIIC and/or any or all of HIIC's Affiliates if given or delivered to
HIIC in accordance with the provisions of this Section 13(i).
(j) Entire Agreement. This Agreement constitutes the sole and entire
agreement of the parties with respect to the subject matter hereof.
* * * * *
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
THE COMPANY:
SKY GAMES INTERNATIONAL LTD.
By: /s/ Laurence Geller
-------------------
Its: Chief Executive Officer
-----------------------
HIIC:
HARRAH'S INTERACTIVE INVESTMENT
COMPANY
By: /s/ John M. Boushy
------------------
Title: Senior Vice President
---------------------
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EXHIBIT 4(b)
REGISTRATION RIGHTS AGREEMENT
This AGREEMENT (the "Agreement") is made as of June 17, 1997 by and between
BE AEROSPACE, INC., a Delaware corporation ("BEA"), and SKY GAMES INTERNATIONAL
LTD., a Bermuda exempted company f/k/a Creator Capital, Inc. (the "Company").
WHEREAS, the Company has issued to BEA a promissory note dated December 30,
1994 in the original principal amount of $2,500,000 (the "Note") which is
convertible at certain times in whole but not in part into shares of common
stock, par value US$.01 per share, of the Company (the "Common Stock") at the
option of BEA;
WHEREAS, the parties have agreed as of October 30, 1996 to convert the Note
in whole into shares of non-voting convertible redeemable preference shares, par
value US$.01 per share, of the Company (the "Class A Preference Shares") which
are convertible into shares of Common Stock at the option of BEA;
WHEREAS, the Company has committed to provide BEA with the rights to
register the Common Stock as set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
covenants and agreements herein contained and for other valuable consideration
the adequacy of which is hereby acknowledged, the parties hereto agree as
follows:
1. Registration Rights.
1.1. Definitions.
(a) The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the United States Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder (the
"1933 Act"), and the automatic effectiveness or the declaration or ordering
of effectiveness of such registration statement or document.
(b) The term "Registrable Securities" means the Common Stock issuable
upon conversion of the Class A Preference Shares which are held by BEA or
its Affiliates or permitted assigns hereunder; provided, however, that
"Registrable Securities" shall not include any shares of such Common Stock
previously disposed of in a registration or pursuant to Rule 144 of the SEC
(as defined below).
(c) The term "Holder" means any person owning or having the right to
acquire (through conversion of the Class A Preference Shares) Registrable
Securities.
(d) The terms "Form S-3," "Form S-4" and "Form S-8" mean such
respective forms under the 1933 Act as in effect on the date hereof, any
comparable form under the 1933 Act for use by foreign issuers or any
successor forms to any such form under the 1933 Act subsequently adopted by
the United States Securities and Exchange Commission ("SEC").
<PAGE>
(e) The term "Affiliate" means any Person which Controls a party to
this Agreement, which that party Controls or which is under common Control
with that party.
(f) The term "Control" means the power, direct or indirect, to direct
or cause the direction of the management and policies of a Person through
voting securities, contract or otherwise.
(g) The term "Person" means any individual, partnership, limited
partnership, corporation, limited liability company, association, joint
stock company, trust, joint venture or 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 or other
entity, and shall include any successor (by merger or otherwise) of such
entity.
1.2. Request for Registration.
(a) If at any time the Company shall receive a written request from
one or more Holders that the Company effect a registration under the 1933
Act of the Registrable Securities owned by such Holders, the Company shall,
subject to the limitations of this Section 1.2, file as soon as practicable
and in any event within ninety (90) days of the receipt of such request a
registration statement under the 1933 Act covering such Registrable
Securities and use its best efforts to have such registration statement
become effective.
(b) If one or more Holders desire to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall
so advise the Company as part of their request made pursuant to this
Section 1.2. All Holders proposing to distribute their Registrable
Securities through such underwriting shall (together with the Company as
provided in Section 1.4(f)) enter into an underwriting agreement in
customary form with the underwriter or underwriters shall be reasonably
acceptable to the Company.
(c) The Company shall be obligated to effect no more than one (1)
registration pursuant to Section 1.2(a).
(d) The Company shall not be obligated to effect any registration
under this Section 1.2 if the Company would be required to supply certified
interim financial statements to any underwriter as a condition of such
registration.
(e) The Company shall not be obligated to effect any registration
under this Section 1.2 if the proposed aggregate offering price of all
Registrable Securities proposed to be sold by the requesting Holder(s) is
reasonably expected to be less than two million U.S. dollars (US$2,000,000)
unless (i) the Registrable Securities proposed to be sold constitute all
Registrable Securities and (ii) if the aggregate offering price of all such
Registrable Securities is expected to be at least one million U.S. dollars
(US$1,000,000).
(f) Upon the reasonable request of the Company, the Holders
requesting registration under this Section 1.2 will permit such filing to
be delayed for a reasonable period of time if the earlier filing of a
registration statement would require the Company to disclose sensitive
confidential information, the earlier disclosure of which may have a
material adverse effect on the Company.
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<PAGE>
1.3. Company Registration. If at any time, the Company proposes to
register any of its Common Stock under the 1933 Act in connection with the
public offering of such securities (other than a registration on Form S-8 or a
registration on Form S-4 or any other form for a limited purpose which excludes
registration of the Registrable Securities), the Company shall give each Holder
written notice of such proposed registration. Upon the written request of any
Holder within fifteen (15) days after the giving of such notice, the Company
shall, subject to the provisions of Section 1.8, use its best efforts, subject
to the written advice of the underwriter for such offering, if any, to cause
such registration statement (i) to cover such Registrable Securities as the
Holders shall specify pursuant to such notice to include in such registration
and (ii) to become effective under the 1933 Act. The Company shall be under no
obligation to complete any offering of its securities it proposes to make and
shall incur no liability to any Holder for its failure to do so.
If at the time of a request under Section 1.2 the Company has publicly
announced its intention to register any of its Common Stock, Holders will be
required to use the provisions of this Section, and no public sale or
distribution (including sales pursuant to Rule 144) of any Registrable
Securities shall be made during the seven (7) days immediately prior to such
registration and no registration of any Registrable Securities shall be
initiated under Section 1.2 until four (4) months after the effective date of
such registration, unless the Company is no longer proceeding to effect such
registration, whether such registration is for the sale of securities for the
Company's account or for the account of others.
1.4. Obligations of the Company. Whenever required under this Section 1 to
use its best efforts the registration of any Registrable Securities, the Company
shall:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the written
request of the Holders of a majority of the Registrable Securities
registered thereunder, keep such registration statement effective for up to
ninety (90) consecutive days; provided that the Company may keep such
registration statement effective for a shorter period if all of the Holders
have notified the Company in writing that the distribution of their
Registrable Securities has been completed.
(b) Provide that the registration statement or any amendments or
supplements thereto, when they become effective or are filed with the SEC,
as the case may be, will conform in all material respects to the
requirements of the 1933 Act and will not contain 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, in light of the
circumstances under which they are made, not misleading.
(c) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement, and use its best efforts to cause each such
amendment to become effective, as may be necessary to comply with the
provisions of the 1933 Act with respect to the disposition of all
securities covered by such registration statement.
(d) Furnish to the Holders such reasonable number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the 1933 Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
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<PAGE>
(e) Use its best efforts to register or qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such United States jurisdictions (not exceeding ten (10) in the
aggregate) as shall be reasonably requested by the Holders; provided that
the Company shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service
of process in any such states or jurisdiction and further provided that
(anything herein to the contrary notwithstanding with respect to the
bearing of expenses) if any jurisdiction in which the Registrable
Securities shall be qualified shall require that expenses incurred in
connection with the qualification therein of the Registrable Securities be
borne by selling shareholders, then such expenses shall be payable by the
Holders pro rata to the extent required by such jurisdiction.
(f) In the event of any underwritten public offering of the
Registrable Securities, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the managing
underwriter of such offering.
(g) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under
the 1933 Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect,
includes 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, in the light of the circumstances under which they are
made, not misleading and promptly file such amendments and supplements
which may be required pursuant to subparagraph (b) of this Section 1.4 on
account of such event and use its best efforts to cause each such amendment
and supplement to become effective.
(h) Furnish, to the extent practicable, at the request of any Holder
requesting registration of Registrable Securities pursuant to this Section
1, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this
Section 1, if such securities are being sold through underwriters, or on
the date that the registration statement with respect to such securities
becomes effective, if such securities are not being sold through
underwriters, (i) an opinion, dated such date, of counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given by company counsel to the underwriters in an underwritten
public offering, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities and (ii) a letter dated
such date, from the independent certified public accountant of the Company,
in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.
(i) Apply for listing and use its best efforts to list the
Registrable Securities being registered on any national securities exchange
on which the Company's Common Stock is listed or, if the Company's Common
Stock is not listed on a national securities exchange, apply for
qualification and use its best efforts to qualify the Registrable
Securities being registered for inclusion on the automated quotation system
of the National Association of Securities Dealers, Inc.
1.5. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 in
respect of the Registrable Securities of any selling Holder that such selling
Holders shall furnish to the Company such information regarding themselves, the
Registrable Securities
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<PAGE>
held by them, and the intended method of disposition of such securities as shall
be required to effect the registration of their Registrable Securities.
1.6. Expenses of Demand Registration. All expenses, other than
underwriting discounts and commissions relating to Registrable Securities,
incurred in connection with each registration, filing or qualification pursuant
to Section 1.2, including (without limitation) all registration, filing and
qualification fees, printing and accounting fees and fees and disbursements of
counsel for the Company, shall be borne by the Company. Underwriting discounts
and commissions, if any, relating to Registrable Securities will be borne and
paid ratably by the Holders of such Registrable Securities. In addition, each
Holder shall bear its own counsel fees and disbursements.
1.7. Expenses of Company Registration. The Company shall bear and pay all
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities with respect to a registration pursuant to Section 1.3
for each Holder, including, without limitation, all registration, filing and
qualification fees, printing and accounting fees and fees and disbursements of
counsel for the Company; provided, however, that if any registration expense is
attributable solely to one or more Holders and does not constitute a normal cost
or expense of registration, such cost or expense shall be allocated to and paid
by such Holder or Holders. Underwriting discounts and commissions, if any,
relating to Registrable Securities will be borne and paid ratably by the Holders
of such Registrable Securities. In addition, each Holder shall bear its own
counsel fees and disbursements.
1.8. Underwriting Requirements. In connection with any offering involving
an underwriting of securities being issued by the Company, the Company shall not
be required under Section 1.3 to include any of the Holders' securities in such
underwriting unless they accept the terms of the underwriting as agreed upon
between the Company and the underwriters selected by it, and then only in such
quantity, if any, as will not, in the opinion of the underwriters, likely
adversely affect the success of the offering by the Company. If the managing
underwriter for the offering shall advise the Company in writing that the total
amount of securities, including Registrable Securities, requested by
shareholders to be included in such offering exceeds the amount of securities
which the managing underwriter reasonably believes can be offered without such
adverse effect, the quantity of securities which the managing underwriter
believes can be offered without such effect shall be allocated first to the
Company and thereafter pro rata among the Holders of Registrable Securities
before any portion of such amount is allocated to any other shareholders. Any
Registrable Securities not included in an offering pursuant to the preceding
sentence shall remain entitled to the benefits of Section 1.3 above in the event
of any subsequent Company registration.
1.9. Indemnification. In the event any Registrable Securities are included
in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the officers, directors, partners, agents and
employees of each Holder, any underwriter (as defined in the 1933 Act) for
such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the 1933 Act or the United States
Securities Exchange Act of 1934, as amended (the "1934 Act"), against any
losses, claims, damages, or liabilities (joint or several) to which they
may become subject under the 1933 Act, the 1934 Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii)
the omission or alleged omission to state therein a
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<PAGE>
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, or (iii) any violation or alleged violation by the
Company of the 1933 Act, the 1934 Act, any state securities law or any rule
or regulation promulgated under the 1933 Act, the 1934 Act or any state
securities law in connection with such registration. The Company will
reimburse each such Holder, officer, director, partner, agent, employee,
underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending
any such loss, claim, damage, liability, or action as such losses are
incurred. The indemnity agreement contained in this subsection 1.9(a) shall
not apply to amounts paid in settlement of any loss, claim, damage,
liability, or action if such settlement is effected without the consent of
the Company, nor shall the Company be liable to a Holder in any such case
for any such loss, claim, damage, liability, or action (i) to the extent
that it arises out of or is based upon an untrue statement or alleged
untrue statement of material fact made in the registration statement, any
preliminary prospectus or the final prospectus or any amendment or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading when made, in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of such Holder, officer, director, partner, agent, employee,
underwriter or controlling person expressly for use in such registration
statement, preliminary prospectus or final prospectus or any amendment or
supplement thereto or (ii) in the case of a sale directly by a Holder of
Registrable Securities (including a sale of such Registrable Securities
through any underwriter retained by such Holder to engage in a distribution
solely on behalf of such Holder), such untrue statement or alleged untrue
statement or omission or alleged omission was contained in a preliminary
prospectus and corrected in a final or amended prospectus, and such Holder
failed to deliver a copy of the final or amended prospectus at or prior to
the confirmation of the sale of the Registrable Securities to the person
asserting any such loss, claim, damage or liability in any case where such
delivery is required by the 1933 Act.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the registration statement, each person, if any,
who controls the Company within the meaning of the 1933 Act or the 1934
Act, each agent and any underwriter for the Company, and any other Holder
selling securities in such registration statement or any of its directors,
officers, partners, agents or employees or any person who controls such
Holder or underwriter, against any losses, claims, damages, or liabilities
(joint or several) to which the Company or any such director, officer,
controlling person, agent, or underwriter or controlling person, or other
such Holder or director, officer or controlling person may become subject,
under the 1933 Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages or liabilities (or actions in respect thereto)
arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact made in the registration statement, any
preliminary prospectus or the final prospectus or any amendment or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent (and only to
the extent) that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company by or on behalf of such
Holder expressly for use in such registration statement, preliminary
prospectus or final prospectus or amendment or supplement thereto; and each
such Holder will reimburse any legal or other expenses reasonably incurred
by the Company or any such director, officer, controlling person, agent or
underwriter or controlling person, other Holder, officer, director,
partner, agent, employee, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, or
action as such expenses are incurred; provided, however, that the liability
of any Holder
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<PAGE>
hereunder shall be limited to the amount of proceeds received by such
Holder in the offering giving rise to the loss, claim, damage, liability or
action; and provided, further, that the indemnity agreement contained in
this subsection 1.9(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Holder, which consent shall not be
unreasonably withheld nor, in the case of a sale directly by the Company of
its securities (including a sale of such securities through any underwriter
retained by the Company to engage in a distribution solely on behalf of the
Company), shall the Holder be liable to the Company in any case in which
such untrue statement or alleged untrue statement or omission or alleged
omission was contained in a preliminary prospectus and corrected in a final
or amended prospectus, and the Company failed to deliver a copy of the
final or amended prospectus at or prior to the confirmation of the sale of
the securities to the person asserting any such loss, claim, damage or
liability in any case where such delivery is required by the 1933 Act.
(c) Promptly after receipt by an indemnified party under this Section
1.9 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to
be made against any indemnifying party under this Section 1.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume and control the defense
thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party,
if representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential
differing interests, as reasonably determined by either party, between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action, if
the indemnifying party shall demonstrate that such failure was prejudicial
to its ability to defend such action, shall relieve such indemnifying party
of any liability to the indemnified party under this Section 1.9 to the
extent of such prejudice, but the omission so to deliver written notice to
the indemnifying party will not relieve it of any liability that it may
have to any indemnified party otherwise than under this Section 1.9.
(d) If the indemnification provided for in this Section 1.9 is
unavailable to or insufficient to hold harmless an indemnified party under
subsections (a) and (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportions as is
appropriate to reflect the relative fault of the Company and each Holder in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as
any other relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or such Holder and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission. The Company and BEA agree that it would not be just and equitable
if contributions pursuant to this subsection (d) were determined by pro
rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred
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by such indemnified party in connection with investigating or defining any
such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(e) The obligations of the Company and the Holders under this Section
1.9 shall survive the completion of any offering of Registrable Securities
in a registration statement whether under this Section 1 or otherwise.
2. Miscellaneous.
2.1. Legend. Each certificate representing Registrable Securities shall
bear a legend to the following effect:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
PROVISIONS OF A REGISTRATION RIGHTS AGREEMENT DATED AS OF JUNE 17,
1997 BY AND AMONG THE ISSUER AND BE AEROSPACE, INC., A COPY OF WHICH
IS ON FILE AT THE REGISTERED OFFICE OF THE ISSUER. SUCH AGREEMENT
PROVIDES FOR THE REQUIRED DIVESTITURE OR REPURCHASE OF SUCH SHARES
UNDER CERTAIN CIRCUMSTANCES.
2.2. Required Divestiture. BEA acknowledges and understands that the
Company and its Affiliates intend to conduct operations and/or enter into
contractual arrangements for the conduct of operations that will or may subject
the Company to laws and regulations regulating gaming and wagering, and that as
a result thereof, the Company may not have as a shareholder any person or entity
found to be unsuitable under such laws or regulations. In addition, as a result
of provisions in the Company's bye-laws and in contracts currently proposed to
be entered into by the Company and its Affiliates with Affiliates of Harrah's
Entertainment, Inc. (collectively, "HEI"), the Company is required and HEI has
required that any such person or entity be divested of its shareholdings in the
Company. Accordingly, in any of such events, the Company may give written
notice to BEA requiring BEA to divest itself immediately of all, but not less
Registrable Securities. If BEA does not so divest itself of such Registrable
Securities required by the notice from the Company HEI or to the time that such
failure may have a material adverse effect on the Company, the Company may, but
shall not be obligated to, purchase such Registrable Securities at a per share
price equal to one hundred twenty percent (120%) (or, if required by a
regulatory body having jurisdiction, one hundred percent (100%)) of the average
closing per share price for the Company's Common Stock in the United States in
the over-the-counter market as reported by NASDAQ or an equivalent generally
accepted reporting service or, if such Common Stock is so traded on the NASDAQ
National Market system or on any United States national securities exchange,
during the twenty (20) trading days preceding the date of the notice from the
Company. Upon any such purchase by the Company, the certificates for such
Registrable Securities shall be duly endorsed and surrendered to the Company,
and shall be accompanied by a certificate from the holder(s) thereof
representing and warranting that such person(s) have good and marketable title
to such Registrable Securities, free and clear of any and all adverse claims,
liens and encumbrances.
2.3. Notices. All notices, requests, consents and demands shall be in
writing and shall be personally delivered, mailed first class (air mail in the
case of international mail), postage prepaid, telecopied against confirmed
receipt,
to BEA at:
-8-
<PAGE>
BE Aerospace, Inc.
1400 Corporate Center Way
Wellington, Florida 33414
Attn: Edmund J. Moriarity, General Counsel
Telecopier: (407) 791-3966
with a copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110
U.S.A.
Attn: Jennifer N. Samsel
Telecopier: (617) 951-7050
and to the Company at:
Sky Games International Ltd.
595 Howe Street, Suite 1115
Vancouver, British Columbia V6C 2T5
Canada
Attn: Malcolm P. Burke
Telecopier: (604) 687-8678
with a copy to:
Altheimer & Gray
10 South Wacker Drive
Suite 4000
Chicago, Illinois 60606
Attn: Andrew W. McCune
Telecopier: (312) 715-4800
or such other address as may be furnished in writing to the other parties
hereto. All such notices, requests, demands and other communication shall, when
mailed (registered or certified air mail, return receipt requested, postage
prepaid), personally delivered, telecopied or telegraphed, be effective seven
(7) days after deposit in the mails, when personally delivered, respectively,
addressed as aforesaid, unless otherwise provided herein and, when telecopied,
shall be effective upon actual confirmed receipt.
2.4. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the matters contemplated herein. This Agreement
supersedes any and all prior understandings or agreements as to the subject
matter of this Agreement, including, without limitation, that Registration
Rights Agreement dated as of December 30, 1994 between the parties.
2.5. Amendments, Waivers and Consents. Any provision in this Agreement to
the contrary notwithstanding, changes in or additions to this Agreement may be
made, and compliance with any covenant or provision herein set forth may be
omitted or waived, if the Company (i) shall obtain consent thereto in writing
from persons holding or having the right to acquire an aggregate of at least a
majority of the aggregate
-9-
<PAGE>
of the Registrable Securities then outstanding and (ii) shall, in each such
case, deliver copies of such consent in writing to any Holders who did not
execute the same.
2.6. Binding Effect; Assignment. This Agreement shall be binding upon and
inure to the benefit of the personal representatives, successors and assigns of
the respective parties hereto.
2.7. General. The headings contained in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement. In this Agreement the singular includes the plural, the plural,
the singular, the masculine gender includes the neuter, masculine and feminine
genders. This Agreement shall be governed by and construed under the laws of
the State of Delaware.
2.8. Severability. If any provisions of this Agreement shall be found by
any court of competent jurisdiction to be invalid or unenforceable, the parties
hereby waive such provision to the extent that it is found to be invalid or
unenforceable. Such provision shall, to the maximum extent allowable by law, be
modified by such court so that it becomes enforceable, and, as modified, shall
be enforced as any other provision hereof, all the other provisions hereof
continuing in full force and effect.
2.9. Counterparts. This Agreement may be executed in counterparts, all of
which together shall constitute one and the same instrument.
2.10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws (other than the conflict of law rules) of Bermuda.
* * * * *
-10-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of the date first above written.
BE AEROSPACE, INC.
By:
--------------------------------
Title:
--------------------------------
SKY GAMES INTERNATIONAL LTD.
By:
--------------------------------
Title:
--------------------------------
-11-
<PAGE>
EXHIBIT 4(c)
WRITTEN CONSENT OF THE DIRECTORS
OF SKY GAMES INTERNATIONAL, LTD.
The Undersigned, being all of the directors of Sky Games International Ltd., a
Bermuda exempted company (the "Company"), do hereby unanimously consent and
agree to the adoption of the following recitals and resolutions pursuant to Bye-
law 77 of the Bye-laws of the Company:
WHEREAS the Company discontinued an engineering and marketing arrangement with
B/E Aerospace, Inc., a Delaware corporation ("B/E Aerospace") in December, 1994
and as part of the termination, the Company issued to B/E Aerospace a promissory
note in the original principal amount of US$2,500,000 at 12% per annum to be
payable from the proceeds of a public offering of the Company or through the
conversion of a note into common shares of the Company.
WHEREAS the Directors of the Company have been authorised pursuant to Bye-law 4A
to issue non-voting convertible redeemable preference shares to B/E Aerospace
with such rights as the Board shall determine.
WHEREAS the note to B/E Aerospace, in the approximate amount of US$2,737,442.58
(including accrued and unpaid interest) is to be converted into the number of
shares of Class A Preference Shares of the Company which is determined by
dividing the loan amount by US$1,000.
IT WAS RESOLVED that the Directors be and they are hereby authorised and
directed and empowered to issue up to 3,000 Class A Preference Shares to B/E
Aerospace with the rights and conditions attaching thereto as set out in the
attached Schedule.
<PAGE>
SCHEDULE
NON-VOTING CONVERTIBLE REDEEMABLE PREFERENCE SHARES
---------------------------------------------------
("Class A PREFERENCE SHARES")
-----------------------------
1. Dividends
The holders of the Class A Preference Shares shall be entitled to receive
dividends payable out of profits of the Company available for the purpose
when, as and if declared by the Board. The dividends shall be cumulative
as of 28 February, 1997 and payable quarterly at an annual dividend rate of
9% per $1,000.00 compounded annually.
2. Voting Rights
Subject to the provisions of the Bye-laws of the Company and the Companies
Acts, the holders of the Class A Preference Shares shall not be entitled to
receive notice of or vote at a general meeting of the members.
3. Conversion
3A. The Class A Preference Shares shall be convertible at any time into common
shares of the Company. The number of Common Shares shall be determined by
dividing $1,000.00 per share of Class A Preference Shares to be converted
plus any accrued and unpaid dividends thereon by the following:
- Prior to 28 February, 1999, a conversion of price equal to 70% of the
average mean of the closing bid and ask prices of the Common Shares
for the 20 day trading days (the "Market Price") prior to the
conversion;
- After 28 February, 1999 and prior to 31 August, 1999, a conversion
price equal to 65% of the Market Price prior to the conversion; and
- Thereafter, a conversion price equal to 60% of the Market Price
preceding the conversion.
In the event the aggregate value of:
(a) the number of Common Shares then issued upon conversion of the
Class A Preference Shares multiplied by the then prevailing Market
Price plus
(b) the number of Common Shares issuable upon further conversion of
the Preference Shares in accordance with the foregoing multiplied
by the then prevailing Market Price plus
(c) all amounts received in redemption of the Class A Preference
Shares by the Company plus
(d) all amounts received as net proceeds from the sale of Common
Shares issued upon conversion of the Class A Preference Shares
is less than the Loan Amount (as hereinafter defined), then the Company shall
either (x) issue such additional number of Common Shares such that at the Market
Price the aggregate value of the Common Shares issued,
<PAGE>
the Class A Preference Shares and sale and redemption proceeds would equal the
Loan Amount or (y) purchase all Common Shares and Class A Preference Shares
issued for an amount equal to the Loan Amount less prior sale and redemption
proceeds.
For the purpose of this resolution, "Loan Amount" means the outstanding
principal and accrued and unpaid interest on the promissory note issued to
B/E Aerospace, Inc., a Delaware corporation ("B/E Aerospace"), in the
original principal amount of $2,500,000 dated December 1994 and payable by
the Company as of February 28, 1997.
The Common Shares issuable upon conversion shall not be issued in fractions
but shall be rounded up to the nearest whole number.
3B. 3.1 Each holder of Class A Preference Shares shall be entitled at any time
and from time to time by notice in writing delivered to the Company (a
"Conversion Notice") to convert such number of Class A Preference
Shares held by him as may be specified in the Conversion Notice into
the like number of Common Shares. The Conversion Notice shall be in
such form as the Board may from time to time prescribe and shall be
delivered to the Company at the specified office (the "Conversion
Office") of such agent as the Company may from time to time designate
in a written notice to the holders of Class A Preference Shares
(provided such office shall be in either the United States or Bermuda)
for the purpose (the "Conversion Agent") during the usual business
hours of the Conversion Agent.
3.2 A Conversion Notice to be effective must be accompanied by delivery up
of the certificate or certificates comprising the Class A Preference
Shares to be converted and by such other evidence (if any) as the
Company or the Conversion Agent may require to prove the title of the
person exercising the right to convert if other than the record holder
of the Class A Preference Shares.
3.3 A Conversion Notice shall not be withdrawn without the written consent
of the Company or the Conversion Agent and shall take effect
immediately prior to the close of business on the date of delivery of
the Conversion Notice as aforesaid, together with the required
certificates in proper order for conversion and any amount payable
pursuant to the provisions of the sentence next following (the
"Conversion Date"). If the Conversion Notice shall specify that any
certificate for Common Shares to be delivered pursuant thereto shall
be issued in a name other than that of the holder of record of the
Class A Preference Shares to be converted, the person or persons
requesting the issuance thereof shall pay to the Company the amount of
any tax which may be payable in respect of any transfer necessary for
such issuance or shall establish to the satisfaction of the Company
that such tax has been paid or is not payable.
3.4 On the Conversion Date the Class A Preference Shares comprised in the
Conversion Notice shall automatically be converted into Common Shares
unless, pursuant to paragraph (3.7) hereof, conversion shall be
effected on the Conversion Date by means of the purchase of Common
Shares and the issue to the holder of a like number of Common Shares.
In any case, the Common Shares arising from such conversion shall
thereupon rank pari passu in all respects with all other Common Shares
for the time being in the share capital of the Company, with the right
to participate in full in all dividends declared on the Common Shares
payable to the holders of record of Common Shares on or after the
Conversion Date whether or not
2
<PAGE>
such dividends are declared wholly or in part in respect of a period
prior to the Conversion Date.
3.5 As soon as practicable after the Conversion Date (but in any event
within three (3) business days), the Company shall deliver or cause to
be delivered at the Conversion Office to or upon the written order of
the holder a certificate or certificates representing the number of
Common Shares to which he was entitled upon conversion of the Common
Shares held by him. Except as otherwise provided in paragraph (3.3)
hereof, the issuance of such certificate or certificates shall be made
without charge for any stamp or other similar tax in respect of such
issuance.
3.6 Upon conversion by holder of only part of the Class A Preference
Shares held by him, the Company shall at its own expense deliver or
cause to be delivered to him at the Conversion Office a new
certificate or certificates representing the number of Class A
Preference Shares remaining unconverted by him.
3.7 Conversion of the Class A Preference Shares may be effected in such
manner as the Board may, subject to the provisions of the Companies
Acts and the Bye-laws of the Company, from time to time determine and,
without prejudice to the generality of the foregoing, the Board is
hereby authorised pursuant to Section 42A of the Act to effect such
conversion by means of the purchase of Common Shares in such manner
and at such price as it may determine. In the case of a conversion by
such means:
(a) the Board may effect the purchase of the Common Shares out of the
amount paid up on such Common Shares, out of funds of the Company
which would otherwise be available for dividend, out of the
proceeds of a fresh issue of shares or in any other manner for the
time being permitted by law; and
(b) the Common Shares to be issued upon such conversion shall be
issued, credited as fully paid-up and not subject to further
calls.
3.8 On or promptly after the conversion of the Class A Preference Shares
into Common Shares, the Company shall list the Common Shares so
arising upon each national securities exchange upon which the
outstanding Common Shares are listed at the time of such conversion,
or if the outstanding Common Shares are not then listed upon a
national securities exchange but are included in the National
Association of Securities Dealers Automated Quotations System will
cause such shares to be so included.
4. Redemption
The Company, at its option, will be entitled upon prior written notice of
not less than fifteen (15) days to redeem the Class A Preference Shares, in
whole or in part, at any time and from time to time, at a redemption price
equal to $1,000.00 per share to be redeemed plus any accrued and unpaid
dividends thereon. Holders of Class A Preference Shares shall be entitled
to convert their shares in accordance with the terms hereof after receipt
of a notice of redemption and prior to consummation of such redemption. The
Company will not be required to redeem the Class A Preference Shares at the
option of the holder of the Class A Preference Shares. If the holder of the
Class A Preference Shares is a "Disqualified Holder", then the Class A
Preference Shares shall be redeemable in accordance with the provisions of
Bye-law (4A).
3
<PAGE>
5. Liquidation
Upon any liquidation of the Company, the holders of the Class A Preference
Shares will be entitled to repayment of an amount equal to $1,000.00 per
share plus accrued and unpaid dividends, prior to any distribution to
holders of the Common Shares.
6. Registration Rights
B/E Aerospace will have one demand registration right with respect to not
less than $2,000,000 of Common Shares (unless (i) the Common Shares
proposed to be sold constitute all Common Shares and (ii) if the aggregate
offering price of all such Common Shares is expected to be at least one
million U.S. dollars (US$1,000,000)) received pursuant to the conversion of
the Class A Preference Shares and the right to include its shares of Common
Shares received upon conversion of the Class A Preference Shares in
registered offerings by the Company in accordance with the terms and
provisions of a Registration Rights Agreement to be entered into between
the Company and B/E Aerospace, the Company and the appropriate officers
being hereby authorised, directed and empowered to execute, deliver and
perform such agreement in accordance with the foregoing and on such terms
and provisions as such appropriate officer shall deem appropriate.
4
<PAGE>
Dated the 16th of June, 1997
/s/ Laurence Geller
Laurence Geller
/s/ Malcolm Burke
Malcolm Burke
/s/ Anthony Clements
Anthony Clements
/s/ Deborah Fortescue-Merrin
Deborah Fortescue-Merrin
/s/ Phillip Gordon
Phillip Gordon
/s/ James Grymyr
James Grymyr
5
<PAGE>
EXHIBIT 10
[EXECUTION COPY]
----------------
FUNDING AGREEMENT
-----------------
FUNDING AGREEMENT (the "Funding Agreement") dated as of the 13th day of
May, 1997 among Interactive Entertainment Limited, a Bermuda exempted company
("IEL" or "Borrower"), and Sky Games International Ltd., a Bermuda exempted
company ("SGI"), Harrah's Interactive Investment Company, a Nevada corporation
("HIIC" or "Lender"), and SGI Holding Corporation Limited, a Bermuda exempted
company ("SGIH").
RECITALS
--------
WHEREAS, SGI is the parent of SGIH; and
WHEREAS, SGIH and SGI have requested that (i) prior to the amalgamation of
IEL and SGIH (the "Subsidiary Amalgamation"), Lender provide IEL with all or a
portion of the funds required to permit IEL to carry on its day-to-day business
activities by means of a loan to Borrower and (ii) following the Subsidiary
Amalgamation, Lender assist in providing funding to IEL by means of a purchase
of shares of common stock, par value Cdn. $.01 per share, of SGI (the "Shares");
and
WHEREAS, the loan will provide IEL with the funds prior to the Subsidiary
Amalgamation and the purchase of equity of SGI will provide SGI with funds to
contribute to IEL, in each case, in order to permit IEL to carry on IEL's day to
day business activities; and
WHEREAS, Lender is willing to make such loan and to purchase such equity,
although Lender is under no obligation to do so; and
WHEREAS, Lender's agreement to make the loan is conditioned on the guaranty
of such loan by SGIH, the receipt of a stock pledge from SGIH and a security
agreement and SGI's grant of warrants to Lender ("Warrant Rights") to purchase
the capital stock of SGI under certain terms, and the issuance to Lender of a
promissory note in the amount of the loan convertible into capital stock of SGI,
and
WHEREAS, Borrower is willing to borrow such funds and enter into the other
credit accommodations herein and to commit to sell its equity on the terms and
subject to the conditions set forth herein. Except where otherwise noted, all
monetary amounts set forth herein are denominated in United States currency.
AGREEMENT
---------
In consideration of the mutual covenants and agreements set forth herein,
the parties hereto hereby agree as follows:
1. Loan. Lender agrees to make a loan to Borrower in the aggregate
principal amount of $1,000,000 (the "Loan") on the terms and subject to the
conditions set forth herein and in the Financing Agreements. The Convertible
Promissory Note attached hereto as Exhibit A, the Pledge Agreement attached as
Exhibit B, the Guaranty attached as Exhibit C, the Warrant Agreement attached as
Exhibit D, the Security Agreement attached as Exhibit E and this Funding
Agreement are referred to herein as the "Financing Agreements".
2. Consideration for Lending. Borrower and SGIH acknowledge and agree
that they are directly benefited by the Loan advances since the utilization of
the Loan proceeds by IEL for working capital purposes will assist IEL to
continue to operate and develop its business.
<PAGE>
3. Use of Proceeds. The Loan is to be used only for the working capital
needs of IEL and shall not be distributed to the shareholders of Borrower.
4. Funding of Loan.
a. Subject to compliance with the terms hereof and the Financing
Agreements, Lender shall advance the Loan to IEL from time to time as required
by IEL's manager and HIIC's affiliate, Harrah's Interactive Entertainment
Company ("HIEC"), (each, a "Funding Date") during the period from the date
hereof through the earlier of (i) the consummation of the Subsidiary
Amalgamation and (ii) June 21, 1997. Funding shall occur as requested by HIEC as
necessary to fund IEL's immediate working capital needs. Upon consummation of
the Subsidiary Amalgamation, Outstanding Amounts (as defined in the Note) under
the Note shall automatically convert into shares of common stock, $.01 par
value, of SGI ("Common Stock") and HIIC shall receive a warrant to purchase
shares of Common Stock in an amount equal to the difference between (x) one
million shares of Common Stock and (y) any Common Stock received pursuant to the
conversion of Outstanding Amounts under the Note.
b. Upon the advice of HIEC, IEL shall request funds on behalf of the
Borrower by delivering a Notice of Borrowing to Lender (with a copy to SGIH)
identifying (i) the total amount of the Loan to be funded and (ii) the Funding
Date. Within three (3) days of receipt of a Notice of Borrowing, SGIH and SGI
shall cause their respective Chief Executive Officer to deliver to HIIC
Officer's Certificates of SGIH and SGI which shall state that, as of the date
thereof and on the Funding Date, the representations set forth herein shall be
true and correct and no default of SGI or SGIH exists under the Note.
c. Following receipt and review of the required documentation, Lender
shall advance the Loan requested on the Funding Date if such documentation is
reasonably satisfactory to Lender in all material respects.
d. If either or both of SGIH and SGI fail to timely deliver the
Officer's Certificate, HIIC may, at its sole discretion (i) declare this
Agreement in default; or (ii) elect to advance the funds requested.
e. IEL may prepay any amounts outstanding under the Loan at any time
and from time to time. Any such prepayments shall be used to repay the Loan with
the earliest advances under the Loan to be repaid first.
5. Purchase of Equity.
a. Subject to compliance with and possible reduction pursuant to the
terms hereof and the consummation on the Subsidiary Amalgamation, HIIC hereby
subscribes for and agrees to purchase from SGI during the period from the day
after the Subsidiary Amalgamation through the 90th day after the Subsidiary
Amalgamation (the "Commitment Period") up to 650,000 Shares (the "Equity
Commitment") at a price of $1.00 per Share (the "Subscription Price")when
requested by IEL in accordance with the schedule set forth herein (each also, a
"Funding Date") as required to fund the working capital needs of IEL. Subject to
possible reduction as set forth below, IEL shall be able to require Lender to
purchase a number of Shares equal to one-third of the Equity Commitment on each
of the 30th, 60th and 90th days (or first business day thereafter) after the
Subsidiary Amalgamation; provided any amounts which are not required to be
purchased on any such scheduled date may be required to be purchased at any
remaining scheduled date. The Subscription Price payable by Lender shall be
payable in cash or other immediately available funds. In the event that IEL
fails to satisfy its obligations under the Note upon maturity thereof, such
failure shall be deemed
2
<PAGE>
to be "exigent circumstances" as described in Section 2.4(b) of the Shareholders
Agreement dated December 30, 1994 among SGIH, HIIC and IEL.
b. Borrower shall deliver a Notice of Exercise to Lender identifying
(i) the portion of the Equity Commitment required to be exercised and (ii) the
Funding Date. Within three (3) days of receipt of a Notice of Exercise, SGI and
IEL shall cause their respective Chief Executive Officer to deliver to HIIC
Officer's Certificates of SGI and IEL which shall state that, as of the date
thereof and on the Funding Date, the representations set forth herein shall be
true and correct and no default of SGI or IEL exists under this Agreement.
c. Following receipt and review of the required documentation, Lender
shall pay the Subscription Price for the portion of the Equity Commitment
required to be exercised on the Funding Date if such documentation is reasonably
satisfactory to Lender in all material respects and provided that all the
conditions contained herein are satisfied in all material respects.
d. When Lender shall make full payment to SGI for the Shares
subscribed by Lender, and such payment is received by SGI, the proper officers
of SGI shall execute and deliver to Lender a certificate representing said
Shares and the Shares shall be validly issued, fully paid and non-assessable.
e. Any then unexercised portions of the Equity Commitment shall be
reduced in an amount equal to the dollar amount of all cash proceeds, net of any
underwriter or brokers discounts, allowances, fees or commissions, to SGI from
the sale of Shares or securities convertible into Shares during the Commitment
Period.
f. If SGI shall at any time prior to the exercise of the Equity
Commitment, (i) pay a dividend in Shares or make a pro rata distribution to all
of its shareholders in Shares, (ii) subdivide its outstanding Shares into a
greater number of Shares, or (iii) combine its outstanding Shares into a smaller
number of Shares, the Subscription Price in effect immediately after the record
date for such dividend or distribution or the effective date of such subdivision
or combination shall be adjusted so that it shall equal the price determined by
multiplying the Subscription Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the number of Shares outstanding
immediately before such dividend, distribution, subdivision or combination, and
the denominator of which shall be the number of Shares outstanding immediately
after such dividend, distribution, subdivision or combination. Such adjustments
shall be made successively whenever any event specified above shall occur.
6. Representations by IEL, SGIH and SGI.
a. Authority. IEL, SGIH and SGI have all requisite corporate power
and authority to execute this Agreement and the other Financing Agreements to
which each is a party or by which each is bound in connection with the
transactions contemplated by this Agreement. IEL, SGI and SGIH have each taken
all necessary action to authorize the execution, delivery and performance of
this Agreement and the other Financing Agreements to which each is a party or by
which each is bound and to consummate the transactions contemplated hereby and
thereby.
b. No Violation. Neither the execution and delivery of the Financing
Agreements, nor any other agreement, certificate or instrument to be executed or
delivered in connection therewith by IEL, SGI or SGIH nor the consummation of
the transactions contemplated hereunder or thereunder or the compliance with or
performance of the terms and conditions herein or therein, is prevented by,
limited by, in conflict in
3
<PAGE>
any material respect with, or will result in a breach or violation of, or a
default (with due notice or lapse of time or both) under, which would have a
material adverse effect on IEL, SGI or SGIH, or the creation or imposition of
any lien, charge, or encumbrance of any nature whatsoever upon any of its
property or assets by virtue of, the terms, conditions or provisions of: (i)
each of their respective organizational documents; (ii) any indenture, evidence
of indebtedness, loan or financing agreement, or other material agreement or
instrument of whatever nature to which each is a party or by which each is
bound; or (iii) any provision of any existing law, rule, regulation, order,
writ, injunction or decree of any court, gaming authority or governmental
authority to which each is subject.
c. Enforceability. This Agreement and each of the other Financing
Agreements, when executed and delivered by each of IEL, SGI and SGIH, will
constitute a legal, valid and binding obligation of each of IEL, SGI and SGIH,
enforceable against each of IEL, SGI and SGIH in accordance with the respective
terms of each such agreement (except to the extent that enforcement may be
affected by laws relating to bankruptcy, reorganization, insolvency and
creditors rights and by the availability of injunctive relief, specific
performance and other equitable remedies).
d. No Defaults. None of IEL, SGI, or SGIH is in violation of or in
default with respect to any material agreement, or applicable laws and/or
regulations which materially and adversely affect the business, financial
condition or property of IEL, SGI or SGIH.
e. No Untrue Statements. All statements, representations and
warranties made by IEL, SGI and SGIH in this Agreement and the Financing
Agreements (i) are and shall be true, correct and complete in all material
respects, at the time they were made and on and as of each Funding Date, (ii) do
not and shall not contain any untrue statement of a material fact, and (iii) do
not and shall not omit to state a material fact necessary in order to make the
information contained therein not misleading or incomplete. IEL, SGI and SGIH
understand that all such statements, representations and warranties shall be
deemed to have been relied upon by Lender as a material inducement to enter into
this Agreement and the Financing Agreements.
f. Solvency. IEL, SGI and SGIH have generally been paying their
obligations as they come due, are not insolvent on the date hereof, and, after
giving effect to the transactions contemplated by this Agreement and the
Financing Agreements, will not be rendered insolvent or unable to pay their
obligations as they come due. Each of IEL, SGI and SGIH has and, after giving
effect to the transactions contemplated by this Agreement and the Financing
Agreements, will have adequate capital to operate its facilities and conduct its
business in the manner in which it is currently being conducted, and, after
giving effect to the transactions contemplated by such Agreements, neither IEL,
nor SGI, nor SGIH is or will be engaged in a business or transaction for which
the remaining assets of such party are unreasonably small in relation to the
business or transaction. Neither IEL, nor SGI, nor SGIH is subject to
liabilities, and the Loan does not represent indebtedness, and neither IEL, nor
SGI, nor SGIH will incur debts that it believes, or reasonably should believe
are, beyond such party's ability to pay as such debts mature.
g. Value of Collateral. The fair market value of the consideration
received by IEL and SGIH hereunder, including without limitation, the Loan,
exceeds the fair market value of the liens and security interests granted to
Lender as set forth in Exhibits B and E.
h. No Intent to Defraud. None of IEL, SGI, or SGIH is entering into
the transactions contemplated herein with any actual intent to hinder, delay or
defraud any creditor.
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7. Representations by HIIC.
a. Authority. HIIC has all requisite corporate power and authority to
execute this Agreement and the other Financing Agreements to which it is a party
or by which it is bound in connection with the transactions contemplated by this
Agreement. HIIC has taken all necessary action to authorize the execution,
delivery and performance of this Agreement and the other Financing Agreements to
which it is a party or by which it is bound and to consummate the transactions
contemplated hereby and thereby.
b. No Violation. Neither the execution and delivery of the Financing
Agreements, nor any other agreement, certificate or instrument to be executed or
delivered in connection therewith by HIIC nor the consummation of the
transactions contemplated hereunder or thereunder or the compliance with or
performance of the terms and conditions herein or therein, is prevented by,
limited by, in conflict in any material respect with, or will result in a breach
or violation of, or a default (with due notice or lapse of time or both) under,
which would have a material adverse effect on HIIC, or the creation or
imposition of any material lien, charge, or encumbrance of any nature whatsoever
upon any of its property or assets by virtue of, the terms, conditions or
provisions of: (i) its organizational documents; (ii) any indenture, evidence of
indebtedness, loan or financing agreement, or other material agreement or
instrument of whatever nature to which it is a party or by which it is bound; or
(iii) any provision of any existing law, rule, regulation, order, writ,
injunction or decree of any court, gaming authority or governmental authority to
which each is subject.
c. Enforceability. This Agreement and each of the other Financing
Agreements, when executed and delivered by HIIC, will constitute a legal, valid
and binding obligation of HIIC, enforceable against HIIC in accordance with the
respective terms of each such agreement (except to the extent that enforcement
may be affected by laws relating to bankruptcy, reorganization, insolvency and
creditors rights and by the availability of injunctive relief, specific
performance and other equitable remedies).
d. No Defaults. HIIC is not in violation of or in default with
respect to any material agreement, or applicable laws and/or regulations which
materially and adversely affect the business, financial condition or property of
HIIC.
e. No Untrue Statements. All statements, representations and
warranties made by HIIC in this Agreement and the Financing Agreement (i) are
and shall be true, correct and complete in all material respects, at the time
they were made and on and as of each Funding Date, (ii) do not and shall not
contain any untrue statement of a material fact, and (iii) do not and shall not
omit to state a material fact necessary in order to make the information
contained therein not misleading or incomplete. HIIC understands that all such
statements, representations and warranties shall be deemed to have been relied
upon by Borrower and SGIH as a material inducement to enter into this Agreement
and the Financing Agreements.
f. Investment Intent. All Shares acquired by or for HIIC pursuant to
this Agreement are being or have been acquired solely for investment and not
with a view to the distribution thereof or with any intention of distributing or
reselling any such Shares, and that, irrespective of any other provisions of
this Agreement, any sale or other transfer of such Shares by HIIC will be made
only in compliance with all applicable federal and state securities laws,
including without limitation the Securities Act of 1933, as amended (the "Act").
SGI and HIIC acknowledge that the Shares acquired pursuant to the Financing
Agreements shall be covered by a registration rights agreement between SGI and
HIIC, pursuant to which HIIC shall have the right to have the Shares acquired
registered upon HIIC's demand, subject to the terms and conditions thereof.
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g. Nature of Shares. All Shares acquired by or for HIIC will not be
registered under the Act and must be held by HIIC until such Shares are
registered under the Act or an exemption from such registration is available.
SGI will have no obligation to take any actions that may be necessary to make
available any exemption from registration under the Act.
h. Rule 144. HIIC is familiar with Rule 144 promulgated by the
Securities and Exchange Commission under the Act, which establishes guidelines
governing, among other things, the resale of "restricted securities" (securities
such as the Shares, which are acquired from the issuer of such securities in a
transaction not involving any public offering). In connection with a sale or
other transfer of the Shares pursuant to an exemption from registration under
the Act, or if available, under Rule 144 or pursuant to some other exemption,
HIIC may be required by SGI to deliver to SGI an opinion from counsel for HIIC,
and/or receive an opinion from counsel for SGI, to the effect that all
applicable federal and state securities law requirements have been met.
i. Access to Information. In order to adequately evaluate the merits
and risks of an investment in SGI, HIIC has had an opportunity to (i) ask
questions and receive answers from SGI and its representatives concerning SGI
and HIIC's investment therein, and (ii) obtain any additional information which
HIIC has requested with respect to SGI and HIIC's investment therein. HIIC
understands that no federal or state agency has recommended or endorsed the
purchase of Shares or made any determination or finding as to the fairness of
the provisions of this Agreement. HIIC understands and is cognizant of all the
risk factors related to the purchase of the Shares, and HIIC's knowledge and
experience in financial and business matters is such that HIIC is capable of
evaluating the risks of an investment in the Shares.
8. Covenant. SGI, SGIH and HIIC each agree to use their reasonable best
efforts and to do all things necessary to effect the Subsidiary Amalgamation and
the amalgamation of SGI and IEL as promptly as practicable.
9. Conditions. The advance of Loans shall be conditioned upon:
a. on the initial Funding Date only receipt by Lender of all of the
following:
(i) Evidence of the authority for each of IEL, SGI and SGIH
to execute, deliver and perform the Financing Agreements
to which each is a party;
(ii) Executed Convertible Promissory Note (the "Note") -
Exhibit A;
(iii) Executed Guaranty of the Note of SGI and SGIH - Exhibit
C;
(iv) Executed Pledge and Security Agreement of IEL Shares
acquired by SGIH subsequent to the date hereof- Exhibit
B;
(v) Executed copy of Security Agreement - Exhibit E;
(vi) Executed Warrant Agreement - Exhibit D;
(vii) Opinion of Counsel for SGI and SGIH;
(viii) Resolutions of the Board of Directors of IEL, SGI and
SGIH, certified by the Secretary thereof, authorizing
execution of the Financing Agreements and all
transactions and obligations contained therein; and
(ix) the holders of the Shares which are being held in escrow
by Montreal Trust Company of Canada pursuant to the
Escrow Agreement dated as of May 27, 1992 having entered
into a binding agreement effective as of the date of
execution to have SGI redeem their Shares at a redemption
ratio of 1 newly issued Share for every 3 escrow Shares
redeemed; and
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b. on each Funding Date, including the initial Funding Date, each of
the following conditions have been satisfied in all material respects:
(i) there not being an uncured Event of Default under this
Agreement;
(ii) there not being a material uncured default under the
Software License and Software Services Agreement and the
Services Agreement, each dated November 7, 1995, between
IEL and Singapore Airlines Ltd.;
(iii) no bankruptcy, reorganization or insolvency proceedings,
including, without limitation, an assignment for the
benefit of creditors having been instituted by or against
any of SGI, SGIH or IEL and, if instituted against any of
SGI, SGIH or IEL, such proceedings having been consented
to (except for any of the foregoing due to HIIC's failure
to fund its obligations to IEL or to advance the Loan when
required hereby);
(iv) there not having been a material adverse change from the
existing 1997 Annual IEL business plan as adopted by the
Board of Directors of IEL;
(v) there not being a material adverse change in the financial
condition of SGI, on a stand alone basis prior to the
amalgamation of IEL with and into SGI, except as a result
of the writedown of SGI's real estate assets;
(vi) following execution of binding documents with respect to
such transaction, there not being a material breach of the
representations and warranties in the agreements to effect
the amalgamation of IEL and SGIH or the amalgamation of
SGI and IEL; and
(vii) there not being any litigation which would or could
reasonably be expected to have the effect of halting or
materially delaying the amalgamation of IEL and SGIH or
the amalgamation of SGI and IEL.
10. Default. Each of the following shall constitute an "Event of Default"
under this Funding Agreement:
a. the failure of IEL to pay in full any amount due under the Note
by the date the same is due, as provided therein, and such failure shall
continue for five (5) days after written notice from HIIC to IEL of such
failure, or IEL's failure to pay in fill any amount due hereunder upon maturity
of the Note, by acceleration or otherwise:
b. the failure of IEL to perform, satisfy and observe in all
material respects, when due, any of the obligations, covenants, conditions and
restrictions under the Financing Agreements or the failure of any
representations and warranties thereunder to be true and correct in any material
respect, not involving the payment of money, and such failure shall continue for
fifteen (15) days after written notice from HIIC to IEL of such failure, or if
said failure cannot reasonably be cured within said fifteen (15) day period, IEL
shall not have pursued the cure with reasonable diligence and shall not have
cured such failure within a reasonable time after the written notice from HIIC
to IEL or SGI and SGIH described above;
c. an uncured default by IEL shall exist under the other Financing
Agreements; or
d. an uncured default by either or both of SGI or SGIH shall exist
under any of the Financing Agreements.
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11. General.
a. Notices. All notices and other communications to be delivered or
made hereunder shall be in writing and shall be (i) delivered personally, (ii)
sent by post prepaid certified mail, return receipt requested, (iii) sent by
express courier service, or (iv) sent by facsimile at the following addresses or
such other addresses described in a written notice as provided herein:
IEL and HIIC: 1023 Cherry Road
Memphis, TN 38117
Attn: John Boushy
Facsimile No.: 901-762-8914
With a copy to: John W. McConomy, Esq.
1023 Cherry Road
Memphis, TN 38117
Facsimile No.: 901-762-8735
SGI and SGIH: 595 Howe Street, Suite 1115
Vancouver, B.C. V6C 2T5
Attn: Malcolm P. Burke
Facsimile No.: 604-687-8678
With a copy to: Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606
Attn: Andrew W. McCune, Esq.
Facsimile No.: 312-715-4800
All such notices and communications shall be deemed effective, if mailed, upon
the expiration of the fifth (5th) day following the date of mailing (except that
any notice of change of address shall be effective only upon receipt by the
party to whom such notice is addressed), if delivered personally or delivered by
courier, upon receipt or refusal of delivery, and if by facsimile, upon the
first business day following confirmed transmission; provided such notice or
communication is also mailed in accordance with the foregoing requirements
within two (2) days of delivery by facsimile.
b. Counterparts. This Agreement and the Financing Agreements may be
executed by the parties hereto in any number of separate counterparts with the
same as if the signatures were upon the same instrument. All such counterparts
shall together constitute but one and the same document.
c. Choice of Law and Forum. This Agreement and the Financing
Agreements shall be governed by and construed in accordance with the laws of the
State of Tennessee. IEL, SGIH and SGI further agree that the determination of
any action relating to this Agreement or any of the Financing Agreements
delivered in favor of Lender pursuant to the terms thereof shall be either an
appropriate court of the State of Tennessee or the United States District Court
for the Western District of Tennessee.
d. Successors and Assigns. All of the terms, covenants, warranties
and conditions contained in this Agreement and the Financing Agreements shall be
binding upon and inure to the sole and exclusive benefit of the parties hereto
and their respective successors and assigns.
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e. Further Assurances. Borrowers, SGI and SGIH will do, execute,
acknowledge and deliver, or cause to be done, executed, acknowledged and
delivered, such amendments or supplements hereto or to any of the Financing
Agreements and such further documents, instruments and transfers as the Lender
may require in connection with or to effect the transactions contemplated hereby
or in any of the Financing Agreements.
IN WITNESS WHEREOF, the parties hereto have affixed their signatures on the
day and date first above written.
INTERACTIVE ENTERTAINMENT LIMITED HARRAH'S INTERACTIVE INVESTMENT COMPANY
By:/s/ Malcolm Burke By:/s/ John Boushy
------------------------------ ---------------
Its:Vice President Its:Senior Vice President
---------------------------- ---------------------
SGI HOLDING CORPORATION LIMITED
By:/s/ Malcolm Burke
-----------------------------
Its:President
-----------------------------
SKY GAMES INTERNATIONAL LTD.
By:/s/ Malcolm Burke
-----------------
Its:President
---------
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[EXECUTION COPY]
----------------
WARRANT AGREEMENT
-----------------
THIS WARRANT AGREEMENT (this "Agreement") is made and entered into as of
May 13, 1997 between Sky Games International Ltd., a Bermuda exempted company
("SGI"), and Harrah's Interactive Investment Company, a Nevada corporation (the
"Warrantholder"). This Agreement is made in connection with the issuance of
warrants to purchase shares of common stock, par value Cdn. $.01 per share, of
SGI (such shares of SGI or its successor pursuant to the Amalgamation of SGI and
SGI Holding Corporation Limited, a Bermuda exempted company, are referred to
herein as the "Shares") by the Warrantholder as set forth on Exhibit A attached
hereto. The Warrant to be issued to the Warrantholder pursuant to this
Agreement hereinafter may be referred to as the "Warrant." The Warrant entitles
the Warrantholder to purchase up to the number of Shares set forth herein at the
Exercise Price (as defined in Section 6 hereof). There shall be no change in the
number of Shares issuable pursuant to this Warrant except as provided in Section
7 hereof. Except where otherwise noted, all monetary amounts set forth herein
are denominated in United States currency.
Section 1. Form of Warrant. The Warrant shall be represented by a
certificate (the "Warrant Certificate") which shall be in the form of Exhibit B
attached hereto, including the exercise form comprising part of Exhibit B.
Section 2. Transfer or Exchange of Warrant.
2.1 Warrant Register. SGI shall number and register the Warrant
Certificate in a Warrant register. SGI shall be entitled to treat the
registered owner of the Warrant as the owner in fact thereof for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Warrant on the part of any other person.
2.2 Transfer. The Warrant shall be transferable only on the books of
SGI, maintained at its principal office, upon delivery of the Warrant
Certificate representing the Warrant duly endorsed by the Warrantholder or by
his duly authorized attorney or representative, or accompanied by proper
evidence of succession, assignment or authority to transfer. Upon each requested
registration of transfer and subject to the restrictions on transfer set forth
in Section 13 hereof, SGI shall deliver a new Warrant Certificate to the person
entitled thereto at the same Exercise Price, with the same Termination Date (as
hereinafter defined) and otherwise of like tenor as the Warrant so transferred
or assigned.
Section 3. Terms of Warrant; Exercise of Warrant.
3.1 Terms of Warrant. Subject to the terms and conditions of this
Agreement, the Warrantholder shall have the right and option to purchase from
SGI the number of validly issued, fully paid and nonassessable Shares set forth
on Exhibit A attached hereto which such Warrantholder may at that time be
entitled to purchase on exercise of the Warrant. The Warrant may be exercised
in whole at any time or in part from time to time on or after the date of the
consummation of the amalgamation (the "Subsidiary Amalgamation") of SGI Holding
Corporation Limited, a Bermuda exempted company, and Interactive Entertainment
Limited, a Bermuda exempted company (the "Commencement Date"). The right to
exercise such Warrant shall terminate without further notice at 5:00 p.m.
Memphis time on the ninetieth (90th) day after the Commencement Date (the
"Termination Date"). Closing of such exercise shall be subject to satisfaction
of the conditions set forth in Section 3.3 hereof.
<PAGE>
3.2 Method of Exercise.
(a) Upon compliance with the terms and conditions of this Agreement,
the Warrant to purchase represented by the Warrant shall be exercisable at the
election of the Warrantholder, either in full or from time to time in part. In
the event that the Warrant is exercised with respect to fewer than all of the
Shares or other securities purchasable on such exercise at any time prior to the
Termination Date, a new Warrant Certificate evidencing the remainder of the
Warrant shall be issued by SGI at the same Exercise Price, with the same
Termination Date, and otherwise of like tenor as the Warrant that has been
partially exercised. SGI shall deliver the new Warrant Certificate pursuant to
the provisions of Sections 1 and 2 hereof.
(b) The Warrant shall be exercised by surrender to SGI, at its
principal office, of the Warrant Certificate evidencing the Warrant, together
with a duly completed and executed form of election to purchase attached
thereto, payment to SGI of the Exercise Price for all of the Shares for which
the Warrant is then exercised and satisfaction of the other conditions set forth
in Section 3.3. Payment of the Aggregate Exercise Price (as hereinafter defined)
shall be made in cash, certified bank check, cashier's check, wire transfer or
otherwise in immediately available funds. All Warrant Certificates surrendered
upon exercise of Warrants shall be canceled by SGI.
3.3 Issuance of the Shares. Within ten (10) business days after all
of (i) the surrender of the Warrant Certificate, (ii) payment of the Aggregate
Exercise Price and (iii) delivery of the Exercise Form attached to the Warrant
Certificate, SGI shall issue and cause to be delivered to the Warrantholder a
certificate for the number of Shares so purchased upon the exercise of the
Warrant together with a Warrant Certificate for the portion of the Warrant not
exercised, if any. All Shares will, upon issuance, be validly issued, fully
paid and nonassessable, and free from all taxes, liens and charges with respect
to the issuance thereof (other than income taxes).
Section 4. Mutilated or Missing Warrant Certificate. If any Warrant
Certificate is mutilated, lost, stolen or destroyed, SGI shall, in the case of a
mutilated Warrant Certificate, issue a new Warrant Certificate of like tenor
upon surrender of such mutilated Warrant Certificate, and in case of the loss,
theft or destruction of any Warrant Certificate, at the request of the
Warrantholder, issue and deliver in exchange and substitution for the
certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor
and representing an equivalent right or interest, but only upon receipt of
evidence reasonably satisfactory to SGI of such loss, theft or destruction of
such Warrant Certificate and reasonable and customary indemnity and bond, if
requested, also reasonably satisfactory to SGI. An applicant for such a
substitute Warrant Certificate also shall comply with such other reasonable
regulations and pay such other reasonable charges as SGI may prescribe to cover
SGI's expenses in processing the mutilated Warrant Certificate or replacing the
lost, stolen or destroyed Warrant Certificate.
Section 5. Certain Covenants.
5.1 Reservation of Shares. SGI shall provide for the authorization
and reservation of Shares for issuance upon the exercise of the Warrant.
5.2 No Impairment. SGI shall not, by amendment of its Memorandum of
Association or Bye-Laws or through reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issuance or sale of securities or
any other agreement or voluntary act, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by SGI.
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Section 6. Exercise Price. The Shares shall be purchasable upon the
exercise of the Warrant at a price per Share of SGI equal to $1.00 per Share.
The Exercise Price shall be subject to adjustments required pursuant to Section
7 hereof. The Exercise Price multiplied by the number of Shares issuable upon
exercise of the Warrant may be referred to herein as the "Aggregate Exercise
Price."
Section 7. Adjustment of Exercise Price and Number of Interests. The
number and kind of securities purchasable upon the exercise of each Warrant and
the Exercise Price shall be subject to adjustment from time to time upon the
happening of the events set forth in this Section 7.
7.1 Mechanical Adjustments--SGI.
(a) If SGI shall at any time prior to the exercise of the
Warrant issued hereby (i) pay a dividend in Shares or makes a pro rata
distribution to all of its shareholders in Shares, (ii) subdivide its
outstanding Shares into a greater number of Shares, or (iii) combine its
outstanding Shares into a smaller number of Shares, the Exercise Price in effect
immediately after the record date for such dividend or distribution or the
effective date of such subdivision or combination shall be adjusted so that it
shall equal the price determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the
number of Shares outstanding immediately before such dividend, distribution,
subdivision or combination, and the denominator of which shall be the number of
Shares outstanding immediately after such dividend, distribution, subdivision or
combination. Such adjustments shall be made successively whenever any event
specified above shall occur.
(b) If SGI shall at any time prior to the exercise of the
Warrant issued hereby declare a distribution (other than a distribution
consisting solely of Shares) or otherwise distribute pro rata to all of its
shareholders any assets, cash, property, rights, evidences of indebtedness or
securities (other than Shares), a Warrantholder holding the unexercised Warrant
shall thereafter be entitled, in addition to the Shares properly receivable upon
the exercise thereof, to receive at no additional cost, upon the exercise of the
Warrant, the same property, assets, cash, rights, evidences of indebtedness or
securities that it would have been entitled to receive at the time of such
distribution as if the Warrant had been exercised immediately prior to such
distribution.
(c) No adjustment need be made in connection with the issuance
of any Shares or other securities of SGI or a successor to the business of SGI
in a bona fide public offering pursuant to a firm commitment underwriting
managed by a nationally recognized investment banking firm which is a member of
the National Association of Securities Dealers, Inc. or for a price determined
to be reasonable by the Board of Directors of SGI.
(d) In case any event shall occur as to which the provisions of
Section 7.1 are not strictly applicable but the failure to make any adjustment
would not fairly protect rights represented by the Warrant in accordance with
the essential intent and principles of such sections, then, in each case, SGI
shall appoint a nationally recognized firm of certified public accountants
(which may be the regular auditors of SGI), which shall give their opinion upon
the adjustment, if any, on a basis consistent with the essential intent and
principles established in Section 7, necessary to preserve, without dilution,
the purchase rights represented by the Warrant. Upon receipt of such opinion,
SGI will promptly mail a copy thereof to the holder of the Warrant and shall
make the adjustments described therein.
7.2 Notice of Adjustment. Whenever the number of Shares purchasable
upon the exercise of the Warrant or the Exercise Price of such Shares is to be
adjusted, as herein provided, SGI shall give
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reasonable advance notice to the Warrantholder (at least 20 days prior to the
date on which the event requiring adjustment is expected to occur) by first
class mail, postage prepaid, with a certificate of SGI, confirmed as to
mathematical accuracy by a firm of independent certified public accountants
selected by SGI (who may be the regular auditors employed by SGI), setting forth
the number of Shares purchasable upon the exercise of the Warrant and the
Exercise Price of such Shares after such adjustment and a brief statement of the
facts requiring such adjustment and the computation by which such adjustment was
made.
7.3 Reorganizations. In case of any capital reorganization, other
than in the cases referred to in Section 7.1 hereto, or the consolidation or
merger of SGI with or into another entity (other than a merger or consolidation
in which SGI is the continuing entity and which does not result in any
reclassification of the outstanding Shares or the conversion of such outstanding
Shares into shares of stock or other securities or property), or the sale of the
property of SGI as an entirety or substantially as an entirety (collectively
such actions hereinafter being referred to as "Reorganizations"), there shall
thereafter be deliverable upon exercise of a Warrant (in lieu of the number of
Shares theretofore deliverable) the number of shares of stock or other
securities or property to which a holder of the number of Shares which would
otherwise have been deliverable upon the exercise of such Warrant would have
been entitled upon such Reorganization if such Warrant had been exercised in
full immediately prior to such Reorganization. In case of any Reorganization,
appropriate adjustment, as reasonably determined by a nationally recognized
independent certified public accounting firm selected by SGI (who may be the
regular auditors employed by SGI), shall be made in the application of the
provisions herein set forth with respect to the rights and interests of the
Warrantholder so that the provisions set forth herein shall thereafter be
applicable, as nearly as possible, in relation to any shares or other property
thereafter deliverable upon exercise of the Warrant. SGI shall not effect any
such Reorganization unless upon or prior to the consummation thereof the
successor entity, or if SGI shall be the surviving entity in any such
Reorganization and is not the issuer of the shares of stock or other securities
or property to be delivered to holders of Shares outstanding at the effective
time thereof, then such issuer shall assume by written instrument the obligation
to deliver to the Warrantholder such shares of stock, securities, cash or other
property as the Warrantholder shall be entitled to purchase in accordance with
the foregoing provisions. No provision of this Warrant and no right or option
granted or conferred hereunder shall in any way limit, affect or abridge the
exercise by SGI of any of its corporate rights or powers to recapitalize, amend
its Memorandum, reorganize, consolidate or merge with or into another
corporation, or to transfer all or any part of its property or assets, or the
exercise of any other of its corporate rights and powers.
7.4 Statement on Warrants. Irrespective of any adjustments in the
Exercise Price or the number or kind of Shares purchasable upon the exercise of
the Warrants, Warrants theretofore or thereafter issued may continue to express
on their face the same price and number and kind of Shares as are stated in the
Warrant initially issuable pursuant to this Agreement and such shall not in any
way affect the adjusted Exercise Price or number of Shares issuable upon
exercise.
Section 8. SGI's Representations and Warranties. SGI hereby represents and
warrants to each Warrantholder as of the date hereof as follows:
8.1 Status. SGI is an exempted company duly formed, validly existing
and in good standing under the laws of Bermuda.
8.2 Power. SGI has all requisite corporate power and authority to own
and operate its properties, to carry on its business as now conducted, and to
enter into this Agreement and to carry out its obligations under this Agreement.
All corporate or similar action required to be taken by SGI in connection with
the execution, delivery and performance of this Agreement has been duly taken.
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8.3 No Conflicts. Neither the execution and delivery of this
Agreement nor the performance by SGI of any of SGI's obligations hereunder, will
(i) conflict with, result in a breach of, or constitute (with notice, lapse of
time or both) a default under, or result in the creation or imposition of any
lien, charge, security interests or other encumbrance upon any of SGI's property
pursuant to the terms of any indenture, mortgage, deed of trust, security
agreement, loan agreement, license, lease, undertaking or any other agreement,
instrument or document to which SGI is a party, by which SGI is bound or to
which any of SGI's properties are subject, the conflict with, breach of or
default under, or the creation or imposition of which, would have an adverse
effect on the ability of SGI to fully and timely perform any of its obligations
under this Agreement, or (ii) violate the Memorandum of Association or Bye-Laws,
or (iii) violate any provision of any federal, state or local law, rule or
regulation to which SGI is subject, or any judgment, writ, decree, injunction or
order to which SGI is a party or by which SGI is bound, which violation would
have an adverse effect on the ability of SGI to perform its obligations
hereunder, or a material adverse effect on the business, assets or financial
condition of SGI.
8.4 Binding Obligation. This Agreement constitutes the legal, valid
and binding obligation of SGI, enforceable in accordance with its terms.
Section 9. Warrantholder's Representations and Warranties. The holder of
this Warrant, by the acceptance hereof, represents that it is acquiring this
Warrant and Shares purchasable upon exercise of the Warrant for its own account
for investment and not with a view to, or for sale in connection with, any
distribution hereof or of any of the Shares or other securities issuable upon
the exercise thereof, and not with any present intention of distributing any of
the same. Upon exercise of this Warrant, the holder shall, if requested by SGI,
confirm in writing, in a form satisfactory to SGI, that Shares purchasable upon
exercise of the Warrant so purchased are being acquired solely for the holder's
own account and not as a nominee for any other party, for investment, and not
with a view toward distribution or resale and that such holder is an Accredited
Investor. If such holder cannot make such representations because they would be
factually incorrect, it shall be a condition to such holder's exercise of the
Warrant that SGI receive such other representations as SGI considers reasonably
necessary to assure SGI that the issuance of its securities upon exercise of the
Warrant shall not violate any United States or state securities laws.
Section 10. Information to Warrantholder. In addition to any other rights
to notice pursuant to this Agreement, SGI shall provide the following
information to the Warrantholder after the Commencement Date:
(i) information regarding any distribution by SGI to the
owners of any equity securities of SGI;
(ii) information regarding the granting to owners of any
equity securities of SGI, including holders of Shares, of any rights to
subscribe for or purchase any equity securities of SGI since the date of this
Agreement;
(iii) information regarding any amendment to the Memorandum of
Association or Bye-Laws of SGI since the date of this Agreement;
(iv) information regarding any proposed reclassification or
change in any Shares or any consolidation, merger, or sale of substantially all
of the assets, property or business of SGI; or
5
<PAGE>
(v) such written information, documents and reports as have been
delivered to all shareholders of SGI since the date of this Agreement; and
(vi) such additional information as the Warrantholder may
reasonably request.
Section 11. Warrantholder Not a Shareholder. The Warrantholder, as the
holder of the Warrant, shall not be, and shall not have any of the rights or
privileges of, a Shareholder of SGI with respect to the Shares purchasable
hereunder, unless and until the Shares shall have been issued and delivered to
such Warrantholder in accordance with this Warrant Agreement.
Section 12. Notices. Any notices or other communications required or
permitted to be given hereunder shall be in writing and either delivered in
person, sent by courier, sent by mail, registered or certified mail, postage
prepaid, return receipt requested, or sent by facsimile transmission and
addressed to SGI at 595 Howe Street, Suite 1115, Vancouver, British Columbia V6C
2T5, Canada, Attn: Malcolm P. Burke, facsimile no.: 604-687-8678 (with a copy to
Altheimer & Gray, 10 South Wacker Drive, Suite 4000, Chicago, Illinois 60606,
Attn: Andrew W. McCune, facsimile no.: 312-715-4800) and to the Warrantholder as
set forth on the signature page to this Agreement, or such other address as
either party may from time to time specify in writing to the other in the manner
aforesaid. Such notices or communications shall be deemed delivered upon
personal or courier delivery or refusal of such delivery, five (5) business days
after being sent by mail, as set forth above or the first business day following
confirmed transmission if sent by facsimile transmission; provided such notice
or other communication is also mailed in accordance with the foregoing
requirements within two (2) days of delivery by facsimile.
Section 13. Successors and Assigns/Assignment.
13.1 Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their permitted
successors and assigns hereunder; provided, however, that neither this Agreement
nor the Warrant Certificate may be sold, assigned or transferred by any
Warrantholder (i) in the absence of an effective registration statement or an
exemption from such requirement under the Act, qualification or exemption from
such requirement under any applicable state laws or an opinion of counsel in
form and substance satisfactory to SGI that registration is not required under
the Act and under any applicable state laws; (ii) except as permitted pursuant
to and in compliance with the applicable gaming laws and regulations; and (iii)
with prior consent of SGI.
13.2 Assignment. Neither this Agreement, any Warrant nor any
Warrant Certificate may be sold, assigned or otherwise transferred, except to an
Affiliate of Warrantholder, unless SGI shall have consented thereto. It shall be
a condition to such assignment that the assignee execute a copy of this
Agreement. SGI may not be sell, assign or otherwise transfer this Agreement,
except to an Affiliate of SGI, unless the Warrantholder shall have consented
thereto. As used herein, an "Affiliate" is any person or entity which controls a
party to this Agreement, which that party controls, or which is under common
control with that party. "Control" means the power, direct or indirect, to
direct or cause the direction of the management and policies of a person or
entity through voting securities, contract or otherwise.
Section 14. Fractional Shares. Fractional Shares shall not be issued to
the Warrantholder on exercise of any Warrant. In lieu thereof, the Warrantholder
shall receive the nearest whole number of Shares to which the Warrantholder is
entitled on such exercise.
6
<PAGE>
Section 15. Applicable Law. This Agreement, the Warrant and the Warrant
Certificate issued hereunder shall be governed by and construed in accordance
with the laws of the State of Tennessee, without giving effect to the conflicts
of laws principles thereof.
Section 16. No Third Party Benefits. This Agreement shall not be construed
to give to any person or entity, other than SGI and the Warrantholder, any legal
or equitable right, remedy or claim under this Agreement, the Warrant or the
Warrant Certificates, and this Agreement, the Warrants and the Warrant
Certificates shall be for the sole and exclusive benefit of SGI and the
Warrantholder.
Section 17. Counterparts. This Agreement may be executed in any number of
counterparts or duplicate originals, each of which shall be an original, but all
of which together shall constitute one instrument.
Section 18. Entire Understanding. This Agreement constitutes the entire
agreement between the parties hereto with respect to the matters set forth
herein and supersedes all prior agreements, understandings and arrangements with
respect to the matters herein. This Agreement cannot be modified except by a
written instrument signed by SGI and the Warrantholder.
Section 19. Attorneys' Fees. If an action is instituted by any of the
parties hereto in any court of law or equity pertaining to the interpretation or
enforcement of any of the provisions of this Agreement, the prevailing party
shall be entitled to recover, in addition to any judgment or decree rendered
therein, all court costs and reasonable attorneys' fees and expenses.
Section 20. Specific Performance/Cumulative Remedies. SGI acknowledges
that, if it breaches any of its obligations hereunder, the Warrantholder shall
suffer irreparable injury for which damages shall be insufficient, and that the
Warrantholder, individually or as a group, shall have the right of specific
performance of such obligations. Notwithstanding the foregoing, the remedies
available to the Warrantholder in the event of a breach by SGI of this Agreement
shall be cumulative of those at law, equity or otherwise.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be duly executed as of the day and year first above
written.
SKY GAMES INTERNATIONAL LTD.
By: /s/ Malcolm P. Burke
---------------------------
Name: Malcolm P. Burke
--------------------
Title: President
---------
HARRAH'S INTERACTIVE INVESTMENT
COMPANY
By: /s/ John M. Boushy
-----------------------------
Name: John M. Boushy
----------------------
Title: Senior Vice President
---------------------
Address: 1023 Cherry Road
Memphis, Tennessee 38117
Facsimile: 901-762-8914
8
<PAGE>
EXHIBIT A
---------
WARRANTHOLDER
-------------
<TABLE>
<CAPTION>
Name Shares Issuable on Exercise
- - ---- ---------------------------
<S> <C>
Harrah' s Interactive Investment The number of Shares equal to
Company 1,000,000 Shares less the number of
Shares issued pursuant to conversion
of that certain Convertible Secured
Promissory Note dated the date hereof
issued under that certain Funding
Agreement dated the date hereof
between SGI and IEL, as borrower, and
Warrantholder, as lender.
If SGI shall at any time prior to the
exercise of the Warrant (i) pay a
dividend in Shares or makes a pro
rata distribution to all of its
Shareholders in Shares, (ii)
subdivide its outstanding Shares into
a greater number of Shares, or (iii)
combine its outstanding Shares, the
Exercise Price in effect immediately
after the record date for such
dividend shall be adjusted so that it
shall equal the price determined by
multiplying the Exercise Price in
effect immediately prior thereto by a
fraction, the numerator of which
shall be the number of Shares
outstanding immediately before such
dividend, distribution, subdivision
or combination. Such adjustments
shall be made successively whenever
any event specified shall occur.
</TABLE>
A-1
<PAGE>
EXHIBIT B
---------
WARRANT CERTIFICATE
-------------------
No. 1
THE SECURITIES EVIDENCED BY THIS CERTIFICATE AND THE SECURITIES THAT MAY BE
ACQUIRED UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR QUALIFIED UNDER ANY STATE SECURITIES LAWS.
NEITHER THIS WARRANT NOR THE SECURITIES THAT MAY BE ACQUIRED UPON ITS EXERCISE
MAY BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES UNDER THE ACT AND QUALIFICATION UNDER ANY
APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION THEREFROM, OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO SGI THAT SUCH REGISTRATION OR QUALIFICATION
OR BOTH IS NOT REQUIRED.
WARRANT TO PURCHASE SHARES OF
SKY GAMES INTERNATIONAL LTD.
VOID AFTER 5:00 P.M. MEMPHIS TIME
ON
____________ __, 1997
This Warrant Certificate certifies that, for value received, Harrah's
Interactive Investment Company, a Nevada corporation (the "Warrantholder"), the
registered holder hereof, or its permitted assigns, is entitled to purchase
______________ from SKY GAMES INTERNATIONAL, a Bermuda exempted company ("SGI"),
the Shares of SGI or such other number of Shares as the Warrantholder then is
entitled to purchase pursuant to the Warrant Agreement (as hereinafter defined).
The right granted herein may be exercised at the times and in the amounts on and
after the Commencement Date (as such date is defined in the Warrant Agreement)
specified in the Warrant Agreement and shall terminate at the Termination Date
(as such date is defined in the Warrant Agreement) specified in the Warrant
Agreement. Closing of such exercise is subject to the satisfaction of several
conditions set forth in the Warrant Agreement. The purchase price for each Share
upon exercise of this Warrant initially shall be as set forth in the Warrant
Agreement (the "Exercise Price"). The Exercise Price and the number of Shares of
SGI purchasable upon exercise of this Warrant are subject to adjustment from
time to time as set forth in the Warrant Agreement.
Subject to the terms of the Warrant Agreement, this Warrant may be
exercised in whole or in part by presentation of this Warrant Certificate with
the Exercise Form and Investment Certificate attached hereto duly completed and
executed and simultaneous payment of the Exercise Price for all of the Shares
for which the Warrant is then exercised at the principal office of SGI. Payment
of such Exercise Price shall be made to SGI in cash, by certified bank or
cashier's check made payable to the order of SGI or other immediately available
funds.
This Warrant Certificate is issued under and in accordance with the Warrant
Agreement dated as of May __, 1997 (the "Warrant Agreement"), between SGI and
the Warrantholder named therein, and is subject to the terms and provisions
contained in the Warrant Agreement, to, which the Warrantholder consents by
acceptance hereof.
B-1
<PAGE>
This Warrant Certificate is transferable at the office of SGI in the manner
and subject to the limitations set forth in the Warrant Agreement.
Neither this Warrant Certificate nor the Warrant entitles the Warrantholder
to any of the rights of a partner or a Shareholder of SGI.
IN WITNESS WHEREOF, SGI has caused this Warrant Certificate to be duly
executed and delivered by its duly authorized officer as of May __, 1997.
SKY GAMES INTERNATIONAL LTD.
By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
B-2
<PAGE>
EXHIBIT C
---------
TO WARRANT CERTIFICATE
----------------------
EXERCISE FORM
-------------
The undersigned hereby irrevocably elects to exercise the Warrant represented by
Warrant Certificate No. 1 dated as of May __, 1997, of Sky Games International
Ltd. ("SGI"), and pursuant to the terms of that certain Warrant Agreement dated
as of May __, 1997 between SGI and the Warrantholder, hereby tenders to SGI the
aggregate payment therefor of $_____________, for ____ Shares of Common Stock,
par value Cdn. $.01.
Name
-----------------------------------
Address
--------------------------------
Signature
------------------------------
Date
-----------------------------------
(Signature must conform in all respects to name of Warrantholder on the face of
the Warrant Certificate.)
C-1
<PAGE>
CONVERTIBLE SECURED
PROMISSORY NOTE
$1,000,000 Memphis, Shelby County, Tennessee
May 13, 1997
This PROMISSORY NOTE (this "Note") is executed as of this 13th day of
May, 1997, by Interactive Entertainment Limited, a Bermuda exempted company
("IEL"), whose address is c/o Harrah's Interactive Entertainment Company, 1023
Cherry Road, Memphis, Tennessee 38117 (facsimile no.: 901-762-8914), in favor of
Harrah's Interactive Investment Company, a Nevada corporation ("HIIC" or
"Holder"), whose legal address is 1023 Cherry Road, Memphis, Tennessee 38117.
1. Promise to Pay. For value received, Maker hereby promises to pay
to the order of Holder the principal sum equal to the lesser of $1,000,000 or
the aggregate amounts advanced hereunder ("Loan Amount") pursuant to the terms
and conditions of that certain Funding Agreement between, inter alia, Maker and
Holder dated contemporaneously herewith (the "Funding Agreement") and related
Financing Agreements (as defined in the Funding Agreement), together with
interest thereon at the rate as hereinafter specified, all in lawful money of
the United States of America which constitutes legal tender for payment of
debts, public and private, at the time of payment.
2. Interest Rate. Interest on the unpaid principal balance of this
Note outstanding from the date hereof and from time to time shall be paid at a
rate equal to the prime rate, plus two percent (2%) per annum ("Interest Rate").
The prime rate shall be that as published from time to time in The Wall Street
Journal. Interest payable hereunder shall be calculated on a 360-day year based
on the actual number of days for which any amounts payable hereunder remain
outstanding.
3. Maturity Date. The "Maturity Date" shall mean June 21, 1997. The
entire outstanding principal balance of this Note, together with all accrued but
unpaid interest, shall, if not previously paid (including by way of conversion
into Shares (as herein defined) pursuant to Section 7 hereof), be finally due
and payable on the Maturity Date.
4. Payment Schedule. Interest shall accrue on the outstanding
principal balance hereunder at the Interest Rate. Payments of interest only
shall be payable by withholding amounts equal to accrued and unpaid interest
from each advance hereunder subsequent to the initial advance until the Maturity
Date, at which time the entire outstanding principal balance of this Note
together with all accrued but unpaid interest hereunder shall, if not previously
paid, be fully due and payable.
5. Prepayment Privilege. Maker shall have the right to prepay all or
any portion of the Loan Amount, plus an accrued and unpaid interest thereon, at
any time; provided, however, that Maker shall give Holder at least five (5)
days' prior written notice of any proposed prepayment.
6. Security. The obligations of Maker under this Note shall be
secured by the Security Agreement dated as of the date hereof attached as
Exhibit E to the Funding Agreement and guaranteed by the Guaranty dated as of
the date hereof attached as Exhibit C to the Funding Agreement, and any and all
other documents which may be delivered in connection with the granting or
perfection of such security or which may secure this Note from time to time
(collectively, the "Security Documents"). Maker agrees to take such other
<PAGE>
action and execute such other documents as may be requested by Holder to perfect
its security interest in such collateral.
7. Conversion. Effective immediately upon consummation of the
amalgamation of IEL and SGI Holding Corporation Limited ("SGIH"), the
outstanding Loan Amount and accrued interest due hereunder as of the date of
such amalgamation (the "Outstanding Amount") shall automatically convert into
the number of shares of common stock, par value Cdn$.01 per share, of SGI
("Shares") at the conversion price per Share of $1.00 (the "Conversion Price")
without any further action required by either Maker or Holder.
In the event of any capital reorganization or reclassification of the
Shares, any consolidation or merger of Maker with or into a corporation, limited
partnership, limited liability company or other entity or any sale, lease or
other disposition of all or substantially all of the assets of Maker, that is
effected in such a manner that holders of Shares are entitled to receive
securities and/or property (including cash) with respect to or in exchange for
Shares and that does not result in a prepayment by Maker pursuant to Section 5,
Maker shall, as a condition precedent to such transaction, cause effective
provision to be made so that Holder, or an affiliate of Holder, shall have the
right thereafter to convert this Note for the kind and amount of securities
and/or other property receivable upon such event by a holder of the number of
Shares for which this Note could have been converted immediately prior to such
event.
In the event that SGI shall at any time prior to the exercise of the
conversion of the Note, (i) pay a dividend in Shares or make a pro rata
distribution to all of its shareholders in Shares, (ii) subdivide its
outstanding Shares into a greater number of Shares, or (iii) combine its
outstanding Shares into a smaller number of Shares, the Conversion Price in
effect immediately after the record date for such dividend or distribution or
the effective date of such subdivision or combination shall be adjusted so that
it shall equal the price determined by multiplying the Conversion Price in
effect immediately prior thereto by a fraction, the numerator of which shall be
the number of Shares outstanding immediately before such dividend, distribution,
subdivision or combination, and the denominator of which shall be the number of
Shares outstanding immediately after such dividend, distribution, subdivision or
combination. Such adjustments shall be made successively whenever any event
specified above shall occur.
8. Application of Payments. All payments hereunder shall be applied
first to the payment of late charges on defaulted payments as hereinafter
provided; second, to the payment of accrued and unpaid interest on the principal
of this Note, including interest accrued at the Default Rate as hereinafter
provided; and third, to the reduction of principal of this Note.
9. Default Interest Rate and Late Charge on Defaulted Payments. Any
payment not make within five (5) days after the same is due hereunder, and
including the entire balance of principal, interest and other sums due upon the
maturity hereof, by acceleration or otherwise, shall bear interest at three
percent (3%) above the then current Interest Rate ("Default Rate"), such
interest to accrue from the date due until paid. In addition, a late charge of
four cents ($.04) per dollar shall be due and payable on all sums not paid when
due but not on any sums due by reason of acceleration.
10. Default. Each of the following shall constitute an "Event of
Default" under this Note:
(a) the failure of Maker to pay in full any amount due hereunder
by the date the same is due, as provided herein, and such failure shall continue
for five (5) days after written notice from Holder to Maker of such failure, or
Maker's failure to pay in full any amount due hereunder upon maturity of this
Note, by acceleration or otherwise;
2
<PAGE>
(b) the failure of Maker to perform, satisfy and observe in all
material respects, when due, any of the obligations, covenants, conditions and
restrictions under the Financing Agreements or the failure of any
representations and warranties thereunder to be true and correct in any material
respect, not involving the payment of money, and such failure shall continue for
fifteen (15) days after written notice from Holder to Maker of such failure, or
if said failure cannot reasonably be cured within said fifteen (15)-day period,
Maker shall not have pursued the cure with reasonable diligence and shall not
have cured such failure within sixty (60) days after the written notice from
Holder to Maker or SGI and SGIH described above;
(c) an uncured default by Maker shall exist under the Security
Documents; or
(d) an uncured default by either or both of SGI or SGIH shall exist
under any of the Financing Agreements.
11. Right to Accelerate on Event of Default. Upon any uncured Event of
Default hereunder, the entire balance of principal, accrued interest, and any
other sum owing hereunder shall, at the option of Holder, become at once due and
payable without prior notice or demand.
12. Waivers of Demand, etc. Maker and all parties now or hereafter liable
for the payment hereof, primarily or secondarily, directly or indirectly, and
whether as endorser, guarantor, surety, or otherwise, severally waive demand,
presentment, notice of dishonor or nonpayment, protest and notice of protest,
and diligence in collecting, and consent to extensions of time for payment,
renewals of this Note and acceptance of partial payments, whether before, at, or
after maturity, all or any of which may be made without notice to any of said
parties and without affecting their liability to Holder.
13. Costs of Collection. Maker and all parties now or hereafter liable for
the payment hereof agree, jointly and severally, to pay all costs and expenses,
including reasonable attorneys' fees, incurred in collecting this Note or any
part thereof.
14. No Usury Payable. The provisions of this Note and of all Agreements
between Maker and Holder are hereby expressly limited so that in no contingency
or event whatsoever shall the amount paid, or agreed to be paid, to Holder for
the use, forbearance, or retention of the Loan Amount ("Interest") exceed the
maximum amount permissible under applicable law. If, from any circumstance
whatsoever, the performance or fulfillment of any provision hereof or of any
other agreement between Maker and Holder shall, at the time performance or
fulfillment of such provision shall be due, exceed the limit for Interest
prescribed by law, then, ipso facto, the obligation to be performed or fulfilled
shall be reduced to such limit. If, from any circumstance whatsoever, Holder
should ever receive as Interest an amount which would exceed the highest lawful
rate, the amount which would be excessive Interest shall be applied to the
reduction of the principal balance owing hereunder (or, at Holder's option, or
if no principal shall be outstanding, be paid over to Maker) and not to the
payment of Interest.
15. Severability of Provisions. If any provision hereof shall, for any
reason and to any extent, be invalid or unenforceable, then the remainder of the
instrument in which such provision is contained, the application of the
provision to other persons, entities or circumstances, and any other instrument
referred to herein shall not be affected hereby but instead shall be enforceable
to the maximum extent permitted by law.
16. Successors to Maker or Holder. The term "Maker" as used herein shall
include the original maker of this Note and any party who may subsequently
become primarily liable for the payments hereof. The term "Holder" as used
herein shall mean the original payee of this Note or, if this Note is
transferred, the then
3
<PAGE>
holder of this note, provide that this Note shall not be transferred, negotiated
or assigned, except to an Affiliate of Holder, without the prior consent of
Maker, which consent shall not be unreasonably withheld, and, until written
notice is given to IEL designating another party as Holder, Maker may consider
the Holder to be the original payee or the party last designated as Holder in a
written notice to IEL. As used herein "Affiliate" is any person or entity which
controls a party to the Financing Agreements, which that person controls, or
which is under common control with that party. "Control" means the power, direct
or indirect, to direct or cause the direction of the management and policies of
a person or entity through voting securities, contract or otherwise.
17. Notices. All notices and other communications to be delivered or
made under this Note shall be in writing, signed by the party giving the same,
and shall be deemed properly given and shall be effective (i) five (5) business
days after mailed, if sent by registered or certified mail, postage prepaid,
(ii) when actually received or delivery is refused, if delivered personally or
delivered by courier, (iii) upon the first business day following confirmed
transmission, if transmitted by facsimile; provided such notice or communication
is also mailed in accordance with the foregoing requirement within two (2) days
of delivery by facsimile to the address set forth in the first paragraph of this
Note, or to such other address as a party may designate by written notice to the
other party.
18. Captions for Convenience. The captions to the Sections hereof are
for convenience only and shall not be considered in interpreting the provisions
hereof.
19. Governing Law. Regardless of the place of its execution, this
Note shall be construed and enforced in accordance with the laws of the State of
Tennessee.
4
<PAGE>
MAKER:
INTERACTIVE ENTERTAINMENT LIMITED
By: /s/ Malcolm P. Burke
--------------------
Its: Vice President
-------------------
HOLDER:
HARRAH'S INTERACTIVE INVESTMENT COMPANY
By: /s/ John M. Boushy
----------------------
Its: Senior Vice President
---------------------
AGREEMENT AND ACKNOWLEDGMENT
Sky Games International Ltd., a Bermuda exempted company ("SGI"),
hereby acknowledges that the Outstanding Amount under this Note may convert into
shares of common stock, Cdn$.01 per share ("Shares"), of SGI under certain
circumstances and hereby agrees to issue Shares in accordance with the terms of
this Note in the event of any such conversion.
SKY GAMES INTERNATIONAL LTD.
By: /s/ Malcolm P. Burke
----------------------
Its: President
---------
5
<PAGE>
[EXECUTION COPY]
----------------
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Security Agreement") dated as of May 13, 1997
is entered into by Interactive Entertainment Limited, a Bermuda exempted company
("Debtor") and Harrah's Interactive Investment Company, a Nevada corporation
(the "Secured Party").
Recitals:
---------
A. SGI Holding Corporation Limited ("SGIH") and Debtor have requested
that the Secured Party provide Debtor with a loan to Debtor (the "Loan"), which
Loan will provide Debtor with funds necessary to permit Debtor to carry on
Debtor's day-to-day business activities.
B. The Secured Party has agreed, although the Secured Party is under no
obligation to do so, to make such Loans and other financial accommodations to
Debtor from time to time which are pursuant to and reflected in the Funding
Agreement, the Convertible Promissory Note (the "Note"), the Pledge and Security
Agreement, the Guaranty, the Warrant Agreement, all of even date herewith
(collectively, with this Security Agreement, the "Financing Agreements").
C. Secured Party's agreement to make the Loan is conditioned on the
guaranty of such Loan by SGIH, the receipt of a security interest in all of the
assets of IEL as evidenced by this Security Agreement.
Agreements:
-----------
NOW, THEREFORE, in consideration of the premises set forth therein, and to
induce Secured Party to make the Loan and financial accommodations to Debtor on
the terms and provisions and as reflected in the Note and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Definitions. The following terms shall have the following meanings:
"Accounts" shall mean any "account," as such term is defined in the
Uniform Commercial Code.
"Chattel Paper" shall mean any "chattel paper," as such term is
defined in the Uniform Commercial Code.
"Collateral" is defined in Section 2 hereof.
"Contracts" shall mean all contracts, undertakings or other agreements
(other than rights evidenced by Chattel Paper or Documents) in or under which
Debtor may now or hereafter have any right, title or interest, including,
without limitation, with respect to an Account, any agreement relating to the
terms of payment or the terms of performance thereof.
"Copyrights" shall mean any of Debtor's copyrights, rights and
interests in copyrights, works protectible by copyrights, copyright
registrations and copyright applications and all renewals of any of the
foregoing, all income, royalties, damages and payments now or hereafter due or
payable under or with respect to any of the foregoing, including, without
limitation, damages and payments for past, present and future
<PAGE>
infringements of any of the foregoing and the right to sue for past, present and
future infringements of any of the foregoing.
"Default" shall mean the occurrence of an uncured Event of Default.
"Documents" shall mean any "documents," as such term is defined in the
Uniform Commercial Code.
"Event of Default" shall mean an uncured event of default under the
Financing Agreements.
"Equipment" shall mean any "equipment," as such term is defined in the
Uniform Commercial Code and shall include motor vehicles, tractors, trailers and
other like property, whether or not the title thereto is governed by a
certificate of title or ownership.
"General Intangibles" shall mean any "general intangibles," as such
term is defined in the Uniform Commercial Code and shall include, without
limitation, all right, title and interest in or under any Contract, drawings,
materials and records, claims, literary rights, goodwill, rights of performance,
Copyrights, Trademarks, Patents, warranties, rights under insurance policies and
rights of indemnification.
"Goods" shall mean any "goods," as such term is defined in the Uniform
Commercial Code.
"Inventory" shall mean any "inventory," as such term is defined in the
Uniform Commercial Code.
"Investment Property" shall mean any "certificated security," or
"uncertificated security" as such terms are defined in the Uniform Commercial
Code.
"Patents" shall mean any of Debtor's patents and patent applications,
including, without limitation, the inventions and improvements described and
claimed therein, all patentable inventions and the reissues, divisions,
continuation, renewals, extensions and continuations-in-part of any of the
foregoing, and all income, royalties, damages and payments now or hereafter due
or payable under or with respect to any of the foregoing, including, without
limitation, damages and payments for past, present and future infringements of
any of the foregoing and the right to sue for past, present and future
infringements of any of the foregoing.
"Proceeds" shall mean "proceeds," as such term is defined in the
Uniform Commercial Code and shall include, without limitation, (a) any and all
proceeds of any insurance, indemnity, warranty or guaranty payable with respect
to any of the Collateral, (b) any and all payments, in any form whatsoever, made
or due and payable from time to time in connection with any confiscation,
condemnation, seizure or forfeiture of all or any part of the Collateral by any
governmental authority, and (c) any and all other amounts from time to time paid
or payable under, in respect of or in connection with any of the Collateral.
"Trademarks" shall mean any of Debtor's trademarks, trade names,
corporate names, company names, business names, fictitious business names, trade
styles, service marks, logos, other business identifiers, prints and labels on
which any of the foregoing have appeared or appear, all registrations and
recordings thereof, and all applications in connection therewith and renewals
thereof, and all income, royalties, damages and payments now or hereafter due or
payable under or with respect to any of the foregoing, including, without
limitation, damages and payments for past, present and future infringements of
any of the foregoing and the right to sue for past, present and future
infringements of any of the foregoing.
2
<PAGE>
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in
effect from time to time in the State of Tennessee; provided, however, if, by
reason of mandatory provisions of law, the attachment, perfection or priority of
Secured Party's security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of
Tennessee, the term "Uniform Commercial Code" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions
hereof relating to such attachment, perfection or priority and for purposes of
definitions related to such provisions.
2. Grant of Security Interest. As collateral security for the Loan,
Debtor hereby pledges and grants to Secured Party a lien on and security
interest in and to all of Debtor's right, title and interest in the following
property and interests in property, whether now owned or hereafter acquired by
Debtor and wherever located (collectively, the "Collateral"):
(a) all Accounts;
(b) all Inventory;
(c) all General Intangibles;
(d) all Equipment;
(e) all Documents;
(f) all Contracts, including, without limitation, that certain Cross-
License Agreement, dated as of December 30, 1994, between Harrah's Interactive
Entertainment Company, a Nevada corporation and an affiliate of Secured Party
("HIEC"), and Sky Games International Ltd., a Bermuda exempted company f/k/a
Creator Capital Inc., an affiliate of SGIH ("SGI"), a copy of which is attached
as Exhibit A hereto;
(g) all Goods;
(h) all Investment Property;
(i) all bank and depositary accounts maintained by Debtor, all funds
on deposit therein, all investments arising out of such funds, all claims
thereunder or in connection therewith, and all cash, securities, rights and
other property at any time and from time to time received, receivable or
otherwise distributed in respect of such accounts; and
(j) all other tangible and intangible property of Debtor, including
without limitation, all Proceeds, products, accessions, rents, profits, income,
benefits, substitutions, additions and replacement of and to any of the property
described in this Section 2 including, without limitation, any proceeds of
insurance thereon and all rights, claims and benefits against any person
relating thereto) and all books, correspondence files, records, invoices and
other papers, including, without limitation, all tapes, cards, computer runs,
computer programs, computer files and other papers, documents and records in the
possession or under the control of Debtor or any computer bureau or service
company from time to time acting for Debtor.
3. Representations, Warranties and Covenants of Debtor. Debtor represents
and warrants to, and covenants with, Secured Party as follows:
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(a) This Agreement is effective to create in favor of Secured Party a
valid security interest in and lien upon all of Debtor's right, title and
interest in and to the Collateral and, upon the filing of appropriate Uniform
Commercial Code financing statements, such security interest will be duly
perfected in all of the Collateral.
(b) Debtor has full right, power and authority to assign and transfer
its interest in the Collateral to Secured Party and to confer upon Secured Party
the rights, interests, powers and authorities herein granted and conferred.
(c) Debtor's interests in the Collateral are not subject to any
claim, setoff, lien or encumbrance of any nature, except as created hereby.
4. Agreements of Debtor. Debtor hereby agrees with Secured Party as
follows:
(a) Other Documents and Actions. Debtor shall give, execute, deliver,
file or record any financing statement, notice, instrument, agreement or other
document that may be necessary or desirable in the reasonable judgment of
Secured Party to create, preserve, perfect or validate the security interest
granted pursuant hereto or to enable Secured Party to exercise and enforce the
rights of Secured Party hereunder with respect to such security interest.
(b) Books and Records. Debtor shall maintain complete and accurate
books and records of the Collateral, including, without limitation, a record of
all payments received and all credits granted with respect to the Collateral and
all other dealings with the Collateral. Debtor shall permit any representative
of Secured Party to inspect such books and records at any time during reasonable
business hours and shall provide photocopies thereof to Secured Party upon the
request of Secured Party.
(c) Further Identification of Collateral. Debtor shall, when and as
often as reasonably requested by Secured Party, furnish to Secured Party,
statements and schedules further identifying and describing the Collateral and
such other reports in connection with the Collateral as Secured Party may
reasonably request, all in reasonable detail.
(d) Changes in Name; Location. Debtor shall notify Secured Party
promptly in writing prior to any change in Debtor's name, identity or corporate
structure or the proposed use by Debtor of any new trade name or fictitious
business name.
(e) Collections. Until notice from Secured Party to the contrary,
given at any time during any Default, Debtor shall, at its own expense, endeavor
to collect all amounts due with respect to any of the Accounts and shall take
such action with respect to such collection as Debtor may deem advisable.
5. Remedies. During the period of any Default:
(a) Secured Party shall have, in addition to other rights and
remedies provided for herein or otherwise available to it, all of the rights and
remedies of a Secured Party upon a default under the Uniform Commercial Code
(whether or not the Uniform Commercial Code applies to the affected Collateral)
and Secured Party may, without notice, demand or legal process of any kind
except as may be required by law, at any time or times (i) enter Debtor's
premises and take physical possession of the Collateral and maintain such
possession on Debtor's premises or remove the Collateral or any part thereof to
such other place or places as
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Secured Party may desire, (ii) require Debtor to, and Debtor hereby agrees to,
assemble the Collateral as directed by Secured Party and make it available to
Secured Party at a place to be designated by Secured Party which is reasonably
convenient to Secured Party and Debtor and (iii) either (x) retain the
Collateral for Secured Party's own use and benefit, or (y) without notice except
as specified below, sell, lease, assign, grant an option or options to purchase
or otherwise dispose of the Collateral or any part thereof at public or private
sale, at any exchange, broker's board or at any of the offices of Secured Party
or elsewhere, for cash, on credit or for future delivery, and upon such other
terms as Secured Party may deem commercially reasonable. Secured Party shall not
be obligated to make any sale of Collateral regardless of notice of sale having
been given. Secured Party may adjourn any public or private sale from time to
time by announcement at the time and place fixed therefor and such sale may,
without further notice, be made at the time and place to which it was so
adjourned;
(b) Secured Party may make any reasonable compromise or settlement
deemed desirable with respect to any of the Collateral and may extend the time
of payment, arrange for payment in installments or otherwise modify the terms
of, any of the Collateral; and
(c) Secured Party may, in the name of Secured Party or in the name of
Debtor or otherwise, demand, sue for, collect or receive any money or property
at any time payable or receivable on account of or in exchange for any of the
Collateral, but shall be under no obligation to do so;
6. Deficiency; Application of Proceeds. If the proceeds of sale,
collection or other realization of or upon the Collateral are insufficient to
cover the costs and expenses of such realization and the payment in full of the
amounts owed under the Notes, Debtor shall remain liable for any deficiency. The
proceeds of any collection, sale or other realization of all or any part of the
Collateral shall be applied: first, to payment of all expenses payable or
reimbursable by Debtor under the Notes; second, to payment of all accrued unpaid
interest on the Notes; third, to payment of principal of the Notes; and last,
any remainder shall be for the account of and paid to Debtor.
7. Power of Attorney. Debtor hereby irrevocably constitutes and appoints
Secured Party, with full power of substitution, as its true and lawful attorney-
in-fact with full irrevocable power and authority in the place and stead of
Debtor and in the name of Debtor or in its own name, from time to time in the
discretion of Secured Party, after an uncured Event of Default, solely for the
purpose of carrying out the terms of this Agreement, to take any and all
appropriate action and to execute and deliver any and all documents and
instruments which may be necessary to accomplish the purposes of this Agreement.
8. Termination. This Agreement and the liens and security interests
granted hereunder shall terminate upon the satisfaction of the obligation under
the Note, including by way of conversion of amounts outstanding under the Note
into shares of common stock, Cdn. $.01 par value, of SGI in connection with the
amalgamation of IEL with and into SGIH.
9. Further Assurances. At any time and from time to time, upon the
request of Secured Party, and at the sole expense of Debtor, Debtor shall
promptly and duly execute and deliver any and all such further instruments,
documents and agreements and take such further actions as Secured Party may
reasonably require in order for Secured Party to obtain the full benefits of
this Agreement, including, without limitation, using Debtor's best efforts to
secure all consents and approvals necessary or appropriate for the assignment to
Secured Party of any Collateral held by Debtor or in which Debtor has any rights
not heretofore assigned, the filing of any financing or continuation statements
under the Uniform Commercial Code with respect to the Liens and security
interests granted hereby, transferring Collateral to Secured Party's possession
if a security interest in such Collateral can be perfected by possession,
placing the interest of Secured Party as lienholder
5
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on the certificate of title of any motor vehicle and obtaining waivers of liens
from landlords and mortgagees. Debtor further hereby authorizes Secured Party to
file any such financing or continuation statement without the signature of
Debtor to the extent permitted by law.
10. Consent and Agreement of HIEC and SGI. HIEC's and SGI's consent to
this Security Agreement and to Debtor's encumbering its interest in the
Collateral as provided herein and HIEC's and SGI's agreement to the provisions,
terms and conditions hereof is evidenced by the Consent and Agreement of HIEC
and the Consent and Agreement of SGI attached hereto and made a part hereof.
11. No Assumption by Secured Party. Neither this Security Agreement nor
any action or actions on the part of Secured Party shall constitute an
assumption of any obligation, duty or liability on the part of Secured Party and
Debtor shall continue to be liable for all its obligations in connection with
the Collateral, Debtor hereby agreeing to perform each and all of its
obligations under the Collateral and to indemnify and hold Secured Party free
and harmless from and against any loss, cost, liability, damage or expense
(including without limitation attorneys fees and expenses) resulting from any
failure of Debtor to so perform.
12. General.
(a) No failure of Secured Party to avail itself of any of the terms
and conditions of this Security Agreement for any period of time shall be
construed to be a waiver of any of its rights hereunder and Secured Party shall
have the full right and authority to enforce this Assignment or any of its terms
at any time or times that Secured Party shall deem fit.
(b) Secured Party shall incur no liability to Debtor if any action
taken by Secured Party or in its behalf in good faith pursuant to this
Assignment or any of the other Financing Agreements shall prove to be in whole
or in part inadequate or invalid.
(c) All notices and other communications to be delivered or made
hereunder shall be in writing and shall be (i) delivered personally, (ii) sent
by postage prepaid certified mail, return receipt requested, (iii) sent by
express courier service, or (iv) sent by facsimile at the following addresses or
at such other addresses as shall be described in written notice as provided
herein:
Debtor: Interactive Entertainment Limited
595 Howe Street, Suite 1115
Vancouver, British Columbia V6C 2T5
Facsimile No.: 604-687-8678
With a copy to: Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606
Attn: Andrew W. McCune, Esq.
Facsimile No.: 312-715-4800
Secured Party: Harrah's Interactive Investment Corporation
1023 Cherry Road
Memphis, Tennessee 38117
Attn: John M. Boushy
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Facsimile No.: 901-762-8914
With a copy to: Harrah's Entertainment, Inc.
1023 Cherry Road
Memphis, Tennessee 38117
Attn: John W. McConomy, Esq.
Facsimile No.: 901-762-8735
All such notices and communications shall be effective, if mailed, upon
expiration of the fifth (5th) day following the date of mailing (except that any
notice of change of address shall be effective only upon receipt by the party to
whom such notice is addressed), and if delivered personally or delivered by
courier, upon receipt or refusal of delivery and if by facsimile, upon the first
business day following confirmed transmission; provided such notice or
communication is also mailed in accordance with the foregoing requirements
within two (2) days of delivery by facsimile.
(d) This Security Agreement and the other Financing Agreements shall
be governed by and construed in accordance with the laws of the State of
Tennessee. Debtor and Secured party further agree that the determination of any
action relating to this Security Agreement or any of the Financing Agreements
delivered in favor of Secured Party shall be either an appropriate court of the
State of Tennessee or the United States District Court for the Western District
of Tennessee.
(e) All of the rights of Secured Party under this Assignment shall be
cumulative and shall inure to the benefit of and may be enforced by Secured
Party and its successors and assigns. All obligations of Debtor, HIEC and SGI
hereunder shall be binding upon the legal representatives, successors and
Debtors of Debtor, HIEC and SGI.
(f) The section headings in this Security Agreement are for
convenience of reference only, are not to be considered in part hereof and shall
not limit or otherwise affect any of the terms hereof.
(g) This Security Agreement may be executed in any number of
counterparts each of which shall be deemed an original and all of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, Debtor has executed this Security Agreement as of the
date first above written.
INTERACTIVE ENTERTAINMENT LIMITED
By: /s/ Malcolm P. Burke
--------------------
Name: Malcolm P. Burke
----------------
Title: Vice President and Director
---------------------------
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EXHIBIT A
CROSS-LICENSE AGREEMENT
8
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CONSENT AND AGREEMENT
OF
SKY GAMES INTERNATIONAL LTD.
With respect to its interest in the Cross-License Agreement (the
"Agreement") referred to in the attached Security Agreement (the "Security
Agreement") from Interactive Entertainment Limited, a Bermuda exempted company
("Assignor"), to and for the benefit of Sky Games International Ltd., a Bermuda
exempted company f/k/a Creator Capital Inc., a Yukon Territory corporation
("Assignee"), the undersigned ("SGI") hereby: (a) consents to Assignor's
assignment of all of its right, title and interest in the Agreement as provided
in the Assignment and to Assignor's encumbering its interest in the Agreement as
provided therein; (b) confirms that the Exhibit A attached to the Agreement is a
true, correct and complete copy of the Agreement, the Agreement is in full force
and effect and constitutes and represents the entire agreement between Assignor
and SGI with respect to the rights and licenses contained therein, there have
been no modifications or additions thereto, written or oral, and there exists no
breach, default or event of default which, with the giving of notice or the
passage of time or both, would constitute a breach thereunder; (c) agrees to all
of the provisions, terms and conditions set forth in the Assignment as they
relate to SGI; (d) agrees to give the notices and certificates and observe and
perform the agreements of SGI provided therein; and (e) agrees to recognize
Assignee under the Agreement for all purposes as though Assignee were an
original party thereunder upon Assignee's assumption of the Agreement pursuant
to Section 5 or 6 of the Assignment.
IN WITNESS WHEREOF, SGI has executed this Consent and Agreement as of the
date first set forth in the Assignment.
SKY GAMES INTERNATIONAL LTD.
By: /s/ Malcolm P. Burke
-------------------------
Name: Malcolm P. Burke
-----------------------
Title: President
----------------------
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CONSENT AND AGREEMENT
OF
HARRAH'S INTERACTIVE ENTERTAINMENT COMPANY
With respect to its interest in the Cross-License Agreement (the
"Agreement") referred to in the attached Security Agreement (the "Security
Agreement") from Interactive Entertainment Limited, a Bermuda exempted company
("Assignor"), to and for the benefit of Harrah's Interactive Investment Company,
a Nevada corporation ("Assignee"), the undersigned ("HIEC") hereby: (a) consents
to Assignor's assignment of all of its right, title and interest in the
Agreement as provided in the Assignment and to Assignor's encumbering its
interest in the Agreement as provided therein; (b) confirms that the Exhibit A
attached to the Agreement is a true, correct and complete copy of the Agreement,
the Agreement is in full force and effect and constitutes and represents the
entire agreement between Assignor and HIEC with respect to the rights and
licenses contained therein, there have been no modifications or additions
thereto, written or oral, and there exists no breach, default or event of
default which, with the giving of notice or the passage of time or both, would
constitute a breach thereunder; (c) agrees to all of the provisions, terms and
conditions set forth in the Assignment as they relate to HIEC; (d) agrees to
give the notices and certificates and observe and perform the agreements of HIEC
provided therein; and (e) agrees to recognize Assignee under the Agreement for
all purposes as though Assignee were an original party thereunder upon
Assignee's assumption of the Agreement pursuant to Section 5 or 6 of the
Assignment.
IN WITNESS WHEREOF, HIEC has executed this Consent and Agreement as of the
date first set forth in the Assignment.
HARRAH'S INTERACTIVE ENTERTAINMENT COMPANY
By: /s/ John M. Boushy
---------------------------
Name: John M. Boushy
-------------------------
Title: Senior Vice President
------------------------
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CROSS-LICENSE AGREEMENT
THIS CROSS-LICENSE AGREEMENT (this "Agreement") is made and entered into as
of the ____ of December 1994, by and among Creator Capital Inc., a Yukon
Territory corporation ("CCI"), Interactive Entertainment Limited, a Bermuda
exempted company ("the Venture"), and Harrah's Interactive Entertainment
Company, a Nevada corporation (the "Manager"). Sky Games International, Corp.
("SGIC"), a Nevada corporation and an Affiliate (as defined below) of CCI, and
SGI Holding Corporation Limited ("SGI Holding"), a Bermuda exempted company and
an Affiliate of CCI, are also executing this Agreement solely for the purposes
of making the representations, warranties, covenants and agreements specifically
made by them in Sections 5 and 8 of this Agreement and to become bound by the
provisions of Sections 7 and 10 of this Agreement, and neither SGIC nor SGI
Holding shall have any other liability or obligation under this Agreement. As
used herein, the term "Affiliate" shall mean an entity, including without
limitation a general partnership or a business trust, controlling, controlled by
or under common control with another entity (except that the Venture shall not
be deemed to be an Affiliate of either SGI Holding or the Manager or any of
their respective Affiliates).
W I T N E S S E T H :
WHEREAS, SGIC has purchased and/or developed software, in both object code
and source code format and including any and all documentation related thereto,
in connection with the development of a computer-based interactive video system
for the operation of gaming and related entertainment activities on-board
aircraft and other venues or locations (which software is described generally on
Schedule A attached hereto and hereby made a part hereof, and which is
memorialized in its current form on diskette(s) attached hereto as Exhibit 1)
and certain additional inventions (whether or not patentable), know-how, trade
secrets and other proprietary information related to or in connection with such
software (collectively, the "Software");
WHEREAS, CCI has acquired from SGIC all right, title and interest in and to
the Software pursuant to an Assignment Agreement (the "SGIC Assignment"), a copy
of which is attached hereto as Exhibit 2;
WHEREAS, the Venture has been recently formed as a Bermuda exempted company
by SGI Holding, which owns 80% of the issued and outstanding stock of the
Venture, and Harrah's Interactive Investment Company, a Nevada corporation and
an Affiliate of the
<PAGE>
Manager, which owns the remaining 20% of the issued and outstanding stock of the
Venture, to develop, implement and operate gaming and other operations in the
pursuit of the "Company Business" (as defined in that certain Shareholders
Agreement, of even date herewith, among SGI Holding, Harrah's Interactive
Investment Company and the Venture, and as such Shareholders Agreement may be
amended from time to time (the "Shareholders Agreement"));
WHEREAS, the Venture has determined that it is in its best interest to
obtain a license to use the Software, and CCI desires to license the Software to
the Venture, on the terms and conditions stated herein;
WHEREAS, it is intended by the Venture that the further development of the
Software and the exploitation of the Software on behalf of the Venture primarily
will be undertaken by the Manager, acting as the manager of the Venture's
business pursuant to a Management Agreement of even date herewith, between the
Venture and the Manager (the "Management Agreement");
WHEREAS, to the extent that the Venture develops or acquires improvements
to the Software, CCI desires to obtain license rights thereto for the purpose of
engaging in business opportunities proposed by SGI Holding or its Affiliates
which are neither undertaken by the Venture nor in conflict with the business of
the Venture (as provided in the Shareholders Agreement), and the Venture desires
to license such rights to CCI, on the terms and conditions stated herein; and
WHEREAS, the Manager desires to obtain license rights to the Software and
the Venture Technology (as defined below) for the purpose of engaging in
business opportunities proposed by the Manager or its Affiliates which are
neither undertaken by the Venture nor in conflict with the business of the
Venture (as provided in the Shareholders Agreement), and CCI and the Venture
desire to license such rights to the Manager, on the terms and conditions stated
herein.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agrees as follows:
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1. License from CCI to the Venture.
(a) License of Software. CCI hereby grants to the Venture an
exclusive (subject to the licenses and rights of use provided for in Sections 2
and 3), worldwide, royalty-free license to the Software for use by the Venture
in the development, implementation and operation of gaming and other pursuits
within the Company Business as such Company Business from time to time shall be
determined by the Venture.
(b) Improvements. The Venture acknowledges and understands that the
Software is not complete and that further development of the Software is
necessary for the implementation and operation of gaming. The Venture also
acknowledges and agrees that any further development, modification, improvement,
upgrading and maintenance of the Software (collectively, "Improvements") for use
within the Company Business shall be the sole responsibility of the Venture.
Except as otherwise provided herein, the Venture shall be the sole and exclusive
owner of all right, title and interest in and to any Improvements made by the
Manager on behalf of the Venture and of all copyrights (including audiovisual
copyrights), patents, patent applications, trademarks, trade secrets, rights of
priority, design rights and other intangible rights therein (collectively,
"Intellectual Property Rights"), and the Manager hereby assigns all such
Improvements and all Intellectual Property Rights therein to the Venture.
Notwithstanding any other provision of this Agreement to the contrary, CCI and
the Venture hereby acknowledge and agree that none of the computer or other
systems of the Manager or any of its Affiliates, as they now exist or as they
may be developed from time to time, nor any interfaces or other modifications
developed to facilitate the operation of the Software in conjunction with such
systems of the Manager or any of its Affiliates (even if the costs of developing
such interfaces or modifications are paid for by the Venture), shall be deemed
to be the property of CCI or the Venture or otherwise deemed to be Improvements,
all such systems and interfaces and modifications shall remain the property of
the Manager or its Affiliates, and CCI and the Venture hereby assign all rights
in all such systems and interfaces and modifications, including but not limited
to Intellectual Property Rights, to the Manager. In the event that the Venture
(or the Manager acting on behalf of the Venture) retains any third party for the
purpose of creating or developing Improvements, the Venture or the Manager shall
require such third party to assign to and transfer to the Venture in writing all
right, title and interest to such Improvements and all Intellectual Property
Rights therein (including without limitation software source code), unless CCI
otherwise shall give its prior written consent, which consent shall not be
unreasonably withheld, conditioned or delayed. CCI shall
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<PAGE>
neither license others to use the Software, nor use the Software for the benefit
of itself, any of its Affiliates or any other party, except as set forth in
Sections 2 and 3.
(c) Disclaimer of Warranties. EXCEPT AS SET FORTH IN SECTION 5(a),
ALL SOFTWARE PROVIDED AND LICENSED UNDER THE SECTION 1 OR UNDER SECTION 3 IS ON
AN "AS IS" BASIS, AND NEITHER CCI NOR ANY OF ITS AFFILIATES ASSUMES ANY
RESPONSIBILITY FOR THE RESULTS OR CONSEQUENCES THAT MAY BE OBTAINED FROM THE USE
OF THE SOFTWARE, INCLUDING WITHOUT LIMITATION ANY ECONOMIC RESULTS OR
CONSEQUENCES OR ANY INJURIES TO PERSONS OR PROPERTY. ON BEHALF OF ITSELF AND
ITS AFFILIATES, CCI HEREBY DISCLAIMS IN THEIR ENTIRETY ANY AND ALL IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
(d) Right to Modify. The Venture and any third party acting on
behalf of the Venture (through the Manager during the term of the Management
Agreement) shall have the unrestricted right to modify, and create derivative
works based upon, the Software as the Venture or the Manager may desire and to
merge any portion of the Software into any other software, provided that any
portion of the Software so modified shall remain subject to the terms and
conditions of this Agreement. The Venture (through the Manager during the term
of the Management Agreement) may, but shall not be obligated to, contract with
CCI or any of its Affiliates to develop Improvements on terms and conditions
mutually agreeable to the Venture and CCI or its Affiliate.
(e) Right to Make and Distribute Copies. The Venture and any third
party acting on behalf of the Venture (including the Manager during the term of
the Management Agreement) shall have the right to make and distribute copies of
the Software and Improvements to the extent deemed necessary by or on behalf of
the Venture and to the extent required for archival back-up or disaster recovery
purposes, provided that each such copy shall remain subject to the terms and
conditions of this Agreement.
(f) Sublicenses. The Venture (through the Manager during the term of
the Management Agreement) shall have the right to grant sublicenses to other
(including to the Manager) to use the Software, provided that no such
sublicensee shall have the right to grant further sublicenses (sub-sublicenses)
without the prior written consent of CCI, which shall not be unreasonably
withheld, conditioned or delayed, and provided further that any sublicense
granted under this subsection shall be subject to this Agreement and shall not
include any
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<PAGE>
terms or conditions inconsistent with this Agreement. Any such sublicensee
shall be permitted to exercise any right provided to the Venture in this
Section 1 to the extent that the Venture so authorizes such sublicensee in
writing.
(g) Access to Source Code. The Venture (through the Manager during
the term of the Management Agreement) and such contractors as the Venture or the
Manager may retain shall have complete access to all source code included in the
Software for all purposes within the scope of the license rights granted hereby,
subject only to the confidentiality provisions of Section 6 hereof.
(h) Related Rights. To the extent CCI has Intellectual Property
Rights related to the Software that might otherwise be infringed by the
Venture's or the Manager's use in any manner of the Software within the license
granted in this Section 1 or in Section 3, respectively, CCI grants to the
Venture and the Manager, as the case may be, and their respective sublicensees
and customers, a royalty-free, worldwide, exclusive (subject to the licenses and
rights of use provided for in Sections 2 and 3) license to such Intellectual
Property Rights to enable the Venture, the Manager and their respective
sublicensees and customers to exercise the license rights granted in this
Section 1 and in Section 3, respectively.
2. License from the Venture to CCI.
(a) License of the Venture Technology. The Venture hereby grants to
CCI a nonexclusive, worldwide license to all Improvements, including any
Improvements to prior Improvements, if any (collectively, the "Venture
Technology"), which licensed rights may only be used or commercially exploited
to the extent, and only to the extent, that such use or exploitation is
specifically excluded from the Company Business through the exercise by Harrah's
Interactive Investment Company of any right of disapproval under Section
1.6(a)(xii) or Section 3.2(b) of the Shareholders Agreement, subject in each
case to the proviso set forth in each such section of the Shareholders
Agreement, and provided that the excluded use is actually undertaken by CCI or a
Permitted CCI Sublicensee (as defined below) within a reasonable time following
such disapproval. Such exploitation or use may not be expanded beyond the
specific use or exploitation specifically disapproved by Harrah's Interactive
Investment Company. The Venture hereby covenants and agrees not to grant any
license to the Venture Technology to any other person for use within the above-
described field of use without the prior written consent of CCI, which shall not
be unreasonably withheld, conditioned or delayed if and to the extent that CCI
is not making use of such license rights and does not then contemplate making
use of such license rights within a reasonable time.
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<PAGE>
CCI shall be permitted to use, modify and create derivative works based upon the
Software in connection with its exploitation or use of the Venture Technology
permitted hereby; provided, however, that no such use or exploitation shall
violate or conflict with the terms of Section 3.4 of the Shareholders Agreement.
Subject to Section 4(d), CCI shall pay or cause to be paid to the Venture
royalties for the use of the Venture Technology at the rate of two percent (2%)
of the Gross Revenues (as defined below) derived from such use during the term
of such license by CCI or any Permitted CCI Sublicensee. The provisions of
Section 4 shall apply to the calculation and payment of such royalties.
(b) Disclaimer of Warranties. EXCEPT AS SET FORTH IN SECTION 5(d), ALL
VENTURE TECHNOLOGY PROVIDED AND LICENSED UNDER THIS SECTION 2 OR UNDER SECTION 3
IS ON AN "AS IS" BASIS, AND THE VENTURE ASSUMES NO RESPONSIBILITY FOR THE
RESULTS OR CONSEQUENCES THAT MAY BE OBTAINED FROM THE USE OF THE VENTURE
TECHNOLOGY, INCLUDING WITHOUT LIMITATION ANY ECONOMIC RESULTS OR CONSEQUENCES
OR ANY INJURIES TO PERSONS OR PROPERTY. THE VENTURE HEREBY DISCLAIMS IN THEIR
ENTIRETY ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
(c) Right to Modify. In connection with its permitted exploitation of
the Venture Technology, CCI and any third party acting on its behalf shall have
the unrestricted right to modify, and create derivative works based upon, the
Venture Technology as CCI may desire and to merge any portion of such Venture
Technology into any other software or technology, provided that any portion of
the Venture Technology so modified shall remain subject in all respects to the
terms and conditions of this Agreement.
(d) Right to Make and Distribute Copies. In connection with its
permitted exploitation of the Venture Technology, CCI and any third party acting
on its behalf shall have the right to make and distribute copies of the Venture
Technology to the extent deemed necessary by or on behalf of CCI and to the
extent required for archival back-up or disaster recovery purposes, provided
that each such copy shall remain fully subject to the terms and conditions of
this Agreement.
(e) Sublicenses. In the event that CCI is permitted under Section 2(a)
to exploit any Software and its license rights with respect to any of the
Venture Technology, CCI shall have the right to grant a license to such Software
and a sublicense to such Venture Technology
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to one or more of CCI's Affiliates or one or more ventures or entities in which
CCI or any of its Affiliates had an interest ("Permitted CCI Sublicensees"),
provided that no such Permitted CCI Sublicensee shall have the right to grant
further sublicenses (sub-sublicenses) to any person or entity (other than
another Permitted CCI Sublicensee) without the prior written consent of the
Venture, and provided further that any license or sublicense granted under this
subsection shall be subject to this Agreement and shall not include any terms or
conditions inconsistent with this Agreement. Any such sublicensee shall be
permitted to exercise any right provided to CCI in this Section 2 to the extent
that CCI so authorizes such sublicensee in writing. A copy of each sublicense
entered into pursuant to this Section shall be given to the Venture promptly
following its execution.
(f) Access to Source Code. To the extent that the Venture obtains
ownership of or access to any source code included in the Venture Technology,
CCI and such contractors as it may retain shall have complete access to such
source code for all purposes within the scope of the license rights granted
hereby, subject only to the confidentiality provisions of Section 6 hereof.
(g) Ownership of Modifications and Derivative Works. CCI shall be the
sole and exclusive owner of all modifications to or derivative works based upon
the Venture Technology and the Software made by or on behalf of CCI and of all
Intellectual Property Rights therein.
3. Licenses from the Venture and CCI to the Manager.
(a) Licenses of the Venture Technology and Software. The Venture
hereby grants to the Manager a nonexclusive, worldwide license to the Venture
Technology, and CCI hereby grants to the Manager a nonexclusive, worldwide
royalty-free license to the Software, which licensed rights may only be used or
commercially exploited to the extent, and only to the extent, that such use or
exploitation is specifically excluded from the Company Business through the
exercise by SGI Holding of any right of disapproval under Section 3.2(b) of the
Shareholders Agreement, subject to the proviso set forth in such section of the
Shareholders Agreement, and provided that the excluded use is actually
undertaken by the Manager or a Permitted Manager Sublicensee (as defined below)
within a reasonable time following such disapproval. Such exploitation or use
may not be expanded beyond the specific use or exploitation specifically
disapproved by SGI Holding nor shall such use or exploitation violate or
conflict with the terms of Section 3.4 of the Shareholders Agreement. The
Venture and CCI hereby severally covenant and agree not to grant any license to
the Venture Technology
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or the Software, respectively, to any other person for use within the
above-described field of use without the prior written consent of the Manager.
Subject to Section 4(d), the Manager shall pay or cause to be paid to the
Venture royalties for the use of the Venture Technology at the rate of two
percent (2%) of the Gross Revenues (as defined below) derived from such use
during the term of such license by the Manager or any Permitted Manager
Sublicensee. The provisions of Section 4 shall apply to the calculation and
payment of such royalties.
(b) Right to Modify. In connection with its permitted exploitation of
the Venture Technology and the Software, the Manager and third party acting on
its behalf shall have the unrestricted right to modify, and create derivative
works based upon, the Venture Technology or the Software as the Manager may
desire and to merge any portion of the Venture Technology or the Software into
any other software or technology, provided that any portion so modified shall
remain subject in all respects to the terms and conditions of this Agreement.
(c) Right to Make and Distribute Copies. In connection with its
permitted exploitation of the Venture Technology and Software, the Manager and
any third party acting on its behalf shall have the right to make and distribute
copies of the Venture Technology and the Software to the extent deemed necessary
by or on behalf of the Manager and to the extent required for archival back-up
or disaster recovery purposes, provided that each such copy shall remain fully
subject to the terms and conditions of this Agreement.
(d) Sublicenses. In the event that the Manager is permitted under
Section 3(a) to exploit its license rights with respect to any the Venture
Technology and Software, the Manager shall have the right to grant a sublicense
to such Venture Technology and Software to one or more of the Manager's
Affiliates or one or more ventures or entities in which the Manager or any of
its Affiliates has an interest ("Permitted Manager Sublicensees"), provided that
no such Permitted Manager Sublicensee shall have the right to grant further
sublicenses (sub-sublicenses) to any person or entity (other than another
Permitted Manager Sublicensee) without the prior written consent of the Venture,
and provided further that any sublicense granted under this subsection shall be
subject to this Agreement and shall not include any terms or conditions
inconsistent with this Agreement. Any such sublicensee shall be permitted to
exercise any right provided to the Manager under this Section 3 to the extent
that the Manager so authorizes such sublicensee in writing. A copy of each
sublicense entered into pursuant to this Section shall be given to each of the
Venture and CCI promptly following its execution.
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(e) Access to Source Code. The Manager and such contractors as it may
retain shall have complete access to all source code included in the Software
and (to the extent that the Venture obtains ownership of or access to any source
code included in the Venture Technology) the Venture Technology for all purposes
within the scope of the license rights granted hereby, subject only to the
confidentiality provisions of Section 6 hereof.
(f) Ownership of Modifications and Derivative Works. The Manager
shall be the sole and exclusive owner of all modifications to or derivative
works based upon the Venture Technology and the Software made by or on behalf of
the Manager and of all Intellectual Property Rights therein.
4. Provisions Generally Applicable to Royalty Payments.
(a) "Gross Revenue" Defined. As used herein, the term "Gross
Revenues" means all revenues of any kind derived by CCI or the Manager, as the
case may be, directly or indirectly, from the exploitation of the Venture
Technology and/or Software pursuant to Section 2 or 3 hereof, respectively,
determined in accordance with generally accepted accounting principles,
consistently applied, including without limitation: in the case of gaming
revenues, "gross revenues" as defined in Nevada Revised Statutes Section
413.0161 (other than subsection 2(b) thereof) as of the date of this Agreement
(and which for purposes of this Agreement shall be determined before the
distribution of any share of gross revenues to any party (such as an operator of
an airline, cruise ship, hotel or railroad (by way of illustration and not
limitation)) with which such licensee enters into an agreement for the operation
of gaming); gross receipts from merchandise sales in which such licensee is the
seller; rental or other payments from any lessee, consignee or concessionaires;
fees for acting as a sales or other agent on behalf of a third party; and any
monies collected from patrons as all or part of a charge for use of any gaming
devices; and in the case such licensee (or any permitted sublicensee thereof)
grants any sublicense as permitted by Section 2 or 3, respectively, "Gross
Revenues" shall be determined by reference to the revenues of such sublicensee
and not by reference to the revenues or receipts of the sublicensor from such
sublicensee. For purposes of the payment of royalties hereunder, "Gross
Revenues" realized in any currency than than U.S. Dollars shall be deemed
converted into U.S. Dollars using the selling rate of exchange prevailing as of
the opening of trading in New York, New York, on the date of payment of such
royalties; provided, however, that if the payment is made after the due date
therefor, the rate of exchange shall be the rate so prevailing on the date of
payment or the due date, whichever results in the higher amount of payment of
royalties.
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(b) Payment of Royalties. Royalties payable to the Venture hereunder
shall be due and payable in United States currency on a quarterly basis on or
before the forty-fifth (45th) day following the end of each calendar quarter.
Each royalty payment shall be accompanied by a statement setting forth in
reasonable detail the basis for and determination of the royalties due. The
books and records of the licensee or its sublicensee relating to its Gross
Revenues for any calendar year shall be preserved for a period of not less than
eighteen (18) months after the end of such calendar year, and such books and
records will be available for inspection by the Venture and its designated
agents, accountants and attorneys during business hours upon reasonable advance
notice. The Venture shall have the right to audit the Gross Revenues of the
licensee and/or its sublicensee(s) on a not more frequent than annual basis for
purposes of determining compliance with the royalty obligations hereunder. Any
such audit shall be paid for by the Venture, unless such audit results in an
increase in the annual amount of royalties payable hereunder of five percent
(5%) or more, in which case the licensee or its sublicensee(s) shall pay for the
costs of such audit. Any such audit shall be conducted by the accounting firm
then responsible for auditing the financial statements of the Venture (unless
otherwise mutually agreed upon by the Venture and the licensee), and the
determination of such auditors shall be final and binding on all parties in the
absence of manifest error. Any adjustment payment by or to the Venture resulting
from such an audit shall be made, without interest or penalty except as provided
below, to the appropriate party within thirty (30) days after the delivery of
the audit report to the licensee and the Venture. In the event that any payment
due under this Section 4(b) is not made within fifteen (15) days of its due
date, such payment shall accrue interest at the lesser of the prime rate charged
from time to time by Citibank, N.A. to its best customers on unsecured
borrowings, plus two (2) percentage points, or the highest rate permitted by
applicable law. Notwithstanding the foregoing, no royalty payment payable in
respect of any calendar year may be challenged, through audit or otherwise, by
the Venture more than eighteen (18) months after the end of such calendar year.
(c) Liability for Taxes. Royalties payable hereunder shall be
exclusive of all taxes of any nature other than taxes imposed upon the Venture
and determined or measured by reference to its income. Whenever applicable, the
licensee or sublicensee paying any royalties hereunder shall be responsible for
any and all sales, value added, ad valorem, use, excise or similar tax or taxes
payable in respect of such royalties.
(d) Termination of Royalties. The respective obligations on the part
of CCI and the Manager to pay royalties pursuant to Sections 2(a) and 3(a) shall
terminate immediately upon any dissolution of the Venture other than by virtue
of its merger, amalgamation or
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consolidation with another corporation or entity or the sale of all or
substantially all of its assets to another person or entity.
5. Representations and Warranties and Covenants.
(a) Representations and Warranties of CCI, SGIC and SGI Holding. CCI,
SGIC and SGI Holding jointly and severally represent and warrant that:
(i) Neither the Software as supplied hereunder, nor its normal
use for its intended purpose in combination with hardware or other software,
will infringe or violate any third-party patent, copyright, trade secret or
other right; no other rights or licenses concerning the Software have been
granted by any of them to any other party; and, subject to the recordation of
assignments in the United States Copyright Office (which have been executed and
will be filed for recordation within fifteen (15) days after the date of this
Agreement), CCI has good and marketable title to all Software free and clear of
any liens or encumbrances.
(ii) Each of them is a corporation duly organized and validly
existing under the laws of the Yukon Territory of Canada, in the case of CCI,
the laws of the State of Nevada, in the case of SGIC, or the laws of Bermuda as
an exempted company, in the case of SGI Holding.
(iii) Each of them has full legal power and right to carry on its
business as such is now being conducted and as proposed to be conducted. Each of
them has the legal power and right under the laws of the Yukon Territory, Nevada
and Bermuda, in the case of CCI, SGIC and SGI Holding, respectively, to enter
into and perform this Agreement and the transactions contemplated hereby; and
that the consummation of the transactions contemplated by this Agreement will
neither violate nor be in conflict with: (A) any provision of the Articles of
Continuation or Bylaws of CCI, the Articles of Incorporation or Bylaws of SGIC,
or the Memorandum of Association or Bye-Laws of SGI Holding; (B) any agreement
or instrument to which any of them is a party or by which any of them or any of
their Affiliates or any of their respective assets are bound; (C) any judgment,
order, ruling or decrees applicable to any of them or any of their Affiliates as
a party in interest or any law, rule or regulation applicable to any of them or
any of their Affiliates; or (D) any document, agreement or other arrangement
creating or relating to the creation or existence of any of them or any of their
Affiliates.
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(iv) The execution, delivery and performance of this Agreement
and the transactions contemplated hereby have been duly and validly authorized
by all requisite corporate action on the part of each of them.
(v) This Agreement is a valid and binding obligation of each of
them and is enforceable in accordance with its terms against each of them,
subject to and limited by the effect of applicable bankruptcy, insolvency,
fraudulent transfer or conveyance, reorganization, receivership, moratorium or
other similar laws now or hereafter in effect relating to or affecting the
rights of creditors generally.
(vi) No consent of any person not a party to this Agreement and
no consent of any governmental authority is required to be obtained on the part
of any of them in connection with or resulting from the execution or performance
of this Agreement.
(vii) None of them nor any of their Affiliates has incurred any
obligation or liability, contingent or otherwise, for brokers' or finder's fees
in respect of the matters provided for in this Agreement, and if any such
obligation or liability exists, it shall be the sole obligation of such party or
its Affiliate.
(viii) None of the statements, representations or warranties made
by any of them in this Agreement or in any exhibit or certificate delivered
pursuant to this Agreement contains any untrue statement of any material fact or
omits to state any material fact necessary to be stated in order to make the
statements, representations or warranties contained herein or therein not
materially misleading.
(b) Representations and Warranties of the Venture. The Venture
represents and warrants that:
(i) It is a corporation duly organized and validly existing under
the laws of Bermuda as an exempted company.
(ii) It has full legal power and right to carry on its business
as such is now being conducted and as proposed to be conducted, subject to
compliance with any applicable laws and regulations prohibiting or regulating
gaming. It has the legal power and right under the laws of Bermuda to enter into
and perform this Agreement and the transactions contemplated hereby; and that
the consummation of the transactions contemplated by this Agreement will neither
violate nor be in conflict with: (A) any provision of its Memorandum of
Association or Bye-Laws; (b) any agreement or instrument to which it is a party
or by
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which it or any of its assets are bound; (C) any judgment, order, ruling or
decrees applicable to it as a party in interest or any law, rule or regulation
applicable to it; or (D) any document, agreement or other arrangement creating
or relating to its creation or existence.
(iii) The execution, delivery and performance of this Agreement
and the transactions contemplated hereby have been duly and validly authorized
by all requisite corporate action on the part of the Venture.
(iv) This Agreement is a valid and binding obligation of the
Venture and is enforceable in accordance with its terms against it, subject to
and limited by the effect of applicable bankruptcy, insolvency, fraudulent
transfer or conveyance, reorganization, receivership, moratorium or other
similar laws now or hereafter in effect relating to or affecting the rights of
creditors generally.
(v) No consent of any person not a party to this Agreement and
no consent of any governmental authority is required to be obtained on it part
in connection with or resulting from the execution or performance of this
Agreement.
(vi) It has not incurred any obligation or liability, contingent
or otherwise, for brokers' or finder's fees in respect of the matters provided
for in this Agreement.
(vii) None of the statements, representations or warranties made
by any it in this Agreement or in any exhibit or certificate delivered pursuant
to this Agreement contains any untrue statement of any material factor omits to
state any material fact necessary to be stated in order to make the statements,
representations or warranties contained herein or therein not materially
misleading.
(viii) It understands and acknowledges that the Software has not
been tested or verified by any testing laboratory or facility and that neither
CCI nor any of its affiliates has made or hereby makes any representation
or warranty with respect to the performance, adequacy or commercial viability of
any of the Software.
(c) Representations and Warranties of the Manager. The Manager
represents and warrants that:
(i) It is a corporation duly organized and validly existing
under the laws of the State of Nevada.
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(ii) It has full legal power and right to carry on it business as
such is now being conducted and as proposed to be conducted. It has the legal
power and right under the laws of Nevada to enter into and perform this
Agreement and the transactions contemplated hereby; and that the consummation of
the transactions contemplated by this Agreement will neither violate nor be in
conflict with: (A) any provision of its Articles of Incorporation or Bylaws; (B)
any agreement or instrument to which it is a party or by which it or any of its
Affiliates or any of their respective assets are bound; (C) any judgment,
order, ruling or decrees applicable to it or any of its Affiliates as a party in
interest or any law, rule or regulation applicable to it or any of its
Affiliates; or (D) any document, agreement or other arrangement creating or
relating to the creation or existence of it or any of its Affiliates.
(iii) The execution, delivery and performance of this Agreement
and the transactions contemplated hereby have been duly validly authorized by
all requisite corporate action on the part of the Manager.
(iv) This Agreement is a valid and binding obligation of the
Manager and is enforceable in accordance with its terms against it, subject to
and limited by the effect of applicable bankruptcy, insolvency, fraudulent
transfer or conveyance, reorganization, receivership, moratorium or other
similar laws now or hereafter in effect relating to or affecting the rights of
creditors generally.
(v) No consent of any person not a party to this Agreement and
no consent of any governmental authority is required to be obtained on its part
in connection with or resulting from the execution or performance of this
Agreement.
(vi) Neither it nor any of its Affiliates has incurred any
obligation or liability, contingent or otherwise, for brokers' or finder's fees
in respect of the matters provided for in this Agreement, and if any such
obligation or liability exists, it shall be the sole obligation of the Manager
or its Affiliate.
(vii) None of the statements, representations or warranties made
by it in this Agreement or in any exhibit or certificate delivered pursuant to
this Agreement contains any untrue statement of any material fact or omits to
state any material fact necessary to be stated in order to make the statements,
representations or warranties contained herein or therein not materially
misleading.
(viii) It understands and acknowledges that the Software has not
been tested or verified by any testing laboratory or facility and that neither
CCI nor any of its Affiliates
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has made or hereby makes any representation or warranty with respect to the
performance, adequacy or commercial viability of any of the Software.
(d) Additional Representations, Warranties and Covenants of the
Venture. The Venture represents and warrants and covenants that neither the
Venture Technology as supplied from time to time hereunder, nor its normal use
for its intended purpose in combination with hardware, the Software or other
software, will infringe or violate any third-party patent, copyright, trade
secret or other right. The preceding representation and warranty shall not apply
to any infringement to the extent it would have occurred from the use of the
Software without the Venture Technology contained therein or not in combination
with the Venture Technology.
6. Confidentiality.
(a) "Confidential Information" Defined. For purposes hereof, the term
"Confidential Information" of a party shall mean, (i) in the case of CCI, source
code of any and all Software and any and all documentation related thereto; and,
(ii) in the case of the Venture, source code of any and all software included in
the Venture Technology and any and all documentation related thereto.
(b) Confidentiality Obligations. Without the prior written consent
of CCI, the Venture and its other Obligated Parties (as defined below) and the
Manager (in its capacity as a license hereunder) and its other Obligated Parties
shall keep confidential and shall not disclose to any third party whatsoever or
use for any purpose whatsoever any Confidential Information of CCI, other than
uses contemplated by Section 1 or 3 hereof and disclosures made in conformity
with Section 6(d) hereof; and without the prior written consent of the Venture,
CCI and its other Obligated Parties and the Manager (in its capacity as a
licensee hereunder) and its other Obligated Parties shall keep confidential and
shall not disclose to any third party whatsoever or use for any purpose
whatsoever any Confidential Information of the Venture, other than uses
contemplated by Section 2 or 3 hereof and disclosures made in conformity with
Section 6(d) hereof, in any case except as follows:
(i) any Confidential Information of CCI or the Venture, as the
case may be, that the applicable Obligated Party can prove was:
(A) in the public domain prior to the date of this
Agreement or subsequently came into the public domain through no fault of any
Obligated Party of CCI, the Venture or the Manager, as the case may be (provided
that any combination of items of
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Confidential Information shall not be deemed within this exception merely
because individual items are part of the public domain, but only if the
combination itself and its principle(s) of operation or utility are part of the
public domain); or
(B) lawfully received by such Obligated Party without a
binder of confidentiality from an independent third party.
(ii) an Obligated Party of CCI, the Venture or the Manager, as
the case may be, may disclose any Confidential Information of another party to
the extent that it has been advised by counsel that such disclosure is necessary
to comply with laws or regulations; provided, that such Obligated Party shall
give the Venture or CCI, as the case may be, reasonable advance written notice
of such proposed disclosure, shall use its best efforts to secure confidential
treatment of any such Confidential Information and shall advise the Venture or
CCI, as the may be, in writing of the manner of the disclosure.
(c) Obligated Parties. For purposes hereof, the term "Obligated
Party" of a party shall mean CCI, the Venture or the Manager, as the case may
be, and the Affiliates, partners, directors, officers, principals, shareholders,
employees, independent contractors, consultants and agents of such party, and
any of such party's permitted sublicensees, successors and assigns and their
respective Affiliates, partners, directors, officers, principals, shareholders,
employees, independent contractors, consultants and agents. In the case of the
Venture, its Obligated Parties shall include the Manager (in its capacity as
manager under the Management Agreement) and its Affiliates, directors, officers,
shareholders, employees, independent contractors, consultants, agents,
successors and assigns, whether or not such persons would be included by virtue
of the above definition.
(d) Dissemination of Confidential Information. Any dissemination of
Confidential Information of a party by an Obligated Party of any other party to
any person, including without limitation other Obligated Parties of such other
party, shall be only to carry out the purposes of this Agreement and shall be
limited to the maximum extent possible consistent with carrying out such
purposes. Prior to receiving any such Confidential Information, any such person
shall agree in writing for the benefit of the other party to be bound by the
provisions of this Section 6, and Sections 10(d), 10(e) and 10(f) to the same
extent that such party is bound hereby. All such written agreements shall be
delivered to the party or parties in favor of which such agreements are made
within (5) days after the execution thereof.
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(e) Safekeeping of Confidential Information. In recognition and
furtherance of the foregoing confidentiality obligations, each party agrees that
all of its Obligated Parties shall keep any and all records which contain any
Confidential Information of the other party in a safe and secure location.
(f) Injunctive Relief. It is expressly covenanted and agreed that,
in the event of a breach of this Section 6 by any Obligated Party of a party,
although the damage to the CCI or the Venture, as the case may be, will be
substantial, the same will be difficult to ascertain, money damages will not
afford an adequate remedy and CCI or the Venture, as the case may be, will
suffer irreparable injury. Therefore, in the event of any such breach, and in
addition to any other rights or remedies available at law, in equity or under
this Agreement, each of CCI and the Venture party shall have the right to obtain
specific performance of such obligations set forth in this Section 6 by way of
temporary and/or permanent injunctive relief without bond.
(g) Survival of Confidentiality Obligations. The provisions of this
Section 6 shall survive any termination of any license granted hereunder for a
period of three (3) years. Upon any termination of any license granted
hereunder, all Obligated Parties of the licensee shall promptly deliver to the
licensing party or parties all tangible manifestations of Confidential
Information of the licensing party or parties in its possession or under its
control, retaining no copies thereof. In the case of Confidential Information
that is commingled with other proprietary information to which the licensing
party or parties do not have rights, the Obligated Parties may, in lieu of
delivering such tangible manifestations to the licensing party or parties,
destroy all such tangible manifestations, and shall so certify in writing to the
licensing party or parties.
(h) Residual Rights and Independent Developments. The terms of
confidentiality contained in this Section 6 shall not be construed to limit any
party's right to independently develop or acquire products without the use of
another party's Confidential Information. Further, all parties shall be free to
use for any purpose the Residuals (as defined below) resulting from access to or
work with the Software, the Venture Technology and Confidential Information,
provided that such party shall maintain the confidentiality of the Confidential
Information as provided herein, and provided that such use does not infringe the
patent, copyright, trade secret or other rights of one of the parties to which
a license is not otherwise granted hereunder. The term "Residuals" means
information in intangible form, which may be retained in the heads of persons
who have had access to the Software, the Venture Technology and the Confidential
Information, including ideas, concepts, know-how,
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techniques and general experience gained. No party hereto shall have any
obligation to limit of restrict the assignment of such persons or to pay
royalties for any work resulting from the use of Residuals, except as otherwise
expressly provided for herein.
7. Limitation of Liability. NOTWITHSTANDING ANY OTHER PROVISION OF THIS
AGREEMENT TO THE CONTRARY, EXCEPT IN CONNECTION WITH A BREACH OF SECTION 6
HEREOF, NO PARTY SHALL IN ANY CASE BE LIABLE TO ANY OTHER PARTY FOR SPECIAL,
INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR OTHER SIMILAR DAMAGES RELATED TO THIS
AGREEMENT OR ITS PERFORMANCE ARISING FROM BREACH OF WARRANTY, BREACH OF
CONTRACT, NEGLIGENCE OR ANY OTHER LEGAL OR EQUITABLE THEORY EVEN IF SUCH PARTY
OR ITS AGENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
8. Infringement.
(a) CCI, SGIC and SGI Holding Indemnification Obligation. CCI, SGIC
and SGI Holding jointly and severally shall indemnify, defend and hold the
Venture and the Manager and their respective officers, directors, employees,
agents and licensees harmless from and against any and all damages (subject to
Section 7 hereof), liabilities, costs and expenses (including reasonable
attorneys' fees) resulting from the breach or untruthfulness of the
representations and warranties set forth in Section 5(a)(i) hereof (and
including amounts incurred in the settlement or avoidance of any claims based
thereon), provided that: (i) in the event of an infringement claim, CCI shall
have the right, but not the obligation, to procure at its expense the right to
use the infringing portion of the Software, or to replace the infringing portion
with an alternative item that meets applicable specifications, and (ii) CCI
shall be given prompt notice of the claim and the opportunity to control the
defense and/or settlement thereof, provided that the Venture or the Manager or
both, as the case may be, shall have the right to approve any settlement
involving other than a monetary payment, which approval shall not be
unreasonably withheld, conditioned or delayed.
(b) Venture Indemnification Obligation. Without limiting Sections
5(a)(i) and 8(a), the Venture shall indemnify, defend and hold CCI and the
Manager and their respective officers, directors, employees, agents and
licensees harmless from and against any and all damages (subject to Section 7
hereof), liabilities, costs and expenses (including reasonable attorneys' fees)
resulting from the breach or untruthfulness of the representations, covenants
and warranties set forth in Section 5(d) hereof (and including amounts incurred
in the
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settlement or avoidance of any claims based thereon), provided: (i) in the event
of an infringement claim, the Venture shall have the right, but not the
obligation, to procure at its expense the right to use the infringing portion of
the Venture Technology, or to replace the infringing portion with an alternative
item that meets applicable specifications, and (ii) the Venture shall be given
prompt notice of the claim and the opportunity to control the defense and/or
settlement thereof.
(c) Infringement of Software. In the event of any infringement of the
Software by any third party by making, selling, copying or distributing the
Software or any portion thereof for a purpose that is within the Company
Business, the Venture will have the right at its sole cost and expense and for
its sole benefit to take any action or to commence any proceeding it deems
necessary against the infringing party or parties. CCI and the Manager (in its
capacity as a licensee) shall provide such cooperation and assistance in
connection therewith as may be reasonably requested by the Venture, and the
Venture shall promptly reimburse CCI or the Manager (in its capacity as a
licensee) for its costs and expenses incurred in connection with providing such
cooperation and assistance. If the Venture declines to take any action or
commence any proceeding against the infringing party or parties or if the
infringement arises out of activities not within the Company Business, CCI and
(if such infringement affects the Manager's actual or potential use or
exploitation of its license rights to Software) the Manager, as the case may be,
each will have the right at its sole cost and expense and for its sole benefit
to take any action or to commence any proceeding it deems necessary against the
infringing party or parties. The Venture shall provide such cooperation and
assistance in connection therewith as may be reasonably requested by CCI or the
Manager, and CCI or the Manager, as the case may be, shall promptly reimburse
the Venture for its costs and expenses incurred in connection with providing
such cooperation and assistance.
(d) Infringement of the Venture Technology. In the event of any
infringement of the Venture Technology by any third party, whether by making,
selling, copying or distributing the Venture Technology or any portion thereof
for a purpose that is within or without the Company Business, the Venture will
have the right at its sole cost and expense and for its sole benefit to take any
action or to commence any proceeding it deems necessary against the infringing
party or parties. CCI and the Manager (in its capacity as a licensee) shall
provide such cooperation and assistance in connection therewith as may be
reasonably requested by the Venture, and the Venture shall promptly reimburse
CCI or the Manager (in its capacity as a licensee) for its costs and expenses
incurred in connection with providing such cooperation and assistance. If the
Venture declines to take any action or commence any
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<PAGE>
proceeding against the infringing party or parties and such infringement affects
CCI's or the Manager's actual or potential use or exploitation of its license
rights to the Venture Technology, CCI or the Manager, as the case may be, each
will have the right at its sole cost and expense and for its sole benefit to
take any action or to commence any proceeding it deems necessary against the
infringing party or parties. The Venture shall provide such cooperation and
assistance in connection therewith as may be reasonably requested by CCI or the
Manager, and CCI or the Manager, as the case may be, shall promptly reimburse
the Venture for its costs and expenses incurred in connection with providing
such cooperation and assistance.
9. Term; Survival of Provisions.
(a) Term.
(i) The term of the license granted under Section 1 hereof shall
be co-extensive with the term of the Venture's corporate existence, which shall
include any period of liquidation and winding up following the dissolution or
authorization of the dissolution of the Venture; provided, however, that if the
Venture is merged or amalgamated with or consolidated into another corporation
or entity or sells all or substantially all of its assets to another corporation
or entity or otherwise is combined with another corporation or entity in a
merger, amalgamation, consolidation, sale of assets or other transaction
approved in accordance with or permitted by Section 1.6 of the Shareholders
Agreement, such license will continue in effect and the successor party to the
Venture shall, if necessary, be deemed to be the assignee of the Venture under
this Agreement. Notwithstanding any breach of this Agreement by the Venture, CCI
shall not be entitled to terminate the license rights granted under Section 1
hereof prior to the expiration of such license rights as provided in this
Section 9(a)(i); provided, however, that this provision shall not otherwise
limit the liability of the Venture for any such breach.
(ii) The terms of the licenses granted under Sections 2 and 3
will expire on December 31, 2093.
(b) Termination of CCI's License Rights for Breach. The license
granted to CCI under Section 2 may be terminated by the Venture upon a breach of
the royalty payment obligations set forth in Sections 2 and 4 which is not cured
within thirty (30) days after written notice of such breach from the Venture to
CCI.
(c) Termination of the Manager's License Rights for Breach. The
license granted to the Manager under Section 3 may be terminated by the Venture
upon a breach of
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<PAGE>
the royalty payment obligations set forth in Sections 3 and 4 which is not
cured within thirty (30) days after written notice of such breach from the
Venture to the Manager.
(d) Survival. Notwithstanding any termination or expiration of any
license granted hereunder, the representations, covenants and warranties of
clauses (a)(i), (d) and (e) of Section 5, the confidentiality provisions of
Section 6, the indemnification provisions of Section 8, the provisions of
Section 10 and all other provisions of this Agreement not required to terminate
with such license rights shall survive any such termination or expiration;
provided, however, that the provisions of Section 6 shall survive only for the
period specified in Section 6(g).
(e) Ownership Upon Dissolution of the Venture. Upon any dissolution of
the Venture or other cessation of its corporate existence other by virtue of its
merger, amalgamation or consolidation with another corporation or entity or the
sale of all or substantially all of its assets to another person or entity, all
right, title and interest in and to all Venture Technology, and to all
Intellectual Property Rights therein, shall vest in, and is hereby conditionally
assigned to, CCI and the Manager as joint owners with undivided interests. Each
of CCI and the Manager, as joint owners, shall be free to make, have made, use,
sell, copy, make derivative works based upon, perform, distribute and otherwise
exploit the Venture Technology in any manner desired without a duty of
accounting of profits to or royalties to the other resulting therefrom. Upon the
request of either CCI or the Manager, the Venture shall take all actions and
execute all documents reasonably necessary to effect and perfect the assignment
of the Venture Technology to CCI and the Manager as joint owners.
10. General Provisions.
(a) Notices; Payments. All notices and other communications required
or permitted to be given pursuant to this Agreement shall be in writing and
shall be personally delivered (by commercial courier or otherwise) or sent by
telecopy receipt of which is confirmed or sent first class mail, registered or
certified, return receipt requested, postage prepaid, addressed as follows:
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<PAGE>
If to CCI, SGIC or SGI Holding:
c/o Creator Capital Inc.
595 Howe Street, Suite 1115
Vancouver, British Columbia V6C 2T5
Canada
Attention: Mr. Malcolm P. Burke
Telecopier: (604) 687-8678
Telephone: (604) 689-1515
with a copy to:
Gordon R. Kanofsky, Esq.
Hughes Hubbard & Reed
350 South Grand Avenue
Los Angeles, California 90071-3442
United States of America
Telecopier: (213) 613-2950
Telephone: (213) 613-2876
If to the Venture:
Interactive Entertainment Limited
c/o Creator Capital Inc.
595 Howe Street, Suite 1115
Vancouver, British Columbia V6C 2T5
Canada
Attention: Mr. Malcolm P. Burke
Telecopier: (604) 687-8678
Telephone: (604) 689-1515
with copies to:
Gordon R. Kanofsky, Esq.
Hughes Hubbard & Reed
350 South Grand Avenue
Los Angeles, California 90071-3442
United States of America
Telecopier: (213) 613-2950
Telephone: (213) 613-2876
-22-
<PAGE>
and
John W. McConomy, Esq.
Associate General Counsel
The Promus Companies Incorporated
1023 Cherry Road
Memphis, Tennessee 38117-5423
United States of America
Telecopier: (901) 762-8735
Telephone: (901) 762-8737
If to the Manager:
Harrah's Interactive Entertainment Company
c/o The Promus Companies Incorporated
1023 Cherry Road
Memphis, Tennessee 38117-5423
United States of America
Attention: Mr. John M. Boushy
Telecopier: (901) 762-8914
Telephone: (901) 762-8944
with a copy to:
John W. McConomy, Esq.
Associate General Counsel
The Promus Companies Incorporated
1023 Cherry Road
Memphis, Tennessee 38117-5423
United States of America
Telecopier: (901) 762-8735
Telephone: (901) 762-8737
Notices and other communications shall be deemed delivered, (i) in the case of
personal delivery, on the date of their receipt at the address(es) specified
above for delivery, (ii) in the case of a telecopy, upon confirmation of its
receipt, and (iii) in the case of mail, at the earlier of the time of receipt or
five days after the mailing thereof. Any payments required to be made pursuant
to this Agreement shall be made and delivered in person or by mail in the same
manner as provided above for notices and other communications. Any party may
change its address for the giving of notices, other communications and payments
by notice given in accordance with this Section.
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<PAGE>
(b) Assignment. Except in connection with assignments or deemed
assignments permitted by Section 9(a)(i) hereof or required or permitted by the
terms of the Shareholders Agreement, the Venture shall not have the right to
assign it interests under this Agreement without the prior written consent of
CCI, which may be given or denied in CCI's sole discretion. Except for an
assignment to an Affiliate of such party who agrees in writing to be bound by
this Agreement, neither CCI nor the Manager shall have the right to assign their
respective interests under this Agreement without the prior written consent of
the Venture, which may be given or denied in the Venture's sole discretion. This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective permitted successors, legal representatives and assigns.
(c) Severability. The provisions of this Agreement shall be deemed
severable. If any provision hereof shall be found invalid, illegal, void
or unenforceable, in whole or in part, the remaining provisions or portions
thereof shall remain in full force and effect to the maximum extent permissible.
To the maximum extent permitted by applicable law, each party hereby waives any
provision of law which renders any provision of this Agreement invalid, illegal,
void or unenforceable.
(d) Governing Law. THIS AGREEMENT AND ALL RELATIONS OF THE PARTIES
IN CONNECTION HEREWITH SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEVADA, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS OR
CHOICE OF LAW RULES OR LAWS OF SUCH JURISDICTION.
(e) Forum Selection. THE PARTIES AGREE THAT ANY LEGAL SUIT, ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE COMMENCED IN
A STATE OR FEDERAL COURT OF OR IN CLARK COUNTY, NEVADA, WHICH THE PARTIES AGREE
IS THE SOLE AND EXCLUSIVE VENUE FOR THE CONVENIENCE OF THE PARTIES FOR PURPOSES
OF THIS AGREEMENT, AND EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION
AND VENUE OF SUCH COURT IN ANY SUCH SUIT, ACTION OR PROCEEDING AND WAIVES ANY
RIGHT THAT IT MAY NOW OR HEREAFTER HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY
SUCH SUIT, ACTION OR PROCEEDING, EXCEPT THAT EACH PARTY RETAINS WHATEVER RIGHT
IT MAY HAVE TO REMOVE SUCH SUIT, ACTION OR PROCEEDING TO THE FEDERAL COURT
SITTING IN CLARK COUNTY, NEVADA.
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<PAGE>
(f) Attorneys' Fees and Costs. If any litigation or other proceeding
between or among the parties is commenced in connection with or related to this
Agreement, the losing party or parties shall pay the reasonable attorneys' fees
and costs and expenses of the prevailing party or parties incurred in connection
therewith.
(g) Entire Agreement; Modification. This Agreement, together with
the Shareholders Agreement, the Management Agreement and the Trademark License
Agreement between CCI and the Venture entered into concurrently herewith,
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and supersede all prior negotiations and agreements with
respect to the subject matter hereof. This Agreement may be modified only by an
instrument in writing duly executed by the party sought to be bound by such
modification.
(h) Waivers. No breach of any covenant, condition, agreement,
warranty or representation made herein shall be deemed waived unless expressly
waived in writing by the party who might assert such breach. Any such waiver
may be made in advance or after the right waived has arisen or the breach or
default waived has occurred. Any such waiver may be conditional. No such
waiver shall be deemed to be a waiver of any other matter, whenever occurring
and whether identical, similar or dissimilar to the matter waived.
(i) Further Assurances. Each party agrees promptly to execute and
deliver such documents and to do such other acts as may be requested by any
other party and are in the reasonable judgment of the requesting party necessary
or appropriate to effectuate the purposes of this Agreement. Such matters may
include, but shall not be limited to, the registration of a party as the owner
or user of some or all of the Software or the Venture Technology, as the case
may be, under the laws of any United States or foreign jurisdiction. The
requesting party shall promptly reimburse the other party for its costs and
expenses incurred in connection with providing such further assurances and
cooperation.
(j) Relationship of Parties. Nothing set forth herein shall ever be
construed to create an association, trust or partnership or impose a trust or
partnership duty, obligation or liability on or with regard to either of the
parties hereto.
(k) Headings; Gender; Number. The headings of the sections and
subsections herein 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
Agreement. As used herein and as the context requires, a reference to the male,
female or neutral gender includes a reference to each other
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<PAGE>
gender, and a reference to the singular or plural number includes a reference to
the other number.
(l) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed to constitute an original.
(m) Computer Media. Each party shall be entitled to have a copy of
this Agreement, including all written schedules and exhibits, on diskette or
other commonly used
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<PAGE>
computer storage media in a format readable by one or more leading word
processing programs as of the date of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
- - --------------------------------------------------------------------------------
CREATOR CAPITAL INC. INTERACTIVE ENTERTAINMENT
LIMITED
By:
---------------------------- By:
Malcolm P. Burke, Director ----------------------------
Daniel H. Greene,
Director and President
By:
----------------------------
James P. Grymyr, Director
- - --------------------------------------------------------------------------------
HARRAH'S INTERACTIVE SKY GAMES INTERNATIONAL,
ENTERTAINMENT COMPANY CORP.
By: By:
---------------------------- ----------------------------
John W. McConomy, Designee James P. Grymyr, President
- - -------------------------------------------------------------------------------
SGI HOLDING CORPORATION
LIMITED
By:
----------------------------
Malcolm P. Burke,
Director and President
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<PAGE>
LIST OF SCHEDULES AND EXHIBITS
------------------------------
Schedules
---------
A Description of Software
Exhibits
--------
1 Diskette(s) containing current version of Software
2 Assignment Agreement
<PAGE>
TRADEMARK LICENSE AGREEMENT
THIS TRADEMARK LICENSE AGREEMENT (this "Agreement") is made and entered
into as of the ___ day of December 1994, by and between Creator Capital Inc., a
Yukon Territory corporation ("CCI"), and Interactive Entertainment Limited, a
Bermuda exempted company ("the Venture"). Sky Games International, Corp.
("SGIC"), a Nevada corporation and an Affiliate (as defined below) of CCI, and
SGI Holding Corporation Limited ("SGI Holding"), a Bermuda exempted company and
an Affiliate of CCI, are also executing this Agreement solely for the purposes
of making the representations, warranties, covenants and agreements specifically
made by them in Sections 2 and 6 of this Agreement and to become bound by the
provisions of Sections 5 and 8 of this Agreement, and neither SGIC nor SGI
Holding shall have any other liability or obligation under this Agreement. As
used herein, the term "Affiliate" shall mean an entity, including without
limitation a general partnership or a business trust, controlling, controlled by
or under common control with another entity (except that the Venture shall not
be deemed to be an Affiliate of SGI Holding or any of its Affiliates).
W I T N E S S E T H:
WHEREAS, SGIC has purchased and/or developed software in connection with
the development of a computer-based interactive video system for the operation
of gaming and related entertainment activities on-board aircraft and other
venues or locations and certain additional inventions (whether or not
patentable), know-how, trade secrets and other proprietary information related
to or in connection with such software (collectively, the "Software");
WHEREAS, SGIC has purchased and/or created the trademarks, trade names,
service marks and service names listed on Schedule A attached hereto (the "Trade
Rights") which Trade Rights has been created for use in connection with the
Software and possibly other products or services;
WHEREAS, CCI has acquired from SGIC all right, title and interest in and to
the Trade Rights pursuant to an Assignment Agreement (the "SGIC Assignment")
entered into concurrently herewith;
WHEREAS, the Venture has been recently formed as a Bermuda exempted company
by SGI Holding, which owns 80% of the issued and outstanding stock of the
Venture, and Harrah's Interactive Investment Company ("HII"), which owns the
remaining 20% of the
<PAGE>
issued and outstanding stock of the Venture, to develop, implement and operate
gaming and other operations in the pursuit of the "Company Business" (as defined
in that certain Shareholders Agreement, of even date herewith, among SGI
Holding, HII and the Venture, and as such Shareholders Agreement may be amended
from time to time (the "Shareholders Agreement"))
WHEREAS, concurrently with the execution of this Agreement, CCI, the
Venture and Harrah's Interactive Entertainment Company (the "Manager"), an
Affiliate of HII and the manager of the Venture's business, are entering into a
Cross-License Agreement (the "License Agreement"), pursuant to which the Venture
is obtaining from CCI a license to the Software; and
WHEREAS, as a condition to investing in the Venture and to assuming
responsibility for the management of the business of the Venture, HII and the
Manager, respectively, have required that CCI license the Trade Rights to the
Venture, and CCI is desirous and willing to grant such a license in
consideration of the benefits anticipated to be realized by CCI, directly or
indirectly, through its investment in the Venture and from the Manager's
management of the Venture's business.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agrees as follows:
1. License of Trade Rights.
(a) License of Trade Rights. CCI hereby grants to the Venture an
exclusive, worldwide, royalty-free license to the Trade Rights.
(b) Sublicenses. The Venture (through the Manager during the term of
the Management Agreement) shall have the right to grant sublicenses in
connection with the Company Business (as defined in the Shareholders Agreement)
to others (including to the Manager) to use the Trade Rights, provided that no
such sublicensee shall have the right to grant further sublicenses
(sub-sublicenses) without the prior written consent of CCI, which shall not be
unreasonably withheld, conditioned or delayed, and provided further that any
sublicense granted under this subsection shall be subject to this Agreement and
shall not include any terms or conditions inconsistent with this Agreement.
-2-
<PAGE>
2. Representations and Warranties.
(a) Representations and Warranties of CCI, SGIC and SGI Holding. CCI,
SGIC and SGI Holding jointly and severally represent and warrant that:
(i) None of the Trade Rights infringes or violates any
third-party trademark, trade name, service mark, service name or other trade
rights in the United States of America; none of them has any notice of any
infringement or violation or claim of infringement or violation of the Trade
Rights (whether in the United States of America or otherwise); no other rights
or licenses concerning the Trade Rights have been granted by any of them to any
other party; CCI has good and marketable title in the United States of America
to the Trade Rights, free and clear of any liens or encumbrances; and, subject
to the recordation of assignments in the United States Patent and Trademark
Office (which have been executed and will be filed for recordation within
fifteen (15) days after the date of this Agreement), CCI has good and marketable
title to any and all registrations and applications for registration of the
Trade Rights in the United States of America, free and clear of any liens or
encumbrances.
(ii) Each of them is a corporation duly organized and validly
existing under the laws of the Yukon Territory of Canada, in the case of CCI,
the laws of the State of Nevada, in the case of SGIC, or the laws of Bermuda as
an exempted company, in the case of SGI Holding.
(iii) Each of them has full legal power and right to carry on its
business as such is now being conducted and as proposed to be conducted. Each of
them has the legal power and right under the laws of the Yukon Territory, Nevada
and Bermuda, in the case of CCI, SGIC and SGI Holding, respectively, to enter
into and perform this Agreement and the transactions contemplated hereby; and
that the consummation of the transactions contemplated by this Agreement will
neither violate nor be in conflict with: (A) any provision of the Articles of
Continuation or Bylaws of CCI, the Articles of Incorporation or Bylaws of SGIC,
or the Memorandum of Association or Bye-Laws of SGI Holding; (B) any agreement
or instrument to which any of them is a party or by which any of them or any of
their Affiliates or any of their respective assets are bound; (C) any judgment,
order, ruling or decrees applicable to any of them or any of their Affiliates as
a party in interest or any law, rule or regulation applicable to any of them or
any of their Affiliates; or (D) any document, agreement or other arrangement
creating or relating to the creation or existence of any of them or any of their
Affiliates.
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<PAGE>
(iv) The execution, delivery and performance of this Agreement
and the transactions contemplated hereby have been duly and validly authorized
by all requisite corporate action on the part of each of them.
(v) This Agreement is a valid and binding obligation of each of
them and is enforceable in accordance with its terms against each of them,
subject to and limited by the effect of applicable bankruptcy, insolvency,
fraudulent transfer or conveyance, reorganization, receivership, moratorium or
other similar laws now or hereafter in effect relating to or affecting the
rights of creditors generally.
(vi) No consent of any person not a party to this Agreement and
no consent of any governmental authority is required to be obtained on the part
of any of them in connection with or resulting from the execution or performance
of this Agreement.
(vii) None of them nor any of their Affiliates has incurred any
obligation or liability, contingent or otherwise, for brokers' or finder's fees
in respect of the matters provided for in this Agreement, and if any such
obligation or liability exists, it shall be the sole obligation of such party or
its Affiliate.
(viii) None of the statements, representations or warranties made
by any of them in this Agreement or in any exhibit of certificate delivered
pursuant to this Agreement contains any untrue statement of any material fact or
omits to state any material fact necessary to be stated in order to make the
statements, representations or warranties contained herein or therein not
materially misleading.
(b) Representations and Warranties of the Venture. The Venture
represents and warrants that:
(i) It is a corporation duly organized and validly existing under
the laws of Bermuda as an exempted company.
(ii) It has full legal power and right to carry on its business
as such is now being conducted and as proposed to be conducted, subject to
compliance with any applicable laws and regulations prohibiting or regulating
gaming. It has the legal power and right under the laws of Bermuda to enter into
and perform this Agreement and the transactions contemplated hereby; and that
the consummation of the transactions contemplated by this Agreement will neither
violate nor be in conflict with: (A) any provision of its Memorandum of
Association or Bye-Laws; (B) any agreement or instrument to which it is a party
or by
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<PAGE>
which it or any of its assets are bound; (C) any judgment, order, ruling or
decrees applicable to it as a party in interest or any law, rule or regulation
applicable to it; or (D) any document, agreement or other arrangement creating
or relating to its creation or existence.
(iii) The execution, delivery and performance of this Agreement
and the transactions contemplated hereby have been duly and validly authorized
by all requisite corporate action on the part of the Venture.
(iv) This Agreement is a valid and binding obligation of the
Venture and is enforceable in accordance with its terms against it, subject to
and limited by the effect of applicable bankruptcy, insolvency, fraudulent
transfer or conveyance, reorganization, receivership, moratorium or other
similar laws now or hereafter in effect relating to or affecting the rights of
creditors generally.
(v) No consent of any person not a party to this Agreement and no
consent of any governmental authority is required to be obtained on its part in
connection with or resulting from the execution or performance of this
Agreement.
(vi) It has not incurred any obligation or liability, contingent
or otherwise, for brokers' or finder's fees in respect of the matters provided
for in this Agreement.
(vii) None of the statements, representations or warranties made
by any it in this Agreement or in any exhibit or certificate delivered pursuant
to this Agreement contains any untrue statement of any material fact or omits to
state any material fact necessary to be stated in order to make the statements,
representations or warranties contained herein or therein not materially
misleading.
3. Ownership of the Trade Rights; Use of Trade Rights. The Venture
acknowledges CCI's exclusive ownership of all right, title and interest in and
to the Trade Rights, and the Venture will at no time do, or cause or permit to
be done, any act impairing or tending to impair such right, title and interest.
When using the Trade Rights, the Venture shall comply, or cause the compliance,
with all applicable laws pertaining to trademarks and other trade rights in
force at the time of such use.
4. Registration of Trade Rights or Venture. At the Venture's expense, CCI
will use reasonable efforts to register and maintain the registration of the
Trade Rights in such jurisdictions as shall be requested from time to time by
the Venture. If applicable law permits
-5-
<PAGE>
and upon the request of the Venture, CCI shall make application, at the expense
of the Venture, to register the Venture as a permitted user or registered user
of the Trade Rights.
5. Limitation of Liability. NOTWITHSTANDING ANY OTHER PROVISION OF THIS
AGREEMENT TO THE CONTRARY, NO PARTY SHALL IN ANY CASE BE LIABLE TO THE OTHER
PARTY FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR OTHER SIMILAR DAMAGES
RELATED TO THIS AGREEMENT OR ITS PERFORMANCE ARISING FROM BREACH OF WARRANTY,
BREACH OF CONTRACT, NEGLIGENCE OR ANY OTHER LEGAL OR EQUITABLE THEORY EVEN IF
SUCH PARTY OR ITS AGENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
6. Infringement.
(a) CCI, SGIC and SCI Holding Indemnification Obligation. CCI, SGIC
and SGI Holding jointly and severally shall indemnify, defend and hold the
Venture and the Manager and their respective officers, directors, employees,
agents and licensees harmless from and against any and all damages (subject to
Section 5 hereof), liabilities, costs and expenses (including reasonable
attorneys' fees) resulting from the breach or untruthfulness of the
representations and warranties set forth in Section 2(a)(i) hereof (and
including amounts incurred in the settlement or avoidance of any claims based
thereon), provided that CCI shall be given prompt notice of the claim and the
opportunity to control the defense and/or settlement thereof, provided that the
Venture shall have the right to approve any settlement involving other than a
monetary payment, which approval shall not be unreasonably withheld, conditioned
or delayed.
(b) Venture indemnification Obligation. Without limiting Sections
2(a)(i) and 6(a), the Venture shall indemnify, defend and hold CCI and its
officers, directors, employees, agents and licensees harmless from and against
any and all damages (subject to Section 5 hereof), liabilities, costs and
expenses (including reasonable attorneys' fees) resulting from the infringement
of any third party trademarks, trade names, service marks, service names or
other trade rights resulting from the use of the Trade Rights outside of the
United States of America, provided that the Venture shall be given prompt notice
of the claim and the opportunity to control the defense and/or settlement
thereof.
(c) Infringement of Trade Rights. In the event of any infringement
of the Trade Rights, the Venture will have the right at its sole cost and
expense and for its sole benefit to
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<PAGE>
take any action or to commence any proceeding it deems necessary against the
infringing party or parties. CCI shall provide such cooperation and assistance
in connection therewith as may be reasonably requested by the Venture, and the
Venture shall promptly reimburse CCI for its costs and expenses incurred in
connection with providing such cooperation and assistance.
7. Term; Survival of Provisions.
(a) Term. The term of the license granted under Section 1 hereof
shall be co-extensive with the term of the Venture's corporate existence, which
shall include any period of liquidation and winding up following the dissolution
or authorization of the dissolution of the Venture; provided, however, that if
the Venture is merged or amalgamated with or consolidated into another
corporation or entity or sells all or substantially all of its assets to another
corporation or entity or otherwise is combined with another corporation or
entity in a merger, amalgamation, consolidation, sale of assets or other
transaction approved in accordance with or permitted by Section 1.6 of the
Shareholders Agreement, such license will continue in effect and the successor
party to the Venture shall, if necessary, be deemed to be the assignee of the
Venture under this Agreement. Notwithstanding any breach of this Agreement by
the Venture, CCI shall not be entitled to terminate the license rights granted
under Section 1 hereof prior to the expiration of such license rights as
provided in this Section 7(a); provided, however, that this provision shall not
otherwise limit the liability of the Venture for any such breach.
(c) Survival. Notwithstanding any termination or expiration of the
license rights granted hereunder, the representations and warranties of clause
(a)(i) of Section 2, the indemnification provisions of Section 6, the provisions
of Section 8 and all other provisions of this Agreement not required to
terminate with such license rights shall survive any such termination or
expiration.
8. General Provisions.
(a) Notices; Payments. All notices and other communications required
or permitted to be given pursuant to this Agreement shall be in writing and
shall be personally delivered (by commercial courier or otherwise) or sent by
telecopy receipt of which is confirmed or sent first class mail, registered or
certified, return receipt requested, postage prepaid, addressed as follows:
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<PAGE>
If to CCI, SGIC or SGI Holding:
c/o Creator Capital Inc.
595 Howe Street, Suite 1115
Vancouver, British Columbia V6C 2T5
Canada
Attention: Mr. Malcolm P. Burke
Telecopier: (604) 687-8678
Telephone: (604) 689-1515
with a copy to:
Gordon R. Kanofsky, Esq.
Hughes Hubbard & Reed
350 South Grand Avenue
Los Angeles, California 90071-3442
United States of America
Telecopier: (213) 613-2950
Telephone: (213) 613-2876
If to the Venture:
Interactive Entertainment Limited
c/o Creator Capital Inc.
595 Howe Street, Suite 1115
Vancouver, British Columbia V6C 2T5
Canada
Attention: Mr. Malcolm P. Burke
Telecopier: (604) 687-8678
Telephone: (604) 689-1515
with copies to:
Gordon R. Kanofsky, Esq.
Hughes Hubbard & Reed
350 South Grand Avenue
Los Angeles, California 90071-3442
United States of America
Telecopier: (213) 613-2950
Telephone: (213) 613-2876
-8-
<PAGE>
and
John W. McConomy, Esq.
Associate General Counsel
The Promus Companies Incorporated
1023 Cherry Road
Memphis, Tennessee 38117-5423
United States of America
Telecopier: (901) 762-8735
Telephone: (901) 762-8737
Notices and other communications shall be deemed delivered, (i) in the case of
personal delivery, on the date of their receipt at the address(es) specified
above for delivery, (ii) in the case of a telecopy, upon confirmation of its
receipt, and (iii) in the case of mail, at the earlier of the time of receipt or
five days after the mailing thereof. Any payments required to be made pursuant
to this Agreement shall be made and delivered in person or by mail in the same
manner as provided above for notices and other communications. Any party may
change its address for the giving of notices, other communications and payments
by notice given in accordance with this Section.
(b) Assignment. Except in connection with assignments or deemed
assignments permitted by Section 7(a) hereof or required or permitted by the
terms of the Shareholders Agreement, the Venture shall not have the right to
assign its interests under this Agreement without the prior written consent of
the CCI, which may be given or denied in CCI's sole discretion. This Agreement
shall be binding upon and inure to the benefit of the parties and their
respective permitted successors, legal representatives and assigns.
(c) Severability. The provisions of this Agreement shall be deemed
severable. If any provision hereof shall be found invalid, illegal, void or
unenforceable, in whole or in part, the remaining provisions or portions thereof
shall remain in full force and effect to the maximum extent permissible. To the
maximum extent permitted by applicable law, each party hereby waives any
provision of law which renders any provision of this Agreement invalid, illegal,
void or unenforceable.
(d) Governing Law. THIS AGREEMENT AND ALL RELATIONS OF THE PARTIES
IN CONNECTION HEREWITH SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEVADA, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS OR
CHOICE OF LAW RULES OR LAWS OF SUCH JURISDICTION.
-9-
<PAGE>
(e) Forum Selection. THE PARTIES AGREE THAT ANY LEGAL SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE COMMENCED IN A
STATE OR FEDERAL COURT OF OR IN CLARK COUNTY, NEVADA, WHICH THE PARTIES AGREE IS
THE SOLE AND EXCLUSIVE VENUE FOR THE CONVENIENCE OF THE PARTIES FOR PURPOSES OF
THIS AGREEMENT, AND EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION
AND VENUE OF SUCH COURT IN ANY SUCH SUIT, ACTION OR PROCEEDING AND WAIVES ANY
RIGHT THAT IT MAY NOW OR HEREAFTER HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY
SUCH SUIT, ACTION OR PROCEEDING, EXCEPT THAT EACH PARTY RETAINS WHATEVER RIGHT
IT MAY HAVE TO REMOVE SUCH SUIT, ACTION OR PROCEEDING TO THE FEDERAL COURT
SITTING IN CLARK COUNTY, NEVADA.
(f) Attorneys' Fees and Costs. If any litigation or other proceeding
between or among the parties is commenced in connection with or related to this
Agreement, the losing party or parties shall pay the reasonable attorneys' fees
and costs and expenses of the prevailing party or parties incurred in connection
therewith.
(g) Entire Agreement; Modification. This Agreement, together with the
Shareholders Agreement, the License Agreement and the Management Agreement
between the Venture and the Manager entered into concurrently herewith,
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and supersede all prior negotiations and agreements with
respect to the subject matter hereof. This Agreement may be modified only by an
instrument in writing duly executed by the party sought to be bound by such
modification.
(h) Waivers. No breach of any covenant, condition, agreement, warranty
or representation made herein shall be deemed waived unless expressly waived in
writing by the party who might assert such breach. Any such waiver may be made
in advance or after the right waived has arisen or the breach or default waived
has occurred. Any such waiver may be conditional. No such waiver shall be deemed
to be a waiver of any other matter, whenever occurring and whether identical,
similar or dissimilar to the matter waived.
(i) Further Assurances. Each party agrees promptly to execute and
deliver such documents and to do such other acts as may be requested by any
other party and are in the reasonable judgment of the requesting party necessary
or appropriate to effectuate the purposes
-10-
<PAGE>
of this Agreement. Such matters may include, but shall not be limited to, the
registration of a party as the owner or user of some or all of the Software or
the Venture Technology, as the case may be, under the laws of any United States
or foreign jurisdiction. The requesting party shall promptly reimburse the other
party for its costs and expenses incurred in connection with providing such
further assurances and cooperation.
(j) Relationship of Parties. Nothing set forth herein shall ever be
construed to create an association, trust or partnership or impose a trust or
partnership duty, obligation or liability on or with regard to either of the
parties hereto.
(k) Headings: Gender; Number. The headings of the sections and
subsections herein 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
Agreement. As used herein and as the context requires, a reference to the male,
female or neutral gender includes a reference to each other gender, and a
reference to the singular or plural number includes a reference to the other
number.
(l) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed to constitute an original.
(m) Computer Media. Each party shall be entitled to have a copy of
this Agreement, including all written schedules and exhibits, on diskette or
other commonly used
-11-
<PAGE>
computer storage media in a format readable by one or more leading word
processing programs as of the date of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CREATOR CAPITAL INC. INTERACTIVE ENTERTAINMENT
LIMITED
By: By:
--------------------------- --------------------------
Malcolm P. Burke, Director Daniel H. Greene,
Director and President
By:
---------------------------
James P. Grymyr, Director
SGI HOLDING CORPORATION SKY GAMES INTERNATIONAL,
LIMITED CORP.
By: By:
--------------------------- ---------------------------
Malcolm P. Burke, James P. Grymyr, President
Director and President
-12-
<PAGE>
SCHEDULE A TO TRADEMARK LICENSE AGREEMENT
-----------------------------------------
EXISTING REGISTRATIONS
<TABLE>
<CAPTION>
Mark Reg. No. Class Date Reg.
- - ---- -------- ----- ---------
<S> <C> <C> <C>
Sky Games 1,718,373 Int. Class 28 September 22, 1992
International - "We (Prior U.S. Classes
Make Time Fly" 22 & 38)
PENDING INTENT TO USE APPLICATIONS
Mark Serial No. Filing Date Type Class
- - ---- ---------- ----------- ---- -----
<S> <C> <C> <C> <C>
Sky Games 74/349915 December 10, 1(b) 42
International - 1991
"We Make Time Fly"
ABANDONED INTENT TO USE APPLICATIONS
Mark Serial No. Filing Date/ Type Class
- - ---- ---------- ------------ ---- -----
Abandonment
-----------
Date
----
<S> <C> <C> <C> <C>
Casino Class 74/338046 December 8, 1(b) 42
1992 / May 17,
1994
</TABLE>
<PAGE>
[EXECUTION COPY]
----------------
GUARANTY
--------
THIS GUARANTY is made and entered into as of this 13th day of May, 1997, by
SGI Holding Corporation Limited, a Bermuda exempted company ("SGIH")
("Guarantor"), in favor of Harrah's Interactive Investment Company, a Nevada
corporation ("Lender").
THIS GUARANTY IS ENTERED INTO WITH RESPECT TO THE FOLLOWING FACTS AND
CIRCUMSTANCES:
A. Pursuant to the Financing Agreements, as defined in that certain
Funding Agreement dated as of the date hereof among Interactive Entertainment
Limited, a Bermuda exempted company ("IEL" or "Borrower") and Sky Games
International Ltd., a Bermuda exempted company ("SGI"), and Lender, as lender
(the "Funding Agreement"), Lender has agreed to loan to IEL funds required by
IEL to fund its day-to-day business activities up to the amounts set forth in
the Funding Agreement. The loan is evidenced by a Convertible Promissory Note
dated the date hereof (the "Note").
B. Lender has required, as a condition to its entering into the Financing
Agreements with IEL, that Guarantor guarantee, in accordance with the terms and
conditions hereinafter set forth, the obligations of IEL under the Financing
Agreements, including without limitation the repayment of all amounts due to
Lender.
C. The Funding Agreement is dated as of the date hereof and is being
executed simultaneously with this Guaranty.
IN CONSIDERATION OF SUCH FACTS AND CIRCUMSTANCES; TO INDUCE LENDER TO ENTER
INTO THE FINANCING AGREEMENTS; AND FOR OTHER GOOD AND VALUABLE CONSIDERATION,
GUARANTOR HEREBY AGREES FOR THE BENEFIT OF LENDER AS FOLLOWS:
1. Guaranty. Guarantor hereby unconditionally guarantees to Lender, and
Lender's successors and assigns, the payment of all amounts that may become
payable by Borrower pursuant to the Funding Agreement and the Note and the full
and punctual performance and observance of all the terms, covenants, obligations
and conditions contained in the Financing Agreements to be kept, performed or
observed by Borrower, for which Guarantor shall be jointly and severally liable
with Borrower.
2. Actions of Lender. Any act of Lender, or Lender's successors and
assigns, consisting of a waiver of any of the terms and conditions of the
Financing Agreements or the giving of any consent to any matter or thing
relating to the Financing Agreements or the granting of any indulgence or
extensions of time to Borrower under the Financing Agreements may be done
without notice to Guarantor and without releasing the obligations of Guarantor.
3. Modifications of Borrower's Obligations. The obligations of Guarantor
shall not be released by the receipt, application or release by Lender of any
security given for the performance and observance of the terms, covenants and
conditions of the Funding Agreement or the Note, nor by any amendment or
modification of the Funding Agreement. If the Funding Agreement or the Note is
amended or modified, by Borrower and Lender, the liability of Guarantor shall be
deemed to be modified in accordance with the terms of any such amendment or
modification of the Funding Agreement or the Note and this Guaranty, as so
modified, shall remain in full force and effect.
<PAGE>
4. Defenses Waived. The liability of Guarantor shall not be affected,
reduced or set-off in any manner by the following events or circumstances: (a)
the release, discharge or the impairment, limitation or modification of the
liability of Borrower in any creditors' receivership, bankruptcy or other
proceedings; (b) the rejection or disaffirmance of the Funding Agreement or the
Note in any proceeding; (c) any disability or other defense or counter-claim or
right of set-off, which might be available at law or equity to Borrower or
Guarantor; (d) the cessation from any cause whatsoever of the duties,
obligations and liabilities of Borrower; (e) any statute of limitations
affecting Guarantor's liability or the enforcement thereof; (f) any invalidity,
irregularity or enforceability of or defect in the Funding Agreement or the
Note; or (g) the winding up, dissolution or reorganization of Borrower; or (h)
any other circumstance permitting a defense.
5. Waiver of Subrogation. Until all the covenants and conditions in the
Funding Agreement to be performed and observed by Borrower are fully kept,
performed and observed, the Guarantor: (a) shall have no right of subrogation
against Borrower by reason of any payments or acts of performance by the
Guarantor, in compliance with the obligations of the Guarantor hereunder; (b)
shall waive any right to enforce any remedy which the Guarantor now or hereafter
shall have against Borrower by reason of any one or more payments or acts of
performance in compliance with the obligation of the Guarantor.
6. Term of Guaranty. This Guaranty is absolute and unconditional, shall
continue in force for the entire period that Borrower and SGI may incur any
liability pursuant to the Financing Agreements and shall not be impaired by any
change in the Guarantor's relationship, or the complete termination of the
Guarantor's relationship, with Borrower or by any other occurrence except a
release in writing from the Lender; provided, however, that, any implication
contained herein to the contrary notwithstanding, this Guaranty shall terminate
upon the amalgamation of IEL with and into SGIH and the conversion of the
obligations under the Note into the common stock, Cdn. $.01 par value, of SGI.
7. Modification. This instrument may not be changed, modified, discharged
or terminated orally or in any manner other than by an agreement in writing
executed by Lender and Guarantor.
8. Release. Lender may, without releasing, reducing, extinguishing or
otherwise affecting Guarantor's liability for the full performance of all
obligations under this Guaranty and full payment of all sums under this Guaranty
at any time, without notice to or consent by Guarantor, release any other
guarantor or party liable therefor from its obligations under the Funding
Agreement or the Note.
9. Actions Against Guarantor. The agreements, obligations, warranties
and representations of the Guarantor are independent of the obligations of
Borrower and, in the event of any default, a separate action or actions may be
brought and prosecuted against Guarantor regardless of whether Borrower is
joined therein or a separate action or actions is brought before, after or
simultaneously against Borrower. Lender may maintain successive actions for
defaults. Lender's rights shall not be exhausted by the exercise of any of its
rights or remedies or by any such action or by any number of successive actions
until and unless all obligations hereby guaranteed have been fully paid and
performed. If Lender is compelled at any time to take any action or proceeding
in court or otherwise to enforce or compel compliance with the terms of this
Guaranty, Guarantor shall, in addition to any other rights and remedies to which
Lender may be entitled hereunder or as a matter of law or in equity, be
obligated to pay all costs, including without limitation reasonable attorneys'
fees, incurred or expended by Lender in connection with such enforcement
proceedings. Lender may resort to Guarantor for payment of any of the
obligations under the Financing Agreements, whether or not Lender (i) shall have
resorted to any property securing any of the obligations under the Financing
Agreements or (ii) shall have proceeded against any other obligor primarily or
secondarily obligated with respect to any of the
2
<PAGE>
obligations under the Financing Agreements (all of the actions referred to in
preceding clauses (i) and (ii) being hereby expressly waived by the Guarantor).
10. Applicable Law and Forum. This Guaranty shall be governed by and
construed in accordance with the laws of the State of Tennessee. Guarantor
further agrees that the determination of any action relating to the Guaranty
pursuant to the terms thereof shall be either in an appropriate court of the
state of Tennessee or the Unites States District Court for the Western District
of Tennessee.
11. Unenforceable Provision. Should any one or more provisions of this
Guaranty be determined to be illegal or unenforceable, all other provisions
shall to the maximum extent possible remain effective.
12. Entire Agreement. This Guaranty shall constitute the entire agreement
of Guarantor with Lender with respect to the subject matter hereof.
13. Successors and Assigns. This Guaranty shall inure to the benefit of
Lender, Lender's successors and assigns. This Guaranty may not be assigned by
Guarantor without the consent of Lender.
14. Notices. All notices and other communications to be delivered or made
hereunder shall be in writing and shall be (i) delivered personally, (ii) sent
by postage prepaid certified mail, return receipt requested, (iii) sent by
express courier service or (iv) sent by facsimile at the following addresses or
at such other addresses as shall be described in written notice as provided
herein:
Guarantor: SGI Holding Corporation Limited
595 Howe Street, Suite 1115
Vancouver, British Columbia V6C 2T5
Attn: Malcolm P. Burke
Facsimile No.: 604-687-8678
With a copy to: Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606
Attn: Andrew W. McCune, Esq.
Facsimile No.: 312-715-4800
Lender: Harrah's Interactive Investment Corporation
1023 Cherry Road
Memphis, Tennessee 38117
Attn: John M. Boushy
Facsimile No.: 901-762-8914
With a copy to: Harrah's Entertainment, Inc.
1023 Cherry Road
Memphis, Tennessee 38117
Attn: John W. McConomy, Esq.
Facsimile No.: 901-762-8735
All such notices and communications shall be effective, if mailed, upon
expiration of the fifth (5th) day following the date of mailing (except that any
notice of change of address shall be effective only upon receipt
3
<PAGE>
by the party to whom such notice is addressed), and if delivered personally or
delivered by courier, upon receipt or refusal of delivery, and if by facsimile,
upon the first business day following confirmed transmission; provided such
notice or communication is also mailed in accordance with the foregoing
requirements within two (2) days of delivery by facsimile.
IN WITNESS WHEREOF, Guarantor, intending to be legally bound, has caused
this Guaranty to be executed as of the date first above written.
Guarantor:
SGI HOLDING CORPORATION LIMITED
By: /s/ Malcolm P. Burke
--------------------
Its: President
---------
4
<PAGE>
EXHIBIT
[EXECUTION COPY]
----------------
PLEDGE AND SECURITY AGREEMENT
-----------------------------
THIS PLEDGE AND SECURITY AGREEMENT (this "Agreement") is made and
entered into as of the 13th day of May, 1997 by SGI Holding Corporation Limited,
a Bermuda exempted company ("Pledgor"), for the benefit of Harrah's Interactive
Investment Company, a Nevada corporation ("Pledgee").
RECITALS
--------
A. Pursuant to the terms of that certain Funding Agreement of even
date herewith among Interactive Entertainment Limited, a Bermuda exempted
company, as borrower ("IEL" or Borrower"), and Sky Games International Ltd., a
Bermuda exempted company, ("SGI"), and Pledgee, as lender (the "Funding
Agreement"), Pledgee has agreed to loan to IEL funds required by IEL to fund its
day-to-day business activities up to the amounts set forth in the Funding
Agreement. Such loans shall be evidenced by a Convertible Promissory Note in the
form attached to the Funding Agreement (the "Note").
B. As a condition precedent to making the loans under the Funding
Agreement, Pledgee has required that Pledgor pledge to Pledgee, as security for
the performance of the obligations of Pledgor under a Guaranty dated as of the
date hereof in favor of Pledgee (the "Guaranty"), all of the shares of capital
stock of IEL (the "IEL Shares") received by Pledgor in respect to its capital
contributions to IEL after the date of this Agreement and during the term of the
Note. All capitalized terms contained herein and not otherwise defined shall
have the meanings ascribed to them in the Funding Agreement.
AGREEMENT
---------
NOW THEREFORE, in consideration of the foregoing recitals, and the
covenants and agreements set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Pledge of Collateral. Pledgor does hereby convey, transfer, assign,
set over and grant unto Pledgee, as security for the payment and performance of
all of Pledgor's obligations under the Guaranty a continuing general lien upon
and security interest in the Collateral (as hereinafter defined) and in
Pledgor's right to receive all distributions attributable to the Collateral,
including, without limitation, all of Pledgor's right, title and interest in and
to all goods, instruments, money and other property, of whatever kind or
character, whether cash or noncash, real or personal, now or hereafter due to
Pledgor in respect of the Collateral Shares (as hereinafter defined), together
with all of the interest of Pledgor, whether now owned or hereafter acquired, as
a member in any successor entity or as an owner in any other entity, whether
said successor is a continuation of IEL or a reformation thereof, or otherwise,
together with all other property which, absent this assignment would, now or
hereafter, be distributable or distributed, transferable or transferred, payable
or paid, or deliverable or delivered to Pledgor by IEL or by such successor,
whether at any time prior to, or in connection with, or after the liquidation of
IEL, including, without limitation, distributions of cash and distributions of
property in kind, by IEL (collectively, the "Distributions"). Pledgor hereby
irrevocably authorizes and directs IEL, upon receipt of written notice from
Pledgee that an uncured Event of Default has occurred to distribute, transfer,
pay and deliver any and all of said Distributions to Pledgee, at such address as
it may direct, at such time and in such manner as such distributions would
otherwise be distributed, transferred, paid or delivered to Pledgor with respect
to the period following the date of such notice.
2. Collateral. For the purpose of this Agreement, "Collateral" shall
mean all of Pledgor's right, title and interest in and to any and all IEL Shares
issued as of the date hereof or issuable to Pledgor on and after the date of
this Agreement and so long as any amounts or obligations are outstanding under
the
<PAGE>
Financing Agreements ("Collateral Shares"), whether now owned or hereafter
acquired, together with all other rights, interests, claims and other property
of Pledgor in any manner arising out of or relating to Collateral Shares,
whether such rights, interests, claims or other property are now owned or
hereafter acquired by Pledgor, whatever their respective kind or character,
whether they are tangible or intangible property, and wheresoever they may exist
or be located, including, without limitation, all of the rights of Pledgor
(whether now owned or hereafter acquired) to Distributions of or from IEL in
respect to the Collateral Shares, whether cash or noncash, and whether prior to
or in connection with the liquidation of IEL and all proceeds, whether cash
proceeds or noncash proceeds (as such terms are defined in the Uniform
Commercial Code), and products of any and all of the foregoing.
3. Delivery of Share Certificates; Stock Powers. Pledgor shall
promptly deliver to Pledgee share certificates, if any, or other documents
representing Collateral acquired or received after the date of this Agreement
with stock powers duly executed by Pledgor. If at any time Pledgee notifies
Pledgor that additional stock powers endorsed in blank held by Pledgee with
respect to the Collateral or other documents with respect to the Collateral are
required, Pledgor shall promptly execute in blank and deliver such stock powers
or other documents as Pledgee may request.
4. Stock Dividends and Distributions. If the Collateral Shares or
any additional shares of capital stock, instruments, or other property
distributable on or by reason of the Collateral, shall come into the possession
or control of Pledgor, and such property is such that a security interest
therein can be perfected only by possession by Pledgee, Pledgor shall hold the
same in trust and forthwith transfer and deliver the same to Pledgee subject to
the provisions hereof. Notwithstanding the above, absent the occurrence of an
uncured Event of Default, Pledgor shall retain the right to vote, receive and
retain all dividends or other Distributions declared on all interests included
in the Collateral Shares. Upon or at any time after the occurrence an uncured
Event of Default, Pledgee, at its option to be exercised in its sole discretion,
may foreclose under the terms of this Agreement and/or deliver written notice to
IEL to pay all Distributions to Pledgee. IEL shall be entitled to rely
conclusively on such notice and is hereby authorized and directed by Pledgor to
pay all Distributions to Pledgee upon receipt of such notice auld shall have no
liability to Pledgor for any loss or damage Pledgor may incur by reason of said
reliance.
5. Power of Attorney. Pledgor hereby constitutes and irrevocably
appoints Pledgee, with full power of substitution and revocation by Pledgee, as
Pledgor's true and lawful attorney-in-fact, to the full extent permitted by law,
at any time or times when an Event of Default has occurred and is continuing,
to: affix to certificates and documents representing the Collateral the stock
powers or other documents delivered with respect thereto; transfer or cause the
transfer of the Collateral or any part thereof on the books of IEL to the name
of Pledgee or Pledgee's nominee and thereafter exercise as to such Collateral
all the rights, powers and remedies of an owner; and execute and file on its
behalf any financing statements, continuation statements or other documentation
required to perfect or continue the security interest created hereby or
otherwise protect Pledgee's interest in the Collateral. The power of attorney
granted pursuant to this Agreement and all authority hereby conferred are
granted and conferred solely to protect Pledgee's interest in the Collateral and
shall not impose any duty upon Pledgee to exercise any power. This power of
attorney shall be irrevocable as one coupled with an interest.
6. No Assumption. Notwithstanding any of the foregoing and except as
otherwise provided herein, whether or not a default by Pledgor shall have
occurred under the terms of the Financing Agreements and whether or not Pledgee
elects to foreclose on its security interest in the Collateral and Distributions
as set forth herein, neither receipt by Pledgee of any of Pledgor's right, title
and interest in and to the Distributions, now or hereafter due to Pledgor from
IEL nor Pledgee's foreclosure of its security interest
-2-
<PAGE>
in the Collateral, shall in any way be deemed to obligate Pledgee to assume any
of Pledgor's obligations, duties, expenses or liabilities under, or under any
and all agreements now existing or hereafter drafted or executed (collectively,
the "Obligations"). In the event of foreclosure by Pledgee, Pledgor shall remain
bound and obligated to perform the Obligations and Pledgee shall not be deemed
to have assumed any of such Obligations.
7. Representations, Warranties and Covenants. Pledgor represents,
warrants, covenants and agrees that it has the full right and title to its
interest in the Collateral and the Distributions free and clear of any liens,
encumbrances or security interests other than in favor of Pledgee and the full
power and authority to pledge, convey, transfer and assign its interest therein.
Pledgor shall not convey, transfer, assign, set over or pledge to any other
party any of its interest in the Collateral or the Distributions.
8. Defaults, Remedies.
(a) An "Event of Default" under the Financing Agreements shall be an
Event of Default hereunder (an "Event of Default").
(b) Upon the occurrence of an uncured Event of Default hereunder,
Pledgee may, at its option, do any one or more of the following:
(i) declare all indebtedness secured hereby to be immediately
due and payable, whereupon all unpaid principal of and accrued and
unpaid interest on said indebtedness and other amounts declared due
and payable shall be and become immediately due and payable without
presentment, demand, protest or notice of any kind;
(ii) either personally, or by means of a court appointed
receiver, take possession of all or any of the Collateral and exclude
therefrom Pledgor and all others claiming under Pledgor, and
thereafter exercise all rights and powers of Pledgor with respect to
the Collateral or any part thereof. Upon application to a court of
competent jurisdiction, Pledgee shall be entitled to a receiver as a
matter of strict right without notice and without regard to the
adequacy or value of any security for the indebtedness secured hereby
or the solvency of any party bound for its payment. The receiver shall
have all the rights and powers permitted under the laws of the State
of Tennessee. In the event Pledgee demands, or attempts to take
possession of the Collateral in the exercise of any rights under this
Agreement, Pledgor promises and agrees to promptly turn over and
deliver complete possession thereof to Pledgee;
(iii) without notice to or demand upon Pledgor, make such
payments and do such acts as Pledgee may deem necessary to protect its
security interest in the Collateral, including, without limitation,
paying, purchasing, contesting or compromising any encumbrance, charge
or lien which is prior to or superior to the security interest granted
hereunder, and in exercising any such powers or authority to pay all
expenses incurred in connection therewith;
(iv) require Pledgor to take all actions necessary to deliver
such Collateral to Pledgee, or an agent or representative designed by
it. Pledgee, and its agents and representatives, shall have the right
to enter upon any or all of Pledgor's premises and property to
exercise Pledgee's rights hereunder;
-3-
<PAGE>
(v) foreclose this Agreement as herein provided or in any
manner permitted by law, and sell or cause to be sold in such order as
Pledgee may determine, the property described in this Agreement;
(vi) sell or otherwise dispose of the Collateral at public or
private sale, without having the Collateral at the place of sale, and
upon terms and in such manner as Pledgee may determine; provided,
Pledgee or IEL may be a purchaser at any sale and may apply any unpaid
portion of indebtedness on account of or in full satisfaction of the
purchase price; and
(vii) exercise any remedies of a secured party under the Uniform
Commercial Code of Tennessee or any other applicable law.
(c) Unless the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Pledgee shall give Pledgor at least ten (10) days' prior written notice of
the time and place of any public sale of the Collateral or other intended
disposition thereof to be made which notice the parties hereto agree to be
reasonable. Such notice may be mailed to Pledgor at the address set forth
in the Shareholders Agreement.
(d) The proceeds of any sale under subparagraph 7(b)(vi) shall be
applied as follows:
(i) to the repayment of the reasonable costs and expenses of
retaking, holding and preparing for the sale and the selling of the
Collateral (including legal expenses and attorneys' fees) and the
discharge of all assessments, encumbrances, charges or liens, if any,
on the Collateral prior to the lien hereof (except any taxes,
assessments, encumbrances, charges or liens subject to which such sale
shall have been made);
(ii) to the payment of all outstanding amounts then due to
Pledgee (including principal and interest) under the Financing
Agreements and
(iii) the surplus, if any, shall be paid to the Pledgor or to
whomsoever may be lawfully entitled to receive the same, or as a court
of competent jurisdiction may direct.
(e) Pledgor recognizes that, by reason of certain prohibitions
contained in the Securities Act of 1933, as amended (the "Securities Act"),
and applicable state securities laws, Pledgee may be compelled, with
respect to any sale of all or any part of the Collateral, to limit
purchasers to those who will agree, among other things, to acquire the
Collateral for their own account, for investment and not with a view to the
distribution or resale thereof. Pledgor acknowledges that any such private
sales may be at prices and on terms less favorable to Pledgor than those
obtainable through a public sale without such restrictions (including,
without limitation, a public offering made pursuant to a registration
statement under the Securities Act), and, notwithstanding such
circumstances, agrees that any such private sale shall be deemed to have
been made in a commercially reasonable manner and that Pledgee shall have
no obligation to engage in public sale and no obligation to delay the sale
of any Collateral for the period of time necessary to permit the issuer
thereof to register it for a form of public sale requiring registration
under the Securities Act or under applicable state securities laws, even if
Pledgor would agree to do so.
(f) If Pledgee exercises its right to sell any or all of the
Collateral, upon written request from Pledgee, Pledgor shall and shall
cause IEL from time to time to furnish to Pledgee all such
-4-
<PAGE>
information as Pledgee may request in order to determine the IEL Shares and
other instruments included in the Collateral which may be sold by Pledgee
as exempt transactions under the Securities Act and the rules of the
Securities and Exchange Commission thereunder, as the same are from time to
time in effect.
(g) Pledgee shall have the right to enforce one or more remedies
hereunder, successively or concurrently, and such action shall not operate
to estop or prevent Pledgee from pursuing any further remedy which it may
have, and any repossession or retaking or sale of the Collateral pursuant
to the terms hereof shall not operate to release Pledgor until full
satisfaction of all of its obligations under the Funding Agreement.
(h) Pledgor agrees that any legal action or proceeding with respect
to this Agreement may be brought in the courts of the State of Tennessee,
all as Pledgee may elect. By execution of this Agreement, Pledgor hereby
submits to such jurisdiction, hereby expressly waiving whatever rights may
correspond to it by reason of its present or future domicile.
9. Further Documentation. Pledgor shall duly execute and/or deliver
(or cause to be duly executed and/or delivered) to Pledgee any instrument,
document, order, financing statement, assignment, waiver, consent, or other
writing which may be reasonably necessary to Pledgee to carry out the terms of
this Agreement, the Funding Agreement and the Note and to perfect its security
interest in and facilitate the collection of the Collateral, the proceeds
thereof, and any other property at any time constituting security to Pledgee.
Pledgor shall perform or cause to be performed such acts as Pledgee may
reasonably request to establish and maintain for Pledgee a valid and perfected
security interest in and security title to the Collateral, free and clear of any
liens, encumbrances or security interest other than in favor of Pledgee.
10. Termination of Agreement and Assignment. This Agreement shall
automatically terminate and shall be surrendered upon satisfaction in full of
all obligations of IEL under the Note, including by way of conversion of amounts
outstanding under the Note into shares of common stock, Cdn. $.01 par value, of
SGI in connection with the amalgamation of IEL with and into SGIH. Upon the
termination of this Agreement, Pledgee shall deliver to Pledgor such instruments
as Pledgor may reasonably request to discharge the lien created by this
Agreement.
11. Governing Law. This Pledge and Security Agreement shall be
governed by and construed in accordance with the laws of the State of Tennessee.
SGIH further agrees that the determination of any action relating to this
Agreement or any of the Financing Agreements delivered in favor of Pledgee
pursuant to the terms thereof shall be either an appropriate court of the State
of Tennessee or the United States District Court for the Western District of
Tennessee.
12. Successors and Assigns. All agreements, covenants, conditions and
provisions of this Agreement shall inure to the benefit of and be binding upon
the respective successors and assigns of the parties hereto.
13. Notices. All notices and other communications to be delivered or
made hereunder shall be in writing and shall be (i) delivered personally, (ii)
sent by postage prepaid certified mail, return receipt requested, (iii) sent by
express courier service, or (iv) sent by facsimile at the following addresses or
at such other addresses as shall be described in a written notice as provided
herein:
-5-
<PAGE>
Pledgor: SGI Holding Corporation Limited
595 Howe Street, Suite 1115
Vancouver, British Columbia V6C 2T5
Attn: Malcolm P. Burke
Facsimile No.: 604-687-8678
With a copy to: Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606
Attn: Andrew W. McCune, Esq.
Facsimile No.: 312-715-4800
Pledgee: Harrah's Interactive Investment Corporation
1023 Cherry Road
Memphis, Tennessee 38117
Attn: John M. Boushy
Facsimile No.: 901-762-8914
With a copy to: Harrah's Entertainment, Inc.
1023 Cherry Road
Memphis, Tennessee 38117
Attn: John W. McConomy, Esq.
Facsimile No.: 901-762-8735
All such notices and communications shall be deemed effective, if mailed, upon
expiration of the fifth (5th) day following the date of mailing (except that any
notice of change of address shall be effective only upon receipt by the party to
whom such notice is addressed), if delivered personally or delivered by courier,
upon receipt or refusal of delivery, and if by facsimile, upon the first
business day following confirmed transmission; provided such notice or
communication is also mailed in accordance with the foregoing requirements
within two (2) days of delivery by facsimile.
14. Attorney's Fees. In the event of any dispute or litigation
concerning the enforcement or validity of this Agreement, the losing party shall
pay all reasonable charges, costs, and expenses (including reasonable attorneys'
fees and costs) incurred by the prevailing party whether or not any action or
proceeding is brought relative to such dispute and whether or not such
litigation is prosecuted to judgment.
15. Severability. Every provision of this Agreement is intended to be
severable. In the event any term or provision hereof is declared by a court of
competent jurisdiction to be illegal or invalid for any reason whatsoever, such
illegality or invalidity shall not affect the balance of the terms and
provisions hereof, which terms and provisions shall remain binding and
enforceable.
16. Amendment. This Agreement may be modified or rescinded only by a
writing expressly relating to this Agreement and signed by both Pledgor and
Pledgee.
IN WITNESS WHEREOF, Pledgor has executed this Agreement as of the date
first above written.
PLEDGOR
-6-
<PAGE>
SGI HOLDING CORPORATION LIMITED
By: /s/ Malcolm P. Burke
--------------------
Title: President
---------
-7-
<PAGE>
EXHIBIT 20
SKY GAMES INTERNATIONAL LTD.
1115-595 Howe Street
Vancouver, British Columbia V6C 2T5
May 13, 1997
To Our Shareholders:
You are cordially invited to attend a Special General Meeting of
Shareholders of Sky Games International Ltd. ("Sky Games") which will be held at
8:30 a.m., Central Daylight Savings Time, on June 16, 1997, at the offices of
Altheimer & Gray, 10 South Wacker Drive, Suite 4000, Chicago, Illinois (the
"Special General Meeting").
The Special General Meeting will be the culmination of an extended effort
by the board of directors (the "Board") and the management of Sky Games to
simplify Sky Games' corporate structure and to enhance Sky Games' competitive
position. On May 13, 1997, Sky Games entered into a Plan and Agreement of
Merger and Amalgamation involving subsidiaries of Sky Games and various
subsidiaries of Harrah's Entertainment, Inc. which will result in Sky Games
being amalgamated with both a direct subsidiary and its indirect subsidiary
Interactive Entertainment Limited ("IEL"). These amalgamations will serve to
simplify the capital structure of the company from its current multi-tiered
arrangement and streamline the decision making process. Following the
restructuring, an affiliate of Harrah's Entertainment, Inc. will become the
largest shareholder of the company with special Board representation rights and
approval rights, Sky Games will change its name to "Interactive Entertainment
Limited" and the operations of the company will be directly managed by a
combination of the current personnel of Sky Games and IEL, with Gordon Stevenson
becoming President and Chief Executive Officer.
In late February 1997, Sky Games agreed with B/E Aerospace, Inc. to convert
Sky Games' promissory note to B/E Aerospace in the approximate outstanding
amount of $2.6 million into convertible redeemable preference shares of Sky
Games. The conversion of debt is essential to bolster the capital and surplus
position of Sky Games.
Both transactions are vital to the future of Sky Games. Neither
transaction can be consummated without Sky Games taking actions which require
your approval as a shareholder of Sky Games. Therefore, at the Special General
Meeting you will be asked to consider a shareholder resolution which will:
. amend the Bye-Laws of Sky Games;
. change the name of Sky Games to "Interactive Entertainment Limited;"
. increase the authorized share capital of Sky Games to create 3,000
convertible redeemable Class A Preference Shares and 5,000,000 redeemable
Class B Preference Shares; and
. change the par value of the common stock of Sky Games to U.S.$.01.
These are exciting and critical times for your company. The restructuring,
coupled with the creation of a management incentive plan and the installation of
Gordon Stevenson as President and CEO, is intended to move Sky Games to the next
level in its development. The Board has voted unanimously to approve the
shareholder resolution and to recommend your approval and adoption of the
shareholder resolution. The actions resulting from the resolution are described
more fully in the accompanying Proxy Statement. I hope you can attend the
Special General Meeting and assist the Board by voting for the shareholder
resolution. Whether or not you plan to attend the Special General Meeting,
please be sure to date, sign and return the proxy card in the enclosed postage-
paid envelope as promptly as possible so that your shares may be represented at
the meeting and voted in accordance with your wishes. Your vote is important
regardless of the number of shares you own.
Sincerely,
Chairman of the Board
<PAGE>
SKY GAMES INTERNATIONAL LTD.
1115-595 Howe Street
Vancouver, British Columbia V6C 2T5
NOTICE OF SPECIAL GENERAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 16, 1997
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that a Special General Meeting (the "Special General
Meeting") of Shareholders of Sky Games International Ltd., a Bermuda exempted
company ("Sky Games"), will be held at the offices of Altheimer & Gray, 10 South
Wacker Drive, Suite 4000, Chicago, Illinois 60606 on June 16, 1997, at 8:30
o'clock in the morning, Central Daylight Savings Time, to:
(a) consider and vote upon the following shareholder resolution:
IT WAS RESOLVED that: 1) the amendments to the Bye-Laws set out
in Appendix B attached to the accompanying Proxy Statement be and they are
hereby approved; 2) the name of Sky Games International Ltd. be changed to
"Interactive Entertainment Limited"; 3) the par value of the Common Shares
of Sky Games International Ltd. be changed from Cdn.$.01 to US$.01 each; 4)
the authorized share capital of Sky Games International Ltd. be increased
from US$500,000 to US$550,030 by the creation of 3,000 Non-Voting
Convertible Redeemable Preference Shares of par value US$.01 each and
5,000,000 Redeemable Preference Shares of par value US$.01 each; and 5) the
Directors of Sky Games International Ltd. be and they are hereby authorized
to issue the Non-Voting Convertible Redeemable Preference Shares and the
Redeemable Preference Shares on such terms as the Directors of Sky Games
International Ltd. deem appropriate in accordance with the provisions of
the Bye-Laws of Sky Games International Ltd.; and
(b) transact such other business as may properly come before
the Special General Meeting.
The Special General Meeting and consideration of the resolution are in
connection with the amalgamation of Sky Games with its direct subsidiary SGI
Holding Corporation Limited, a Bermuda exempted company ("SGIHC"), and its 80%
owned indirect subsidiary Interactive Entertainment Limited ("IEL"). The text
of the agreement for such amalgamations is attached as Appendix A to the
attached Proxy Statement. As a result of these amalgamations, the issued and
outstanding shares of common stock of IEL held by Harrah's Interactive
Investment Company, a Nevada corporation ("HIIC") and the holder of 20% of the
outstanding capital stock of IEL, would be converted into 5,879,040 shares of
common stock, par value U.S.$.01 per share, of Sky Games (subject to adjustment
in the manner described on the attached Proxy Statement). HIIC and its
affiliates would be given the right to representation on the Board of Directors
and certain committees generally proportionate to their ownership of common
stock of Sky Games and the right that their prior approval would be required
before Sky Games could undertake specified significant corporate actions.
Sky Games has also agreed with B/E Aerospace, Inc. ("B/E Aerospace") to the
conversion of Sky Games' promissory note to B/E Aerospace into preference shares
of Sky Games (the "B/E Conversion") which will be convertible into the common
stock of Sky Games.
Approving the resolution is necessary to enable Sky Games to perform its
obligations pursuant to such agreements. Without shareholder approval of the
resolution, the Amalgamations and the B/E Conversion will not be consummated.
The resolution would result in:
. certain amendments to the Bye-Laws of Sky Games;
. the name of Sky Games being changed to "Interactive Entertainment
Limited";
<PAGE>
. the authorized share capital of Sky Games increasing by the creation of
3,000 convertible redeemable Class A Preference Shares, par value U.S.$.01
per share (the "Class A Preference Shares"); and 5,000,000 redeemable Class
B Preference Shares, par value U.S.$.01 per share (the "Class B Preference
Shares"); and
. the par value of the common stock of Sky Games changing from Cdn.$.01 to
U.S.$.01 per share.
The amendments to the Bye-Laws of Sky Games, the text of which is attached
as Appendix B to the attached Proxy Statement, would:
. provide HIIC and its affiliates (the "HIIC Entities") with the right to
appoint a number of members of the Board of Directors of Sky Games (the
"Board") generally proportionate to their share holdings and the right to
similar representation on the executive, audit and compensation committees
of the Board;
. provide the HIIC Entities with approval rights with respect to specified
significant corporate actions, such as merging or amalgamating, selling a
substantial portion of its assets, making material acquisitions or changing
its business activities;
. add provisions to enable Sky Games to take actions with respect to
shareholders of Sky Games who could reasonably be expected to cause any
company engaged in the gaming business in any jurisdiction not to obtain,
maintain or renew any licenses or approvals necessary to conduct the gaming
business;
. add provisions regarding the qualification of any director or officer who
could reasonably be expected to cause any company engaged in the gaming
business in any jurisdiction not to obtain, maintain or renew any licenses
or approvals necessary to conduct the gaming business;
. permit the Bye-Laws of Sky Games to be amended by the vote of a simple
majority of the votes cast at any general meeting of the shareholders of
Sky Games other than provisions relating to the HIIC Entities' Board and
shareholder approval rights;
. authorize the Board to designate the rights attaching to the Class A
Preference Shares and the Class B Preference Shares;
. permit shareholders of Sky Games to issue irrevocable proxies with respect
to their holdings of Common Stock; and
. make certain technical corrections to the Bye-Laws.
The foregoing matters are described more fully in the accompanying Proxy
Statement. While all of the shareholders of record on the date of the meeting
are entitled to attend and vote at the Special General Meeting, only Sky Games'
shareholders of record at the close of business on April 21, 1997 have been
mailed this notice and proxy.
We hope you will be represented at the meeting by signing, dating and
returning the enclosed proxy card in the accompanying envelope as promptly as
possible, whether or not you expect to be present in person. Your vote is
important - as is the vote of every shareholder - and the Board appreciates the
cooperation of shareholders in directing proxies to vote at the meeting.
Your proxy may be revoked at any time by the following procedures set forth
in the accompanying Proxy Statement.
By order of the Board of Directors
Secretary
May 13, 1997
<PAGE>
Sky Games International Ltd.
PROXY STATEMENT
---------------
This Proxy Statement ("Proxy Statement") relates to a shareholder
resolution (the "Shareholder Resolution") proposed in connection with:
(i) the proposed amalgamation (the "Subsidiary Amalgamation") of
Interactive Entertainment Limited ("IEL"), a Bermuda exempted company and an 80%
owned subsidiary of SGI Holding Corporation Limited, a Bermuda exempted company
("SGIHC") and wholly-owned subsidiary of Sky Games International Ltd., a Bermuda
exempted company ("Sky Games"), with and into SGIHC pursuant to a Plan and
Agreement of Merger and Amalgamation (the "Amalgamation Agreement") dated as of
May 13, 1997, among IEL, SGIHC, Sky Games and Harrah's Interactive Investment
Company, a Nevada corporation and the owner of 20% of the outstanding stock of
IEL ("HIIC"), and the amalgamation (the "Parent Amalgamation") of SGIHC with and
into Sky Games (collectively, the "Amalgamations"); and
(ii) the conversion of Sky Games' note to B/E Aerospace, Inc. for
approximately $2.6 million (including accrued and unpaid interest) into shares
of convertible redeemable Class A Preference Shares of Sky Games (the "B/E
Conversion").
Pursuant to the Subsidiary Amalgamation, the outstanding shares of IEL
common stock held by HIIC will be converted into 5,879,040 shares (the
"Conversion Shares") of common stock, par value U.S.$.01 per share, of Sky Games
("Common Stock"). The Conversion Shares are subject to adjustment, as more
fully described herein. See "Summary -- The Amalgamations" and "The
Amalgamations." The Amalgamation Agreement also provides that HIIC and its
affiliates (the "HIIC Entities") will have the right to appoint members (the
"HIIC Appointees") to the Board of Directors of Sky Games (the "Board") and
specified committees in a number generally proportionate to their share
holdings. The HIIC Entities, as shareholders, and the HIIC Appointees would
have the right to approve specified significant corporate actions by Sky Games
for as long as the ownership of Common Stock by the HIIC Entities is in excess
of 20% (10% in some cases) of the outstanding voting shares computed on a fully-
diluted basis. See "Certain Provisions of the Amalgamation Agreement."
A number of amendments are proposed to be made to Sky Games' Bye-Laws to
reflect the rights granted the HIIC Entities and to improve the management
controls and the protection of Sky Games by requiring that all directors,
officers and shareholders not have an adverse impact on Sky Games or the HIIC
Entities ability to conduct certain regulated activities (the "Amendments").
See "Summary -- The Amendments" and "The Amendments."
A number of additional corporate actions are also proposed: to change the
name of Sky Games to "Interactive Entertainment Limited" to preserve the
corporate identity of IEL following the Amalgamations (the "Name Change"); to
change the par value of the Common Stock to U.S.$.01 per share from Cdn.$.01 per
share to reflect the increasing importance of U.S. capital markets to Sky Games
(the "Change in Par Value"); to increase the authorized share capital of Sky
Games by creating 3,000 Class A Preference Shares, par value U.S.$.01 per share,
to effect the B/E Conversion and, to create additional flexibility in Sky Games'
capital structure, the creation of 5,000,000 Class B Preference Shares, par
value U.S.$.01 per share (collectively, the "Capitalization Change"). See
"Summary -- Additional Actions" and "Additional Actions."
Approval and adoption of the Shareholder Resolution will have the effect of
approving and adopting each of the Amendments and the Additional Actions. This
Proxy Statement serves as the Proxy Statement of Sky Games for its Special
General Meeting of shareholders to be held on June 16, 1997 (the "Special
General Meeting") to consider the Shareholder Resolution. See "The Meeting."
This Proxy Statement and the accompanying form of proxy are first being mailed
to shareholders of Sky Games on or about May 13, 1997 in connection with the
solicitation by the Board of proxies from the holders of Common Stock to be used
at the Special General Meeting.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY SKY GAMES. THIS PROXY STATEMENT DOES NOT
CONSTITUTE THE SOLICITATION OF A PROXY IN ANY JURISDICTION IN WHICH, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH PROXY SOLICITATION. THE DELIVERY OF
THIS PROXY STATEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF SKY GAMES SINCE THE DATE HEREOF
OR THAT THE INFORMATION SET FORTH OR INCORPORATED BY REFERENCE HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------------------
THE DATE OF THIS PROXY STATEMENT IS May 13, 1997.
<PAGE>
AVAILABLE INFORMATION
Sky Games is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports and other
information may be inspected and copied or obtained by mail upon the payment of
the Commission's prescribed rates at the public reference facilities maintained
by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the following Regional Offices of the Commission:
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661;
and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Such material may also be accessed electronically by means of the Commission's
home page on the Internet at http://www.sec.gov. The Common Stock of Sky Games
is quoted on the National Association of Securities Dealers Automated Quotation
System's SmallCap Market ("SmallCap Market") and certain Sky Games reports may
be available for inspection at the offices of the National Association of
Securities Dealers, Inc., 9513 Key West Avenue, Rockville, Maryland 70850.
Sky Games is also subject to the British Columbia Securities Act, as
amended, and regulations promulgated thereunder, and, in accordance therewith,
files reports and other information with the British Columbia Securities
Commission (the "B.C. Commission"). Such reports and other information may be
inspected and copied at the public reference facilities maintained by the B.C.
Commission at 1100-865 Hornby Street, Vancouver, British Columbia, Canada V6Z
2H4.
Statements contained in this Proxy Statement or in any document
incorporated in this Proxy Statement by reference as to the contents of any
contract or other document referred to herein or therein are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document attached as an appendix to this Prospectus or such other
document, each such statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT INCORPORATES CERTAIN DOCUMENTS BY REFERENCE WHICH ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE TO
ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, UPON REQUEST FROM, ERIC WISE,
TELEPHONE NUMBER (312) 715-4017. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY MAY 26, 1997.
Requests for such documents should be directed to the person indicated in
the immediately preceding paragraph.
The following documents, which have been filed with the Commission pursuant
to the Exchange Act, are hereby incorporated herein by reference:
(1) Sky Games' Annual Report on Form 20-F for its fiscal year ended
February 29, 1996;
(2) Sky Games' report on Form 6-K filed on July 31, 1996;
(3) Sky Games' report on Form 6-K filed on October 17, 1996;
(4) Sky Games' report on Form 6-K filed on November 22, 1996; and
(5) Sky Games' report on Form 6-K filed on January 24, 1997.
ii
<PAGE>
All documents and reports filed by Sky Games pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy Statement
and prior to the date of the Special General Meeting shall be deemed to be
incorporated by reference herein and to be a part hereof from the respective
dates of filing of such documents or reports. All information appearing in this
Proxy Statement or in any document incorporated herein by reference is not
necessarily complete and is qualified in its entirety by the information and
financial statements (including notes thereto) appearing in the documents
incorporated herein by reference and should be read together with such
information and documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein (or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein) modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed to constitute a
part of this Proxy Statement except as so modified or superseded.
ENFORCEABILITY OF CIVIL LIABILITIES
UNDER FEDERAL SECURITIES LAWS
Sky Games is a Bermuda company. Certain directors and executive officers
are residents of countries other than the United States. A portion of the assets
of Sky Games and of such individuals is located outside of the United States. It
may be difficult or impossible for investors to effect service of process within
the United States upon such persons with respect to matters arising under the
U.S. federal securities laws or to enforce against them in U.S. courts judgments
of such courts predicated upon civil liability provisions of the U.S. securities
laws.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
AVAILABLE INFORMATION................................................................. ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... ii
ENFORCEABILITY OF CIVIL LIABILITIES
UNDER FEDERAL SECURITIES LAWS....................................................... iii
SUMMARY............................................................................... 1
The Companies....................................................................... 1
The Special General Meeting......................................................... 4
The Amalgamations................................................................... 6
The Amendments and the Additional Actions........................................... 9
Price Range of Common Stock......................................................... 10
Selected Financial Information...................................................... 11
Selected Historical Financial Information of IEL.................................... 11
Selected Historical Financial Information of Sky Games.............................. 11
Selected Unaudited Pro Forma Consolidated Financial Information of Sky Games........ 12
RECENT DEVELOPMENTS................................................................... 15
Product Developments................................................................ 15
Option Plans........................................................................ 15
B/E Conversion...................................................................... 15
Private Placement of Debentures..................................................... 16
February 28, 1997 Year-End Results.................................................. 17
Cancellation of Performance Shares.................................................. 17
Change in Fiscal Year End........................................................... 18
RISK FACTORS.......................................................................... 19
Integration of the Businesses....................................................... 19
Management of the Amalgamated Company's Operations.................................. 19
Uncertainty of Achieving Business Objective......................................... 19
Realization of Anticipated Benefits to Amalgamations................................ 19
Substantial Increase in the Number of Outstanding Shares of Common Stock............ 20
Discretion of Largest Shareholder to Appoint Certain Members of the
Board of Directors and Approve Specified Corporate Actions........................ 20
Inability to Integrate Software..................................................... 21
New and Untested Product............................................................ 21
SHAREHOLDER EQUITY TABLE.............................................................. 22
THE MEETING........................................................................... 23
Special General Meeting............................................................. 23
Quorum.............................................................................. 23
Vote Required....................................................................... 23
Record Date; Shares Entitled To Vote................................................ 24
Voting of Proxies................................................................... 24
Revocation of Proxies............................................................... 24
Solicitation of Proxies............................................................. 24
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Security Ownership of Certain Persons.............................................. 25
THE AMALGAMATIONS.................................................................... 25
The Effective Time of the Subsidiary Amalgamation.................................. 25
Adjustments to Amalgamation Consideration.......................................... 25
Background of the Amalgamations.................................................... 26
Recommendation of the Board; Reasons for the Amalgamations......................... 34
Analysis of Financial Advisor...................................................... 35
Effective Time of the Amalgamations................................................ 38
Governance......................................................................... 39
Certain U.S. Federal Income Tax Consequences....................................... 39
Anticipated Accounting Treatment................................................... 39
Resales of Common Stock and Registration Rights.................................... 40
Status as Foreign Private Issuer................................................... 40
Interests of Certain Persons in the Amalgamations.................................. 40
Related Agreements................................................................. 42
CERTAIN PROVISIONS OF THE AMALGAMATION AGREEMENT..................................... 44
Conditions to the Subsidiary Amalgamation.......................................... 44
Additional Conditions to Obligation of HIIC........................................ 45
Additional Conditions to Obligation of Sky Games................................... 46
Representations and Warranties..................................................... 46
Certain Covenants; Conduct of Business of Sky Games................................ 47
Amendment, Waiver and Termination.................................................. 48
Indemnification Provisions......................................................... 49
THE AMENDMENTS....................................................................... 50
Board Representation............................................................... 50
Approval Rights.................................................................... 51
Shareholder Approval Rights........................................................ 51
Rights to Protect Gaming Licenses and Integrity.................................... 51
Rights Attaching to Preference Shares.............................................. 52
Amendment to the Bye-Laws by a Simple Majority; Irrevocable Proxy;
Technical Amendments............................................................. 52
ADDITIONAL ACTIONS................................................................... 52
The Name Change.................................................................... 52
The Change in Par Value............................................................ 53
The Capitalization Change.......................................................... 53
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS.......................... 54
SHARE OWNERSHIP OF OFFICERS, DIRECTORS, EMPLOYEES
AND SIGNIFICANT SHAREHOLDERS OF THE COMPANY........................................ 57
MANAGEMENT AND OTHER INFORMATION..................................................... 58
SHARES ELIGIBLE FOR FUTURE SALE...................................................... 58
Registration Rights................................................................ 58
</TABLE>
v
<PAGE>
APPENDICES:
Appendix A - Agreement and Plan of Merger and Amalgamation
Appendix B - Form of Amendments to the Bye-Laws
Appendix C - Form of Shareholder Resolution
Appendix D - Analysis of Valuemetrics, Inc. dated as of April 22, 1997
vi
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained or incorporated by
reference in this Proxy Statement and the Appendices hereto.
As used herein, in each case unless the context otherwise clearly requires,
"Amalgamations" refers to the Parent Amalgamation and the Subsidiary
Amalgamation collectively, "Amalgamation Agreement" refers to the Plan and
Agreement of Merger and Amalgamation, a copy of which is attached hereto as
Appendix A, "Amendments" refers to the proposed amendments to the Bye-Laws of
Sky Games in such form as set forth in Appendix B attached hereto, "Name Change"
refers to changing the name of Sky Games to "Interactive Entertainment Limited,"
"Change in Par Value" refers to changing the par value of the Common Stock to
U.S.$.01, "Capitalization Change" refers to the authorization of an increase in
the share capital of Sky Games by the creation of 3,000 convertible redeemable
Class A Preference Shares and 5,000,000 redeemable Class B Preference Shares,
"Additional Actions" refers to the Name Change, the Change in Par Value and the
Capitalization Change, collectively, the "Shareholder Resolution" refers to the
shareholders' resolution approving and adopting the Amendments and the
Additional Actions attached hereto as Exhibit C, and "Sky Games" refers to Sky
Games International Ltd., without its subsidiaries, prior to the Amalgamations,
the "Company" refers to Sky Games with its subsidiaries, including IEL, prior to
the Amalgamations, and the "Amalgamated Company" refers to Sky Games, SGIHC and
IEL as amalgamated after the Amalgamations.
--------------------
Shareholders are urged to read carefully this Proxy Statement and the
Appendices hereto in their entirety and should consider carefully the
information set forth below under the heading "Risk Factors" beginning on page
19.
--------------------
The Companies
Sky Games. Sky Games was incorporated pursuant to the laws of the Province
of British Columbia on February 28, 1981 under the name Tu-Tahl Petro Inc. On
May 10, 1990, Sky Games changed its name to Creator Capital, Inc., and on
January 23, 1995, Sky Games changed its name to Sky Games International Ltd.
Sky Games was reincorporated through the continuance of its corporate existence
from the province of British Columbia to the Yukon Territory on July 15, 1992.
Effective February 22, 1995, Sky Games continued its corporate existence from
the Yukon territory to Bermuda as an exempted company under the Bermuda
Companies Act of 1981 (the "Bermuda Act").
The Sky Games business is conducted by Sky Games through its wholly-owned
subsidiaries, Sky Games International Corp., SGIHC and Creator Island
Development, Inc., and SGIHC's 80% owned subsidiary, IEL. IEL is Sky Games'
principal operating subsidiary. IEL's business is operated by Harrah's
Interactive Entertainment Company, a Nevada corporation ("HIEC"), pursuant to a
Management Agreement dated as of December 30, 1994 (the "Management Agreement")
between IEL and HIEC. In November of 1992, Sky Games approached Harrah's, a
Nevada corporation, to provide consulting services on the management and
operation of its business, which resulted in the parties entering into a
consulting agreement in September, 1993. In mid 1994, HIIC and Sky Games began
discussing a joint venture to explore the potential of in-flight gaming. These
discussions resulted in HIIC and Sky Games forming IEL as a joint venture as of
December 30, 1994.
Sky Games' principal executive offices are located at 1115-595 Howe Street,
Vancouver, British Columbia V6C 2T5 Canada and its telephone number is 604-689-
1515.
IEL. In connection with the formation of IEL as a joint venture with HIIC,
an indirect subsidiary of Harrah's Entertainment, Inc., Sky Games transferred to
IEL its developmental stage in-flight gaming software and entered into the
Management Agreement with HIEC, also an indirect subsidiary of Harrah's
Entertainment, Inc., and
<PAGE>
the Shareholders Agreement, dated as of December 30, 1994, (the "Shareholders
Agreement") among SGIHC, IEL and HIIC. The purpose of the joint venture was to
have HIEC finalize development of the in-flight gaming software and manage the
business of IEL. Pursuant to the Management Agreement, the management of IEL has
been delegated to HIEC. Prior to the Subsidiary Amalgamation, the HIIC Entities
have not owned any capital stock of Sky Games and have not been represented on
the Board of Sky Games. The software and attendant system support, as are being
developed by HIEC for IEL, are intended to allow international airline
passengers 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 is being made possible by the introduction of audio/video,
interactive, in-flight, entertainment hardware ("IFE Systems"). The Sky Games
system is intended to interface with the IFE Systems offered by Matsushita and
is also intended to interface with the IFE Systems being developed by other
hardware manufacturers. See "Recent Developments -- Product Development," "Risk
Factors -- Inability to Integrate Software" and "-- New and Untested Product."
IEL made proposals to and held discussions with major airlines in Europe
and Asia and, in April of 1996 Sky Games announced the signing by IEL in
November of 1995 of a three-year contract, subject to a two-year extension term,
for the provision of in-flight gaming services to Singapore Airlines. The
Singapore Airlines agreement is subject to a trial period which has not yet
commenced and is further subject to termination by either party upon the
occurrence of specified events. The agreement with Singapore Airlines consists
of a license of the system to the airline and a services agreement under which
IEL will manage certain aspects of the airline's in-flight gaming operations.
Fees payable by the airline are based on a percentage of net revenues generated
from in-flight gaming services.
In order to operate the system in commercial settings, additional hardware
and software systems are necessary to properly record an account for gaming
activities by patrons. IEL has designed accounting and financial control
systems for the management of in-flight gaming operations, which will rely
partly on and use systems developed and owned by the HIIC Entities. It is
planned that in-flight gaming transactions will be paid for through major credit
cards.
IEL's principal executive offices are located at 1023 Cherry Road, Memphis,
Tennessee 38117, and its telephone number is 901-537-3800. It is anticipated
that on May 30, 1997, IEL will move its principal executive office to 845
Crossover Lane, Suite D-215, Memphis, Tennessee 38117. Following the
Amalgamations, the Amalgamated Company's principal office will be located at
what was IEL's office at 845 Crossover Lane, Suite D-215, Memphis, Tennessee
38117.
2
<PAGE>
Corporate Structure Chart
The following corporate structure chart illustrates the corporate structure
of the Company and the Amalgamated Company before and after the Amalgamations.
The Sky Games' wholly-owned subsidiaries which are not involved in the
Amalgamations, Sky Games International Corp. and Creator Island Development,
have been omitted from the chart. These subsidiaries are not material to the
Company's operations.
[INSERT DIAGRAM OF STRUCTURE OF COMPANY BEFORE AND AFTER AMALGAMATION]
3
<PAGE>
The Special General Meeting
Meeting of Shareholders........ The Special General Meeting will be held on June
16, 1997 at 8:30 a.m., Central Daylight Savings
Time, at the offices of Altheimer & Gray, 10
South Wacker Drive, Suite 4000, Chicago,
Illinois 60606.
Matter to be Considered at
the Special General Meeting.. At the Special General Meeting, shareholders of
Sky Games will be asked to approve and adopt the
Shareholder Resolution providing for the
Amendments and the Additional Actions.
Pursuant to the terms of the Amalgamation
Agreement, upon consummation of the Subsidiary
Amalgamation, the shares of IEL common stock
held by HIIC will be converted into 5,879,040
shares of Common Stock. The Conversion Shares
are subject to certain adjustments as described
under "The Amalgamations -- Adjustments to
Amalgamation Consideration." The Amendments to
the Bye-Laws are required in order to effect
certain covenants made in the Amalgamation
Agreement, to permit the B/E Conversion to be
consummated and to provide restrictions to
protect the regulatory licenses and approvals of
the Amalgamated Company and the HIIC Entities.
See "The Amendments" and "Additional Actions."
If the Shareholder Resolution providing for the
Amendments and Additional Actions is not
approved by the shareholders of Sky Games, the
Amalgamations and the B/E Conversion will not be
consummated. For additional information relating
to the Special General Meeting, see "The
Meeting."
Interests of Certain Parties... Certain members of the management and
shareholders of the companies that are
participating in the Amalgamations, including
HIIC, have interests in the Amalgamations and
the approval of the Shareholder Resolution
providing for the Amendments and the Additional
Actions that are different from, or in addition
to, the interests of the shareholders of Sky
Games or the other entities participating in the
Amalgamations generally. See "The
Amalgamations --Interests of Certain Persons in
the Amalgamations," and "The Amendments -- Board
Representation" and "-- Approval Rights."
Interests of HIIC Entities..... The interests of the HIIC Entities in the
Amalgamations include: (i) the right to receive
5,879,040 shares of Common Stock as
consideration for the Amalgamations, as such
shares may be adjusted for dilution resulting
from share issuances prior to the Amalgamations
and for the issuance to B/E Aerospace, Inc.
("B/EA") of shares of Common Stock upon the
conversion of the convertible redeemable Class A
Preference Shares, par value $.01 per share
("Class A Preference Shares"), which will be
held by B/EA; (ii) the automatic conversion of
all outstanding principal amounts and any
accrued and unpaid interest under the revolving
loan commitment by HIIC to IEL in a principal
amount of up to $1,000,000 (the "HIIC Loan")
into shares of Common Stock at a conversion
price of U.S.$1.00 per share and the right to
exercise a warrant issued in connection with the
HIIC Loan to HIIC for the purchase, at U.S.$1.00
per share, of shares of Common Stock
4
<PAGE>
in the amount of 1,000,000 less the number of
shares of Common Stock issued to HIIC in
connection with the conversion of the HIIC Loan;
(iii) for 90 days after the Subsidiary
Amalgamation, the Amalgamated Company will have
the right to request HIIC to purchase up to
650,000 shares of Common Stock at a price of
U.S.$1.00 per share (the "HIIC Equity
Commitment") to provide working capital for the
Amalgamated Company; (iv) the right to appoint a
number of Board and committee members generally
proportionate to their share ownership and to
approve certain major actions of the Amalgamated
Company; (v) registration and preemptive rights
with respect to voting shares of the Amalgamated
Company ("Voting Shares"); (vi) rights under the
Amalgamation Agreement, including
indemnification for breach of representation by
Sky Games and SGIHC; (vii) termination of and a
release of claims under the Management
Agreement, the Shareholders Agreement and the
Cross-License Agreement dated December 30, 1994
between Sky Games, IEL and HIEC (the "Cross-
License Agreement"); (viii) receipt of a license
of certain IEL intellectual property; (ix) entry
into a continuing services agreement with the
Amalgamated Company; and (x) indemnification for
their representatives on the Board. See "Recent
Developments -- Cancellation of Preference
Shares"; "The Amalgamations -- Adjustments to
Amalgamation Consideration"; "--Effects of the
Amalgamations"; "-- Interests of Certain Persons
in the Amalgamations"; "-- Related Agreements";
"-- Certain Provisions of the Amalgamation
Agreement"; "The Amendments -- Board
Representation"; "-- Approval Rights"; and "--
Shareholder Approval Rights." The HIIC Entities
will also be beneficiaries of the Amalgamated
Company's rights to protect gaming licenses it
may hold through the redemption of shares held
by Disqualified Holders (as hereinafter
defined), including mandatory redemption
whenever the HIIC Entities own 10% or more of
the Voting Shares, and removal of disqualified
directors and officers, which would also protect
the gaming licenses of the HIIC Entities. See
"The Amendments --Rights to Protect Gaming
Licenses and Integrity."
Record Date.................... While all shareholders of record of Sky Games on
June 16, 1997 are entitled to be present and
vote at the Special General Meeting, only
shareholders of record at the close of business
on April 21, 1997 (the "Record Date") were sent
notice of and proxies for the Special General
Meeting. On that date, there were 13,304,405
shares of Common Stock outstanding, with each
such share of Common Stock entitled to cast one
vote with respect to the Shareholder Resolution
regarding the Amendments and the Additional
Actions.
5
<PAGE>
Quorum/Vote Required.......... The presence, in person or by proxy, at the
Special General Meeting of at least two
shareholders entitled to vote is necessary to
constitute a quorum at the Special General
Meeting. Adoption and approval of the
Shareholder Resolution requires the affirmative
vote of not less than three-fourths of the votes
cast at the Special General Meeting. If the
Shareholder Resolution is not approved by the
shareholders of Sky Games, the Amalgamations and
the B/E conversion will not be consummated. See
"The Meeting -- Vote Required" and "The
Amalgamations -- Certain Provisions of the
Amalgamation Agreement."
Security Ownership of
Management.................. Directors, executive officers and employees of
Sky Games who had the right to vote, as of the
Record Date, approximately 25.1% of the
outstanding Common Stock, have indicated that
they intend to vote in favor of the proposal to
adopt and approve of the Shareholder Resolution.
See "The Meeting -- Security Ownership of
Certain Persons"; and "Risk Factors --
Substantial Increase in the Number of
Outstanding Shares of Common Stock."
The Amalgamations
Effect of the Amalgamations... Pursuant to the Amalgamations, IEL will
amalgamate with and into SGIHC and immediately
thereafter SGIHC will amalgamate with and into
Sky Games, and the Amalgamated Company will
continue under the name "Interactive
Entertainment Limited." Pursuant to the
Amalgamations, the issued and outstanding shares
of common stock of IEL held by HIIC would be
automatically converted into 5,879,040 shares of
Common Stock. The number of shares to be
received by HIIC would be adjusted for issuances
of Common Stock prior to consummation of the
Amalgamations. In the event that the Class A
Preference Shares of Sky Games to be issued to
B/EA are converted, in whole or in part into
Common Stock, the number of shares of Common
Stock issued to HIIC in connection with the
Amalgamations would be increased to adjust for
any such issuance. Upon consummation of the
Subsidiary Amalgamation, all amounts outstanding
under the HIIC Loan will automatically convert
in shares of Common Stock. HIIC will have the
option to purchase, within 90 days of the
Subsidiary Amalgamation, the balance of
1,000,000 shares at $1.00 per share and the
Amalgamated Company could require HIIC to
purchase up to 650,000 shares of Common Stock at
$1.00 per share. Sky Games anticipates that the
Amalgamated Company will not exercise its right
to have HIIC purchase the 650,000 shares of
Common Stock. See "The Amalgamations --
Percentage Ownership Interest of HIIC after the
Amalgamations" and "-- Interests of Certain
Persons in the Amalgamations."
Percentage Ownership Interest
of HIIC after the
Amalgamations............... Based on 13,304,405 shares of Common Stock
outstanding on the Record Date and assuming the
issuance of approximately 5,879,040 shares of
Common Stock constituting the Conversion Shares,
the issuance upon consummation of the
Amalgamations of 1,000,000 shares of Common
6
<PAGE>
Stock pursuant to conversion of the HIIC Loan,
the issuance of 1,175,000 shares of Common
Stock, and the agreed upon future cancellation
of 3,525,000 shares being held in escrow, there
will be approximately 17,833,445 shares of
Common Stock outstanding and entitled to vote
(23,611,693 on an Adjusted Outstanding Basis) of
which HIIC will own approximately 38.6% (29.1%
on an Adjusted Outstanding Basis). For purposes
of this Proxy Statement, "Adjusted Outstanding
Basis" shall mean an increase of 1,508,143 for
all currently outstanding options and warrants
to purchase shares of Common Stock, 200,000 for
the vesting and issuance of shares granted to
Geller & Co. and 4,070,105 for the allocation,
vesting and exercise of all options to be
allocated to management under the existing
management incentive plan (which results in an
aggregate increase of 5,778,248) to the number
of shares of Common Stock assumed to be
outstanding following consummation of the
relevant transaction described as having
occurred. The foregoing does not take into
account any conversion of the Class A Preference
Shares issued to B/EA. See "Recent
Developments -- Cancellation of Performance
Shares."
Approval of the
Board and Reasons
for the Amalgamations........ The Board believes that the terms of the
Amalgamations are fair to and in the best
interests of Sky Games' shareholders and has
unanimously approved the Amalgamation Agreement
and the Amalgamations. See "The Amalgamations --
Background of the Amalgamations" and
"--Recommendation of the Board; Reasons for the
Amalgamations."
Sky Games' Board believes the Amalgamations and
the transactions to be effected in connection
therewith provide opportunities for Sky Games's
shareholders to participate in a combined
enterprise that is better positioned to avail
itself of business and financial resources than
Sky Games would be absent the Amalgamations. See
"The Amalgamations -- Background of the
Amalgamations" and "-- Recommendation of the
Board; Reasons for the Amalgamations."
Analysis of Financial
Advisor to Sky Games......... Valuemetrics, Inc. ("Valuemetrics") has
delivered its written analysis to the Board as
of April 22, 1997, concluding that, as of the
date of such analysis, in respect of the entire
Amalgamations, considered as one transaction,
the proposed Amalgamations are reasonable given
the current circumstances of the Company. Sky
Games did not seek a fairness opinion from
Valuemetrics or any other firm and Valuemetrics'
analysis is not a fairness opinion.
For information on the assumptions made, matters
considered and limits of the review by
Valuemetrics in connection with its analysis,
see "The Amalgamations -- Analysis of Financial
Advisor to Sky Games." Shareholders are urged to
read in its entirety the analysis of
Valuemetrics, attached as Appendix D to this
Proxy Statement.
7
<PAGE>
Effective Time of the
Amalgamations................ The effective date of each of the Amalgamations
is the date on which the Registrar of Companies
in Bermuda registers the Amalgamations and
issues a Certificate of Amalgamation to the
Amalgamated Company. It is anticipated that the
effective date of the Amalgamations will be the
date of the Special General Meeting, June 16,
1997.
Governance.................... Upon consummation of the Amalgamations and the
effectiveness of the Amendments, the size of the
Board will be fixed at 10 members and Sky Games
anticipates that the Board will be comprised of
all six members from the current Board, three
persons sitting as new members designated by the
HIIC Entities as the HIIC Appointees and one
person as a new member of the Board. The HIIC
Appointees shall be appointed to the Board by
HIIC as members of the Board for terms expiring
at the Amalgamated Company's 1997 annual general
meeting of shareholders. See "The
Amalgamations -- Governance and -- Interests of
Certain Persons in the Amalgamation" and "The
Amendments -- Board Representation" and
"-- Approval Rights."
Upon consummation of the Amalgamations, the
officers of the Amalgamated Company will be
Laurence S. Geller, non-executive Chairman, and
Gordon Stevenson, President and CEO. Sky Games
is in the process of hiring a new Chief
Financial Officer, Secretary and Treasurer who
is expected to take office shortly after the
Amalgamations.
United States Securities Law
Considerations............... The shares of Common Stock to be issued to HIIC
in connection with the Subsidiary Amalgamation,
the HIIC Loan and the HIIC Equity Commitment, if
any, will be restricted securities under the
Securities Act of 1933, as amended (the
"Securities Act"), and initially will not be
freely tradeable. Subject to certain
limitations, HIIC will have the ability to cause
the Amalgamated Company to register its shares
of Common Stock for sale under the Securities
Act. See "The Amalgamations -- Resales of Common
Stock; Registration Rights."
Status as a Foreign Private
Issuer....................... As a foreign private issuer under the rules
promulgated under the Exchange Act, Sky Games is
exempt from the Sections 14(a), 14(b), 14(c),
14(f) and 16 of the Exchange Act. As a foreign
private issuer, Sky Games files its annual
report on Form 20-F. As such, Sky Games is
currently not required to comply with many of
the disclosure requirements of the Exchange Act
in connection with the solicitation of proxies
and sales of the securities of Sky Games by
officers, directors and more than 10%
shareholders of Sky Games. Following the
Amalgamations, it is anticipated that the
Amalgamated Company will no longer be a foreign
private issuer and will be subject to Sections
14(a), 14(b), 14(c), 14(f) and 16 of the
Exchange Act and will be required to file its
annual report on Form 10-K and quarterly reports
on Form 10-Q. See "The Amalgamations -- Status
as Foreign Private Issuer."
8
<PAGE>
Certain U.S. Federal Income Tax
Consequences................. As to Sky Games and SGIHC, the Amalgamations
constitute, for U.S. federal income tax
purposes, liquidations under sections 332 and
337 of the Internal Revenue Code of 1986, as
amended. In general, under U.S. tax principles,
no gain or loss is recognized (i) to a
liquidating corporation on the distribution of
property in a complete liquidation or (ii) to
the recipient of property distributed in a
complete liquidation, if the recipient of such
property owns stock (A) possessing at least 80
percent of the total voting power of the stock
of such corporation and (B) which has a value
equal to at least 80 percent of the total value
of the stock of such corporation. The existing
shareholders of Sky Games, for U.S. federal
income tax purposes, should not recognize
taxable income as a result of the Amalgamations.
See "The Amalgamations -- Certain U.S. Federal
Income Tax Consequences."
Anticipated Accounting
Treatment.................... The Amalgamations will be accounted for under
the purchase method of accounting. See "The
Amalgamations -- Anticipated Accounting
Treatment."
The Amendments and the
Additional Actions
Effect of Shareholder
Resolution................... At the Special General Meeting, the Shareholder
Resolution will be considered for approval and
adoption. If approved and adopted, the
Shareholder Resolution will have the effect of
approved and adopting each of the Amendments and
Additional Actions.
The Amendments................ The Amendments: (i) provide the HIIC Entities
the right to appoint a number of members of the
Board and members of the executive, audit and
compensation committees of the Board generally
proportionate to their percentage ownership of
Voting Shares, subject to certain conditions;
(ii) provide the HIIC Entities, as shareholders
and through the HIIC Appointees sitting of the
Board, with the right to approve specified major
corporate actions; (iii) fix the size of the
Board of 10 for as long as the HIIC Entities
hold certain percentages of Voting Shares; (iv)
require that at least two of the directors on
the Board be outside directors and that the
Compensation Committee be comprised of
independent directors; (v) add provisions to
enable the Amalgamated Company to take actions
with respect to shareholders of the Amalgamated
Company who could reasonably be expected to
cause any company engaged in the gaming business
in any jurisdiction not to obtain, maintain or
renew any licenses or approvals necessary to
conduct the gaming business; (vi) add provisions
regarding the qualification of any director or
officer who could reasonably be expected to
cause any company engaged in the gaming business
in any jurisdiction not to obtain, maintain or
renew any licenses or approvals necessary to
conduct the gaming business; (vii) permit
amendment to the Bye-Laws by a vote of a simple
majority of the votes cast at a general meeting
of the shareholders of the Amalgamated Company,
other than provisions relating to the HIIC
Entities' shareholder approval rights; (viii)
authorize the Board to designate the rights
attaching to the new Class A
9
<PAGE>
Preference Shares and redeemable Class B
Preference Shares, par value $.01 per share (the
"Class B Preference Shares"); (ix) permit
shareholders of the Amalgamated Company to issue
irrevocable proxies with respect to their
holdings of Common Stock; and (x) make certain
technical corrections to the Bye-Laws. See "The
Amalgamations -- Interests of Certain Persons in
the Amalgamations and -- Related Agreements" and
"The Amendments."
The Name Change............... Changing the name of the Company to "Interactive
Entertainment Limited" is required to preserve
the corporate identity of IEL following the
Amalgamations.
The Change in Par Value....... Changing the par value of the Common Stock from
Cdn.$.01 to U.S.$.01 per share is intended to
reflect the increasing importance of the U.S.
capital markets to Sky Games.
Capitalization Change......... In order to consummate the B/E Conversion, an
increase in the authorized share capital of Sky
Games by the creation of a new class of Class A
Preference Shares is required. Pursuant to an
agreement with B/EA, Sky Games' outstanding
promissory note to B/EA in the approximate
amount of $2.6 million (including accrued and
unpaid interest) is to be converted into
approximately 2,600 shares of such new Class A
Preference Shares. The Class A Preference Shares
would be convertible at B/EA's option into
shares of Common Stock determined according to a
formula and shall pay cumulative dividends
quarterly at an annual rate of 9% per $1,000.00.
Sky Games, at its option, could redeem the Class
A Preference Shares at a redemption price equal
to $1,000.00 per share plus any accrued and
unpaid dividends thereon. The Class A Preference
Shares shall have no voting rights. See "Recent
Developments -- B/E Conversion."
Additionally, in order to provide Sky Games with
increased flexibility with respect to financing,
the creation of a class of Class B Preference
Shares is also proposed. The Board would have
the discretion, subject to the rights of the
HIIC Entities, to determine when any such Class
B Preference Shares would be issued and what
rights would attach to such shares.
Recommendation of the Board
of Directors................ The Board believes that the Amendments and the
Additional Actions are fair to and in the best
interests of its shareholders and, therefore,
unanimously recommends that the Sky Games
shareholders vote to approve and adopt the
Shareholder Resolution which will have the
effect of approving and adopting the Amendments
and the Additional Actions. If the Shareholder
Resolution is not approved by the shareholders
of Sky Games, the Amalgamations and the B/E
Conversion will not be consummated.
Price Range of Common Stock
10
<PAGE>
Common Stock is quoted on the NASDAQ SmallCap Market under the symbol
"SKYGF." Following the Amalgamations, Sky Games anticipates that the Amalgamated
Company's trading symbol will be changed. It has not yet been determined what
the Amalgamated Company's new trading symbol will be.
The following table sets forth the closing bid and ask price per share of
Common Stock on the SmallCap Market on February 24, 1997, the business day
preceding public announcement of the Amalgamations and the Management Incentive
Plan and the Director Stock Plan, and on May 12, 1997:
<TABLE>
<CAPTION>
Common Stock
------------
Bid Ask
<S> <C> <C>
February 24, 1997........ $4 5/8 $5
May 12, 1997............. $3 1/8 $3 1/2
</TABLE>
Shareholders are advised to obtain current market quotations for Common
Stock. No assurance can be given as to the market price of Common Stock at or
after the effective time of the Amalgamations.
Selected Financial Information
The following tables set forth selected historical financial information
for IEL and for Sky Games for each of the three fiscal years in the period ended
February 28, 1997. The historical financial information for Sky Games for each
of the aforementioned three fiscal periods is presented in accordance with
United States generally accepted accounting principles ("GAAP") principles with
a reconciliation to Canadian GAAP. Such data should be read in conjunction with
the consolidated financial statements of Sky Games and the related notes thereto
included in the documents incorporated by reference in this Proxy Statement.
Selected Historical Financial Information of IEL
The following selected historical financial information of IEL with respect
to each annual period in the three-year period ended February 28, 1997 is
derived from the financial statements of IEL which have been prepared by Sky
Game's independent auditors, Buckley Dodds, independent public accountants. The
historical financial information of IEL for 1995 is for the two months ended
February 28, 1995. All dollar amounts are in U.S. dollars.
<TABLE>
<CAPTION>
Years Ended February 28 and 29,
-------------------------------------
1997 1996 1995
----------- ----------- ---------
Income Statement Data:
<S> <C> <C> <C>
Interest income.................... $ 18,865 $ 48,728 $ 2,198
Expenses
General and administrative....... 686,462 363,622 27,584
Consulting and contract labor.... 501,299 560,015 53,795
Marketing........................ 316,150 162,817 24,172
Legal............................ (4,007) 211,459 55,729
Travel........................... 198,587 195,049 2,480
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Management fee................... 120,000 120,000 20,000
Depreciation..................... 43,581 3,718 --
Net income (loss) before taxes... (1,843,207) (1,567,952) (181,662)
Income tax....................... 20,938 -- --
Net loss......................... (1,864,145) (1,567,952) (181,662)
</TABLE>
<TABLE>
<CAPTION>
February 28, February 29, February 28
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance Sheet Data:
Total assets....................... $2,119,219 $1,743,485 --
Total current liabilities.......... 732,978 493,099 181,662
Shareholders' equity............... 1,386,241 1,250,386 (181,662)
</TABLE>
Selected Historical Financial Information of Sky Games
The following selected historical consolidated financial information of Sky
Games with respect to each year in the three-year period ended February 28, 1997
is derived from and should be read in conjunction with the consolidated
financial statements of Sky Games. The consolidated financial statements of Sky
Games for each year in the three-year period ended February 28, 1997 are
included in documents incorporated by reference in this Proxy Statement. Such
consolidated financial statements have been audited by Buckley Dodds,
independent public accountants. All dollar amounts are in U.S. dollars. See
"Available Information" and "Incorporation of Documents by Reference."
<TABLE>
<CAPTION>
Years Ended
----------------------------------
February February February
28, 29, 28,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income Statement Data:
Revenues
Interest Income............................ $ 63,738 $ 118,163 $ 111,566
Other...................................... --- ---- 7,174
Expenses
Administration............................. 3,277,601 3,122,156 2,647,912
Write down of assets....................... 1,377,279 315,456 233,548
Contract buy-out........................... --- ---- 2,500,000
Net loss before non-controlling interest... (4,553,142) (3,320,449) (5,262,720)
Non-controlling interest................... 372,829 313,590 36,332
----------- ----------- -----------
Net loss................................... (4,180,313) (3,006,859) (5,226,388)
Net loss per share......................... (0.51) (0.38) (0.73)
</TABLE>
<TABLE>
<CAPTION>
February February February
28, 29, 28,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance Sheet Data:
Working capital............................ (172,131) (279,597) (521,575)
Total assets............................... 3,524,576 3,860,935 3,601,596
Long-term debt............................. --- 2,346,028 2,550,000
Shareholders' equity....................... 3,524,576/(i)/ (54,175) (695,455)
</TABLE>
12
<PAGE>
Reconciliation to Canadian GAAP
shareholders equity........................ 3,524,576 403,100 (233,180)
- - ------------------
/(i)/ Reflects the conversion of $2,600,000 promissory note to B/EA into Class A
Preference Shares and the exercise of warrants during the course of
the year ended February 28, 1997.
Selected Unaudited Pro Forma Consolidated Financial Information of Sky Games
The following selected unaudited pro forma consolidated statements of
operations data and other financial data for the year ended February 28, 1997
and selected unaudited pro forma consolidated balance sheet data as of February
28, 1997 have been prepared from the historical financial statements of IEL,
SGIHC and Sky Games. The selected unaudited pro forma consolidated financial
information is presented for illustrative purposes only, and therefore is not
necessarily indicative of the operating results and financial position that
might have been achieved had the Amalgamations occurred as of an earlier date,
nor is it necessarily indicative of operating results and financial position
which may occur in the future.
The selected unaudited pro forma consolidated results of operations
and other financial data presented herein have been prepared as if the
Amalgamations had been consummated on March 1, 1996. The selected unaudited pro
forma consolidated balance sheet data as of February 28, 1997 reflects the
Amalgamations as if they had occurred on March 1, 1996.
The selected unaudited pro forma consolidated financial information
for the respective periods presented should be read in conjunction with the
historical consolidated financial statements and notes thereto of Sky Games
which are included in documents incorporated by reference in this Proxy
Statement and the Unaudited Pro Forma Condensed Consolidated Financial
Information appearing elsewhere in this Proxy Statement. See "Available
Information," "Incorporation of Documents by Reference" and "Unaudited Pro Forma
Condensed Consolidated Financial Information."
IEL and Sky Games
Unaudited Pro Forma Combined Condensed Balance Sheet
February 28, 1997
<TABLE>
<CAPTION>
At February 28, 1997
-----------------------------------------
<S> <C>
Assets
Current
Cash.......................................... $ 1,689,514
Accounts receivables.......................... 76,000
Prepaid expenses.............................. 61,975
Notes receivable.............................. 43,768
------------
1,871,257
Computer gaming technology.................... ---
Due from affiliated company................... ---
Software development.......................... 1,357,869
Capital assets................................ 1,358,890
------------
$ 4,588,016
============
Liabilities
Current.......................................
Payables and accruals......................... $ 393,388
Loans payable................................. ---
------------
393,388
------------
Shareholders' equity
Common shares................................. 162,152
Contributed surplus........................... 17,569,057
Preferred shares.............................. 2,600,000
Deficit....................................... (16,136,581)
------------
4,194,628
------------
$ 4,588,016
============
</TABLE>
13
<PAGE>
IEL and Sky Games
Unaudited Pro Forma Combined Condensed Statement Of Income
Year Ended February 28, 1997
<TABLE>
<CAPTION>
As of February 28, 1997
-----------------------
<S> <C>
EXPENSES
Consulting and contract labor................ $1,108,492
Travel, and advertising and promotion........ 625,945
Office and administration.................... 443,908
Professional fees............................ 315,929
Interest and bank charges.................... 300,388
Management fees.............................. 211,000
Investors relations and corporate awareness.. 120,082
Amortization................................. 87,976
Exchange loss................................ 20,793
Filing and listing fees...................... 20,301
Repairs and maintenance...................... 18,236
Transfer agent............................... 4,551
3,277,601
-----------
LOSS FROM OPERATIONS........................... (3,277,601)
-----------
OTHERS
Interest income.............................. 63,738
Write-down of assets......................... (1,796,554)
-----------
(1,732,816)
-----------
Net loss for the year.......................... (5,010,417)
Deficit, beginning of year..................... (11,126,164)
------------
Deficit, end of year........................... $(16,136,581)
============
Loss per share................................. $ 0.292
------------
Weighted average common shares outstanding..... 17,134,000
------------
</TABLE>
14
<PAGE>
RECENT DEVELOPMENTS
Product Developments
IEL continues to integrate the Company's software with the Matsushita
network and operating system and other third party provided software with which
the software is also required to be integrated in accordance with the
requirements under IEL's agreements with Singapore Airlines. IEL believes it is
in the final stage of this integration. As of the most recent testing of the
Company's software and the Matsushita system, it appears that recent software
upgrades by Matsushita have resulted in improved stability of the Company's
software on the Matsushita system. However, the software is not yet fully
integrated on the Matsushita network and operating system utilized by Singapore
Airlines. While it is currently anticipated that there will be another test of
the Matsushita network and operating system late in the second quarter, neither
HIEC nor Sky Games can predict whether or when the test will occur. Even if the
test does occur and it is successful, neither HIEC nor Sky Games can predict
whether or when the software will become operational on the Matsushita system
utilized by Singapore Airlines. The Company continues to believe the success of
its software on Singapore Airlines will be critical to its ability to secure
additional airline contracts. IEL recently bid on a contract with a European
charter airline and lost the bid to one of IEL's competitors. IEL has yet to
receive any revenues under its agreement with Singapore Airlines and may never
receive any such anticipated revenues if its software cannot be successfully
integrated with the Matsushita network and operating system utilized by
Singapore Airlines. Unless the Amalgamated Company receives revenues under the
agreements with Singapore Airlines or obtains alternate financing, the
Amalgamated Company will not have funds with which to satisfy its obligations,
which will have a material adverse effect on the Amalgamated Company. See
"-- B/E Conversion" and "-- Private Placement of Debentures."
Option Plans
In anticipation of the Amalgamations and the need following the
Amalgamations to be able to attract and motivate the caliber of managers
necessary to help the Amalgamated Company fulfill its mission of becoming the
preeminent provider of in-flight entertainment content, the Board has adopted a
Management Incentive Plan (the "MIP") pursuant to which options for 4,070,105
shares of Common Stock (17.2% of the outstanding Common Stock on the Record Date
on an Adjusted Outstanding Basis, assuming the issuance to HIIC of 5,879,040
shares of Common Stock and the issuance of 1,000,000 shares of Common Stock in
connection with the conversion of the HIIC Loan). The Board has the authority to
determine the allocation and vesting requirements, if any, for such options
under the MIP. It is the Board's intention that vesting of the options to be
issued under the MIP will create performance incentives for management because a
percentage of the options under the MIP will only be exercisable upon the
achievement of significant increases in the trading price of the Common Stock
and another percentage will vest upon satisfaction of continued employment and
of other performance goals. The Board also adopted on December 6, 1996, 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.
B/E Conversion
In December 1994, Sky Games discontinued an engineering and marketing
arrangement with B/EA. As part of the termination, Sky Games issued to B/EA a
promissory note in the original principal amount of U.S.$2.5 million at 12% per
annum to be payable from the proceeds of a public offering by Sky Games or
through the conversion of the note into Common Stock. The note to B/EA, in the
approximate amount of U.S.$2.6 million as of October 30, 1996 (including accrued
and unpaid interest), is to be converted into the number of shares of Class A
Preference Shares which is determined by dividing the loan amount by
U.S.$1,000.00. The Class A Preference Shares shall be convertible at any time
into a number of shares of Common Stock, determined by dividing U.S.$1,000.00
per share
15
<PAGE>
of Class A Preference Shares, plus any accrued and unpaid dividends thereon by:
(i) prior to February 28, 1999, a conversion price equal to 70% of the average
mean of the closing bid and ask prices of the Common Stock for the 20 trading
days prior to the conversion (the "Market Price"); (ii) after February 28, 1999
and prior to August 31, 1999, a conversion price equal to 65% of the Market
Price; and (iii) after August 31, 1999, a conversion price equal to 60% of the
Market Price. In the event the aggregate value of (i) the number of shares of
Common Stock then issued upon conversion of the Class A Preference Shares
multiplied by the then prevailing Market Price plus (ii) the number of shares of
Common Stock issuable upon further conversion of the Class A Preference Shares
in accordance with the foregoing formula multiplied by the then prevailing
Market Price plus (iii) all amounts received by B/EA in redemption of the Class
A Preference Shares by Sky Games plus (iv) all amounts received by B/EA as
proceeds from the sale of shares of Common Stock issued upon conversion of the
Class A Preference Shares is less than the loan amount, then Sky Games would be
obligated to either (x) issue such additional number of shares of Common Stock
to B/EA such that at the Market Price the aggregate value of B/EA's Common
Stock, Class A Preference Shares and redemption proceeds would equal the loan
amount or (y) purchase all Common Stock and Class A Preference Shares issued to
B/EA for an amount equal to the loan amount less B/EA's prior redemption
proceeds. Dividends on the Class A Preference Shares would be cumulative as of
February 28, 1997 and payable quarterly at an annual dividend rate of 9% per
$1,000.00. Sky Games, at its option, could redeem the Class A Preference Shares,
in whole or in part, at any time and from time to time, at a redemption price of
$1,000.00 per share to be redeemed plus any accrued and unpaid dividends
thereon. Sky Games would not be required to redeem the Class A Preference
Shares. Upon liquidation, holders of the Class A Preference Shares will be
entitled to repayment of an amount equal to $1,000 per share plus accrued and
unpaid dividends, prior to any distributions to holders of Common Stock. The
Class A Preference Shares will not have any voting rights. B/EA will have,
subject to certain conditions, one demand registration right with respect to not
less $2 million of the shares of Common Stock received pursuant to a conversion
of the Class A Preference Shares and the right to include its shares of Common
Stock received upon conversion of the Class A Preference Shares in registered
offerings by the Amalgamated Company. Were B/EA to convert the Class A
Preference Shares into Common Stock and exercise its demand registration rights,
a substantial increase in the number of shares of Common Stock available for
trading would occur. The Amalgamated Company's ability to pay dividends on the
Class A Preference Shares is dependent upon receiving revenue from IEL's
contract with Singapore Airlines or obtaining alternate financing, as to which
there can be no assurance. Failure to make such payments would have a material
adverse effect on the Amalgamated Company. In the event that the Class A
Preference Shares issued to B/EA are converted into Common Stock, the Conversion
Shares to be issued to HIIC as consideration for the Amalgamations shall be
adjusted for any dilution from such conversion of Class A Preference Shares. See
"The Amalgamations -- Adjustments to Amalgamation Consideration." HIIC also will
have preemptive rights pursuant to the Registration and Preemptive Rights
Agreement which is to be entered into in connection with the Amalgamations. See
"The Amalgamations -- Related Agreements."
Private Placement of Debentures
Sky Games has entered into an engagement letter pursuant to which it has
retained London Select Enterprises, Ltd. ("Broker") to make a private placement
pursuant to Regulation S under the Securities Act of up to $3.5 million of 8%
convertible debentures due March 31, 1999 (the "Debentures") which are
convertible into shares of Common Stock on a best efforts basis (the "Debenture
Placement"). As of May 9, 1997, Sky Games has closed sales of $763,250 of
Debentures. Based upon discussions with Broker, Sky Games anticipates that it
will close sales of between $1.8 million and $2.25 million of Debentures.
However, there can be no assurance as to the exact amount, if any, of additional
sales of Debentures which may be closed. One-third of the Debentures shall be
convertible at any time after 60 days, one-third shall be convertible after 90
days; and the balance shall be convertible after 105 days into Common Stock at
the lower of 85% of the average of the closing bid prices of the Common Stock
for the five trading days immediately preceding the execution by the subscriber
of its individual subscription for Debentures or 77.5% of the average of the
closing bid prices of the Common Stock for the five trading days immediately
preceding the date of conversion. Sky Games will pay Broker 8.0% of the gross
proceeds from the sale of the Debentures. As additional compensation for the
Debenture Placement, Sky Games had agreed that Broker would receive warrants
exercisable at any time within five years of the date such warrants were issued
to Broker to purchase up to 125,000
16
<PAGE>
shares of Common Stock for 120% of the average of the closing bid prices of the
Common Stock for the five trading days immediately preceding the date of
issuance and up to 25,000 shares of Common Stock at the average of the closing
bid prices of the Common Stock for the five trading days immediately preceding
the date of issuance. However, Sky Games and Broker are continuing to negotiate
the amount of the aforementioned warrants. The Amalgamated Company's ability to
pay interest on the Debentures is dependent upon receiving revenue from IEL's
contract with Singapore Airlines or obtaining alternate financing as to which
there can be no assurance. Failure to make such payments would have a material
adverse effect on the Amalgamated Company. Additionally, with respect to the
Debentures, HIIC will have preemptive rights pursuant to the Registration and
Preemptive Rights Agreement which is to be entered into in connection with the
Amalgamations. See "The Amalgamations -- Related Agreements."
February 28, 1997 Year-End Results
Through the current year ended February 28, 1997, the Company concentrated
its financial and physical resources on IEL's efforts to develop its gaming
software. The Company continued its marketing efforts to potential international
airline customers through product awareness programs and direct information
meetings. Sky Games' ongoing financial requirements have been funded through
private equity placements and exercise of share purchase warrants by investors.
Fiscal 1997 revenue was solely interest income of $63,738 compared to $118,163
in 1996.
Fiscal 1997 operating expenses, discussed hereunder, are higher than the
prior year, reflecting the Company's increasing cost of implementing IEL's
software and system. Interest costs for 1997 decreased $305,541 to $300,388
compared to $605,929 for 1996, reflecting Company's efforts to eliminate its
reliance on debt instruments.
Operating expenses for fiscal 1997 were $3,277,601 compared to $3,123,156
for 1996. The 1997 expenses include $1,883,010 for IEL for business and software
development, product marketing, management and administration of its industry
programs compared to $1,616,679 for the year ended February 29, 1996. Office and
administration costs decreased $98,807 in fiscal 1997 being $443,908 compared to
$542,715 in 1996. IEL costs were $283,088 compared to $363,622. This reduction
reflects closure of representation offices in Los Angeles, California and Las
Vegas, Nevada in October 1995. Travel, advertising and promotional costs were
$625,945 for 1997, an increase of $166,448 over 1996 costs of $459,497. IEL
costs were $514,736 for 1997 compared to $357,866 for 1996.
Consulting and technical contract labor costs increased $480,566 to
$1,108,492 for 1997 compared to $627,926 in 1996. The 1997 costs include
$870,183 for IEL compared to $560,015 for 1996. Professional fees at $315,929
for 1997 were $15,776 higher than the 1996 cost of $300,153. IEL expense was
$51,423 for 1997 compared to $211,459 for 1996. The current costs of $315,929
includes professional legal service costs relative to the Amalgamations.
Fiscal 1997 management fees were $211,000 compared to $171,307 for 1996.
Fees include $120,000 to HIEC. Investor relations and corporate awareness costs
amounted to $120,082 for 1997, an increase of $27,364 on 1996 costs of $92,748.
During the year, the Company engaged the services of The Financial Relations
Board to provide for investor relations.
Subsequent to February 28, 1997, the Company assessed the book value of its
assets relative to current market value and U.S. GAAP requirements and, in
conjunction with its independent auditors, wrote down the carried value of
certain assets by $1,796,554 to reflect anticipated realization values based on
current utilization plans and market conditions.
Cancellation of Performance Shares
When Sky Games acquired the rights to the in-flight gaming software from
Sky Games International, Inc. ("SGII") on November 7, 1991, a portion of the
consideration was 3,000,000 shares of Common Stock which,
17
<PAGE>
according to then applicable requirements, were placed in escrow, to be released
on the basis of one share for each U.S.$1.78 of net cash flow generated from the
assets over a ten-year period (the "Performance Shares"). The Performance Shares
were issued at a price of U.S.$.01 per share with 2,000,000 shares issued to
SGII (87% of the outstanding stock of which is owned by James P. Grymyr, a
director of Sky Games, and his wife) and 1,000,000 shares issued to Anthony
Clements, a director of Sky Games. An additional 525,000 shares which were
issued to Dr. Rex E. Fortescue, formerly a director of Sky Games, are held in
the escrow on the same terms and are also included as Performance Shares. Each
of Messrs. Clements and Fortescue, as of April 30, 1997, have agreed to allow
Sky Games to redeem and cancel the Performance Shares when and if they are
released from escrow for any reason whatsoever (the "Redemption Agreement"). As
consideration for such agreement to tender the Performance Shares for
cancellation by the Amalgamated Company in the event they are ever released from
the escrow, Sky Games has issued to Messrs. Clements and Fortescue, 333,333 and
175,000 shares of Common Stock, respectively. SGII, as of April 30, 1997, has
also agreed that it will tender the 2,000,000 Performance Shares for
cancellation by the Amalgamated Company which it holds when and if such
Performance Shares are released from escrow for any reason whatsoever. As
consideration of such agreement, Sky Games has forgiven the outstanding balance
of a note made by SGII to Sky Games in the approximate amount of $549,651 and
has issued to SGII 80,590 shares of Common Stock (the "Redemption and
Cancellation Agreement"). In the event the Performance Shares are not released
prior to six months after the end of Sky Games' financial year ending in the
year 2002, the Performance Shares will automatically be cancelled in accordance
with the terms of the escrow agreement.
Each of Messrs. Cements and Fortescue and SGII have the right to include
the 588,923 shares of Common Stock issued in connection the transactions
contemplated by the Redemption Agreement and the Redemption and Cancellation
Agreement in certain registered offering conducted by Sky Games prior to
February 25, 1999. As part of the agreements to allow the redemption and
cancellation of the Performance Shares, the holders of the Performance Shares
have agreed to issue an irrevocable proxy to a national banking association
selected by HIIC and approved by Sky Games, and such bank will agree to enter
into an agreement not to vote the Performance Shares at any General Meeting of
Shareholders or otherwise. The irrevocable proxy and the agreement not to vote
the Performance Shares will terminate upon the cancellation of the Performance
Shares.
Change in Fiscal Year End
At its April 23, 1997 meeting at which the Board approved the
Amalgamations, the Amendments and the Additional Actions and voted to recommend
the Amendments and Additional Actions to the shareholders, the Board approved
and adopted a resolution changing the fiscal year end of Sky Games to December
31 of each year from the last day of February of each year.
Consulting Agreement
Sky Games and Mr. Grymyr have entered into a consulting agreement (the
"Consulting Agreement") whereby Mr. Grymyr would provide certain consulting
services to Sky Games. Under the terms of the Consulting Agreement, as
consideration for his past and future consulting services, Sky Games has agreed
to issue to Mr. Grymyr 586,077 shares of Common Stock, upon the earlier of his
termination as consultant to Sky Games or the termination of the Consulting
Agreement on April 30, 1998.
18
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully by the
shareholders of Sky Games in connection with voting upon the Shareholder
Resolution and considering the Amendments and the Additional Actions.
Integration of the Businesses
The Amalgamations involve the integration of two companies that have
previously operated independently. There can be no assurance that the
Amalgamated Company will not encounter difficulties in integrating the
operations of IEL with those of Sky Games or that the benefits expected from
such integration will be realized. Prior to the Amalgamations, the affairs of
IEL were managed by HIEC. Following the Amalgamations, the personnel of Sky
Games and IEL will be responsible for administering the business of the
Amalgamated Company. Any delays or unexpected costs incurred in connection with
such integration could have a material adverse effect on the Amalgamated
Company's business, operating results or financial condition. Furthermore, there
can be no assurance that the resulting structure will facilitate the Amalgamated
Company's ability to raise capital or avail itself of business opportunities.
Management of the Amalgamated Company's Operations
Since its creation effective as of December 30, 1994, the management of Sky
Games' operating subsidiary, IEL, has been administered and operated on a day-
to-day basis by HIEC and, subject to an annual plan adopted by the board of
directors of IEL, HIEC has controlled IEL's operational activities. Sky Games
initially sought Harrah's Entertainment, Inc. as a joint venture partner and
entered into the Management Agreement granting to HIEC an exclusive right to
manage IEL's operations, because Sky Games did not have the requisite management
ability and believed that HIEC's management resources would contribute to the
success of IEL's operations. Following the Amalgamations, the Amalgamated
Company will manage its own operations with substantially the same personnel as
HIEC now uses to manage IEL's operations, but without HIEC or any of the other
HIIC Entities directing operations, without the Amalgamated Company being able
to use the "Harrah's" name and without the full availability of Harrah's
experience in the gaming entertainment industry. HIEC has agreed to provide
certain interim back-office and administrative services, on a cost-plus basis,
which is expected to result in terms more favorable than the Amalgamated Company
would be able to obtain from an un-affiliated third party. However, HIEC may
have provided certain services to IEL at a cost less than the Amalgamated
Company may be able to obtain independently from a third party following the
Amalgamations. There can be no certainty that the personnel of the Amalgamated
Company following the Amalgamations will be able to successfully manage the
Amalgamated Company's operations without the oversight and resources of HIEC.
Uncertainty of Achieving Business Objective
The business of Sky Games is currently focused on having HIEC develop IEL's
in-flight gaming software and becoming the preeminent provider of in-flight
entertainment content. Given the inherent difficulties of developing a
technologically complex product such as the software for its gaming system and
the delays which IEL has already experienced in trying to integrate its software
with the Matsushita network and operating system and third party provided
software, there can be no assurance as to when or whether the Amalgamated
Company will be any more successful in this business effort than in its earlier
business ventures, regardless of whether the Amalgamations are consummated.
Currently, it is not expected that any significant revenues will be received
under IEL's agreements with Singapore Airlines in 1997, nor can it be predicted
when or whether any such revenues will first be received. See "Recent
Developments -- Product Developments."
Realization of Anticipated Benefits to Amalgamations
19
<PAGE>
The Amalgamations involve a change in the capital structure of Sky Games
and IEL. An intended benefit of the Amalgamations is to enable the Amalgamated
Company to raise capital with more favorable pricing and on a more efficient
basis than Sky Games has been able to achieve. This anticipated benefit is
speculative insofar as it is dependent upon improved recognition by the markets
of value that the management of Sky Games believes is already present in Sky
Games prior to the Amalgamations but is obscured by Sky Games' complex capital
structure. There can be no certainty that such increased value will be realized
following the Amalgamations nor that there will be any tangible benefit to Sky
Games from the Amalgamations. See "The Amalgamations -- Analysis of Financial
Advisor."
Substantial Increase in the Number of Outstanding Shares of Common Stock
The Amalgamations, when consummated, will result in substantial increase in
the number of outstanding shares of Common Stock. As a result of the issuance of
the 5,879,040 Conversion Shares, the conversion of the HIIC Loan of up to
$1,000,000 into shares of Common Stock at U.S.$1.00 per share upon consummation
of the Subsidiary Amalgamation, the issuance of 1,175,000 shares of Common Stock
as consideration for various agreements with the holders of the Performance
Shares, and the agreed-upon future cancellation of 3,525,000 Performance Shares,
the percentage of outstanding stock on the Record Date held by non-management
shareholders who are not affiliates of management is anticipated to decrease
from 74.9% to 53.9% (60.3% to 42.8%, on an Adjusted Outstanding Basis).
Concurrently, the percentage of stock held by the HIIC Entities is anticipated
to increase from 0% to 38.6% (0% to 29.1%, on an Adjusted Outstanding Basis).
The percentage of outstanding stock on the Record Date held by management and
directors would decrease from 25.1% to 7.5% (39.7% to 28.1% on an Adjusted
Outstanding Basis). Taking into account the Amalgamations, the total number of
shares outstanding on the Record Date, on an Adjusted Outstanding Basis, is
anticipated to increase from 16,732,653 to 23,611,693, giving effect to the
cancellation of the 3,525,000 Performance Shares and the issuance of 1,175,000
shares of Common Stock to the holders of the Performance Shares. See "Summary --
Effect of the Amalgamations," "Recent Developments -- Option Plans and --
Cancellation of the Performance Shares", "The Amalgamations -- Related
Agreements" and "The Amalgamations -- Analysis of Financial Advisor."
Discretion of Largest Shareholder to Appoint Certain Members of the Board of
Directors and Approve Specified Corporate Actions
Prior to the Amalgamations, HIIC owned 20% of the capital stock of IEL and
did not own any capital stock or other securities of Sky Games and had no
representation on the Board. Following the Amalgamations, HIIC will become the
largest shareholder of the Amalgamated Company, holding up to approximately
38.6% of the outstanding shares as of the Record Date, assuming the cancellation
of the Performance Shares, the issuance of 1,175,000 shares pursuant to the
Redemption Agreement, the Redemption and Cancellation Agreement and the
Consulting Agreement, the issuance of the Conversion Shares and the conversion
of the HIIC Loan (29.1% on an Adjusted Outstanding Basis) in exchange for HIIC's
ownership interest in IEL and rights under the Shareholders Agreement and HIEC's
rights and expected income under the Management Agreement. After the
Amalgamations, the HIIC Entities will gain certain Board representation rights
and, subject to certain conditions, the right as shareholders and through their
board appointees to approve specified major corporate actions and other rights.
Additionally, HIEC and the Amalgamated Company will enter into a Continuing
Services Agreement. See "The Amalgamations -- Interests of Certain Persons in
the Amalgamations" and "-- Related Agreements" and "Amendments -- Board
Representation and -- Approval Rights." Consequently, following the
Amalgamations, the HIIC Entities will be able to exercise substantial control
over certain corporate actions of the Amalgamated Company. Such control or share
ownership may also have the effect of delaying or preventing a change in control
of the Amalgamated Company, impede a merger, consolidation, takeover or other
business combination involving the Amalgamated Company or discourage a potential
acquiror from making a tender offer or otherwise attempting to gain control of
the Amalgamated Company.
20
<PAGE>
Inability to Integrate Software
IEL has been attempting to integrate its in-flight gaming software with the
Matsushita network and operating system and other third party provided software
with which it is also required to integrate for over a year with limited
success. Although IEL believes the software will ultimately be successfully
integrated, there is no assurance of such success or, if it does occur, when it
will occur. The Matsushita system is only one of several competing systems used
by major airlines, and the software will need to be integrated with each system
if the software is to be sold to an airline using a different system. It is
likely the same or similar problems as encountered integrating with the
Matsushita system will be encountered with competing systems.
New and Untested Product
No airline has implemented a full scale program of in-flight gaming.
Assuming IEL or any of its competitors can successfully launch a program, it is
unknown what the acceptance will be of such a program by passengers or what the
actual level of utilization will be. Many cultures do not approve of gaming and
many countries have prohibitions against or restrictions on gaming. It is
unknown how these cultural preferences may affect demand for in-flight gaming or
how provision of in-flight gaming might be regulated. Currently, gaming is
prohibited under U.S. law on flights to or from the United States on a foreign
air carrier, as well as all international flights of U.S. carriers and all
commercial flights within U.S. airspace. There can be no assurance that other
jurisdictions will not impose similar restrictions or restrictions on
advertising or similar promotional efforts which could reduce utilization of the
program from projected levels. Also, individual airlines may place restrictions
on aggregate and per-player losses, limitations on the amount of individual
wagers or other restrictions, which may limit the amount of revenue generated by
in-flight gaming. Geographically broad rejection of in-flight gaming or
limitations or prohibitions on conducting in-flight gaming could prevent a
market developing for in-flight gaming software.
21
<PAGE>
SHAREHOLDER EQUITY TABLE
The following table sets forth the shareholder equity of Sky Games as of
February 28, 1997, and the Amalgamated Company as adjusted to reflect the
Amalgamations, the HIIC Loan and the HIIC Equity Commitment. See also "Summary
- - -- Selected Financial Information."
<TABLE>
<CAPTION>
February 28, 1997
-----------------
Actual As Adjusted/(1)(2)/
---------------------------------------
Shareholders Equity (Deficit):
<S> <C> <C>
Common Stock, $.01 par value; 50,000,000 shares authorized;
13,304,405 issued and outstanding; 17,833,445 issued and
outstanding as adjusted..................................... 106,752 162,152
Class A Preference Shares, U.S.$.01 par value; 3,000 shares
authorized; 2,600 allotted; 2,600 issued and outstanding as
adjusted.................................................... 26 26
Class B Preference Shares, U.S.$.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding; no shares issued
and outstanding as adjusted................................. -- --
Contributed Surplus........................................... 15,324,379 20,168,974
Class A Preferred, 2,600 shares authorized; 2,600 issued and
outstanding as adjusted..................................... 2,574 2,574
Deficit....................................................... (15,763,752) (16,136,581)
----------- -----------
2,267,379 4,194,628
</TABLE>
- - ---------------------------
/(1)/Reflects the issuance of the Conversion Shares in connection with the
Amalgamations, the conversion of the HIIC Loan and the exercise of the HIIC
Equity Commitment. See "Summary -- Selected Financial Information,"
"-- Selected Unaudited Pro Forma Consolidated Financial Information of Sky
Games."
/(2)/Management of Sky Games does not intend to exercise the HIIC Equity
Commitment if the Amalgamated Company is able to procure alternate
financing.
<PAGE>
THE MEETING
Special General Meeting
The Special General Meeting is to be held at the offices of Altheimer &
Gray, 10 South Wacker Drive, Suite 4000, Chicago, Illinois June 16, 1997, at
8:30 a.m., Central Daylight Savings Time.
Amalgamations. Under the Amalgamation Agreement, among other things, IEL
would be amalgamated with and into SGIHC, and SGIHC would then be amalgamated
with and into Sky Games with the Amalgamated Company resulting from the
Amalgamations. The outstanding shares of IEL common stock held by HIIC would be
converted into 5,879,040 shares of Common Stock. The Conversion Shares are
subject to adjustment in certain circumstances described herein. See "The
Amalgamations -- Adjustments to the Amalgamation Consideration."
At the Special General Meeting, the shareholders of Sky Games will be asked
to consider and vote upon a Shareholder Resolution which would have the effect
of amending the Bye-Laws of Sky Games, changing the name of Sky Games, changing
the par value of the Common Stock, and increasing the authorized share capital
of Sky Games. The Shareholder Resolution is required in order for Sky Games to
consummate the Amalgamations and for Sky Games to consummate the B/E Conversion.
Amendments. The Amendments to the Bye-Laws of Sky Games will have the
effect discussed in "The Amendments."
Additional Actions. The Shareholder Resolution also provides for the
following Additional Actions: (i) changing the name of Sky Games to "Interactive
Entertainment Limited"; (ii) changing the par value of the Common Stock to
U.S.$.01 per share from Cdn.$.01 per share; and (iii) increasing the authorized
share capital of Sky Games by the creation of 3,000 Class A Preference Shares,
par value U.S.$.01 per share and 5,000,000 Class B Preference Shares, par value
U.S.$.01 per share.
Recommendations. The Board has unanimously approved the Amalgamation
Agreement, the Amendments and the Additional Actions and recommends a vote FOR
adoption and approval of the Shareholder Resolution as a means to approve and
adopt the Amendments and the Additional Actions. IF THE SHAREHOLDER RESOLUTION
IS NOT APPROVED BY THE REQUISITE VOTE OF THE SHAREHOLDERS OF SKY GAMES THE
AMALGAMATIONS AND THE B/E CONVERSION WILL NOT BE CONSUMMATED.
Quorum
The presence, in person or by proxy, at the Special General Meeting of at
least two shareholders entitled to vote is necessary to constitute a quorum at
the Special General Meeting.
Vote Required
The affirmative vote of not less than three-fourths of the votes cast at
the Special General Meeting is required to adopt and approve the Shareholder
Resolution. If the Amendments and Additional Actions were considered separately,
the affirmative vote of not less than three-fourths of the votes cast at the
Special General Meeting would be required to approve and adopt the Amendments
and the affirmative vote of not less than a majority of the votes cast at the
Special General Meeting would be required to adopt and approve the Additional
Actions. However, if the Amendments and Additional Actions were considered
separately the approval of each would be conditional upon the approval of the
other.
23
<PAGE>
Record Date; Shares Entitled To Vote
The Board has established the Record Date as April 21, 1997, which is the
date used to determine those record holders of Common Stock to whom notice of
the Special General Meeting will be sent. However, under Bermuda law, regardless
of whether this Notice and Proxy Statement were received, all of the
shareholders of record of Sky Games are entitled to be present and vote at the
Special General Meeting. On the Record Date, there were 13,304,405 shares of
Common Stock outstanding, with each share entitled to one vote with respect to
the Amalgamations. Except for Cede & Co., Howe & Co., Anthony Clements, and
SGII, on the Record Date there were no other persons known to the management of
Sky Games to be the beneficial owners of 5% or more of the outstanding Common
Stock. Pursuant to the irrevocable proxy granted in connection with the
Redemption Agreement and the Redemption and Cancellation Agreement, Mr. Clements
and SGII, respectively, have agreed to grant their proxy for 3,000,000 of the
Performance Shares to a national banking association which will enter into an
agreement not to vote such shares.
Voting of Proxies
Shares represented by all properly executed proxies received prior to the
Special General Meeting will be voted at the meeting in the manner specified by
the holders thereof. Proxies that do not contain voting instructions will be
voted FOR adoption and approval of the Shareholder Resolution and, therefore,
for the Amendments and the Additional Actions at the Special General Meeting. It
is not expected that any matter other than those referred to herein will be
brought before the Special General Meeting. If, however, other matters are
properly presented, the persons named as proxies will vote in accordance with
their judgment with respect to such matters.
Revocation of Proxies
Any holder of Common Stock has the unconditional right to revoke his or her
proxy at any time prior to the voting thereof at the Special General Meeting by
(i) filing a written revocation with the Secretary of Sky Games prior to the
voting of such proxy, (ii) giving a duly executed proxy bearing a later date, or
(iii) attending the Special General Meeting and voting in person. Attendance by
a shareholder at the Special General Meeting will not in and of itself revoke
his or her proxy.
Solicitation of Proxies
Solicitation of proxies for use at the Special General Meeting may be made
in person or by mail, telephone, telecopy or telegram. Sky Games will bear the
cost of the solicitation of proxies. In addition to solicitation by mail, the
directors, officers and employees of Sky Games may solicit proxies from
shareholders by telephone, telecopy or telegram or in person. Sky Games has
requested banking institutions, brokerage firms, custodians, trustees, nominees
and fiduciaries to forward solicitation materials to the beneficial owners of
Common Stock held of record by such entities, and Sky Games will, upon the
request of such record holders, reimburse reasonable forwarding expenses.
24
<PAGE>
Security Ownership of Certain Persons
As of April 21, 1997, Sky Games's directors and executive officers as a
group may be deemed to own beneficially (excluding shares purchasable upon
exercise of stock options) 25.1% of the outstanding shares of Common Stock. Of
the directors and executive officers of Sky Games who had the right to vote, as
of the Record Date, approximately 25.1% of the outstanding Common Stock have
indicated that they intend to vote in favor of the proposal to approve and adopt
the Shareholder Resolution. Pursuant to the irrevocable proxy granted in
connection with the Redemption Agreement and the Redemption and Cancellation
Agreement, Mr. Clements and SGII, respectively, have agreed to grant their proxy
for 3,000,000 of the Performance Shares to a national banking association which
will enter into an agreement not to vote such shares.
THE AMALGAMATIONS
The Effective Time of the Subsidiary Amalgamation
Pursuant to the Amalgamation Agreement, at the Subsidiary Effective Time
(as defined below), IEL will amalgamate with and into SGIHC, and the shares of
IEL common stock held by HIIC immediately prior to the Subsidiary Effective Time
will be converted into 5,879,040 shares of Common Stock and all shares of IEL
common stock held by SGIHC immediately prior to the Subsidiary Effective Time
will be cancelled. All shares of IEL common stock, when so converted, shall no
longer be outstanding and shall automatically be cancelled and retired and shall
cease to exist, and HIIC shall cease to have any rights with respect thereto,
except the right to receive the shares of Common Stock to be issued or paid in
consideration therefor upon the surrender of such certificate.
Based upon the 13,304,405 shares outstanding on the Record Date of Sky
Games, immediately after the Subsidiary Effective Time and assuming the issuance
of the Conversion Shares and the issuance of 1,000,000 shares pursuant to
conversion of the HIIC Loan, the cancellation of the Performance Shares and the
issuance of 588,923 shares to the holders of the Performance Shares as
consideration for various agreements therewith and the issuance of 586,077
shares to Mr. Grymyr and SGII under the Consulting Agreement and the Redemption
and Cancellation Agreement, shareholders of Sky Games as of the Record Date will
hold approximately 61.4% (70.9% on an Adjusted Outstanding Basis).
Adjustments to Amalgamation Consideration
HIIC's Conversion Shares to be received pursuant to the Subsidiary
Amalgamation have been calculated assuming the outstanding Common Stock, on an
Adjusted Outstanding Basis, would be adjusted as necessary for any stock splits,
stock dividends or similar actions, prior to the Subsidiary Effective Time.
Until the Amalgamations are consummated, Sky Games has agreed not to issue any
shares (other than pursuant to already outstanding options and warrants and
option plans) without HIIC's prior approval, unless an adjustment is made to the
number of Conversion Shares so that HIIC receives an aggregate number of shares
which constitutes the same percentage of the outstanding Voting Shares, on an
Adjusted Outstanding Basis, following such issuance as 5,879,040 shares
represented of the 24,261,693 shares of Voting Shares which were assumed to be
outstanding on an Adjusted Outstanding Basis, based on the 13,304,405 shares of
Common Stock outstanding on the Record Date and assuming the cancellation of the
3,525,000 Performance Shares, the issuance of 1,175,000 shares, the issuance of
the Conversion Shares, the conversion of the HIIC Loan and the exercise the HIIC
Equity Commitment. The number of shares of Voting Shares to be issued to HIIC
would be adjusted in accordance with the foregoing for any issuance of Common
Stock upon the conversion into Common Stock of the Class A Preference Shares to
be issued to B/EA. HIIC will also have preemptive rights pursuant under the
Registration and Preemptive Rights Agreement which is to be entered into in
connection with the Amalgamations. See "The Amalgamations -- Related
Agreements."
25
<PAGE>
Background of the Amalgamations
In 1993, the directors of Sky Games recognized that reaching Sky Games'
goal of commercial implementation of the technology which is the basis for its
gaming product required greater expertise and resources than it could then
provide. Sky Games sought a relationship with a recognized gaming operator who
could supply the expertise and resources which Sky Games then lacked. As a
result of this effort, Sky Games entered into a consulting agreement with
Harrah's on September 22, 1993. Under the agreement, Harrah's, a Nevada
corporation which has subsequently consolidated into Harrah's Operating Company,
Inc., a Nevada corporation, consulted with Sky Games on the management and
operation and of Sky Games' business, and the game design and operation of
gaming activities. Based on the success of the arrangement, Sky Games and
Harrah's Entertainment, Inc. expanded the relationship to develop and market the
in-flight gaming software.
Effective as of December 30, 1994, Sky Games, through SGIHC, and HIIC
completed the formation of IEL, a joint venture corporation incorporated as an
exempted company under Bermuda law. Through its subsidiary, Sky Games owns 80%
and HIIC owns 20% of IEL. At the same time, IEL entered into the Management
Agreement with HIEC and the Shareholders Agreement with HIIC. Pursuant to the
Management Agreement, HIEC was given complete authority to manage the operations
of IEL, and Sky Games and HIIC agreed to provide the necessary financing for IEL
based on their percentage ownership interests of IEL pursuant to the
Shareholders Agreement.
Pursuant to the Shareholders Agreement, Sky Games committed to provide
$4,000,000 and HIIC committed to provide $1,000,000 of the anticipated initial
capital requirement of $5,000,000 for IEL. These initial commitments, and all
additional commitments, were based on the percentage ownership of IEL by Sky
Games and HIIC. In the event either party failed to make a scheduled payment of
initial capital contributions or an agreed-upon contribution of additional
capital, the non-defaulting party would have the option under the Shareholders
Agreement to provide such funds as a loan to IEL. If the defaulting party did
not repay the loan within 180 days, the non-defaulting party could convert the
loan into shares of common stock of IEL, on the basis of U.S.$1.00 per share.
According to terms of the Shareholders Agreement, SGIHC and HIIC were originally
required to make their total capital contributions of U.S.$5,000,000, in an
initial contribution of $500,000, two aggregate contributions of $167,000, one
aggregate contribution of $166,000, and four aggregate contributions of
$1,000,000.
Through the end of 1995, Sky Games' total capital contributions to IEL were
$1.76 million. It became apparent to the Sky Games' Board that Sky Games would
have to raise additional capital to satisfy its obligations to IEL under the
Shareholders Agreement. Its current capital reserves were sufficient to satisfy
its expected near term obligations; but with the scheduled increase in the
amount of capital contributions required to be made to IEL, reserves would soon
be exhausted. The Shareholders Agreement was amended several times to
accommodate Sky Games' inability to satisfy its capital requirements on the
original timetable. In the event that at any time Sky Games was unable to make
its required capital contribution under the Shareholders Agreement, HIIC would
have been able to dilute Sky Games' equity interest on IEL on a basis of
U.S.$1.00 per share.
The Board found raising the necessary capital problematic. Potential
investors commented that they were having trouble understanding the corporate
structure of Sky Games and its operations. While Sky Games was the majority
owner of IEL, the delegation of management and other control of IEL to HIEC
caused Sky Games shareholders to bear the majority of the risk of a
developmental company without having the right to manage the development of the
operations or its products. The Board concluded that it must act to rationalize
the corporate structure of Sky Games and its subsidiaries to improve its capital
raising prospects. Sky Games commenced on both courses of action simultaneously.
In January 1996, Malcolm Burke, then President and Chief Executive Officer
of Sky Games, approached HIIC to discuss whether they would be willing to
discuss a reorganization of the IEL structure, possibly through an amalgamation
of IEL into Sky Games. On January 25, 1996, John W. McConomy, Associate General
Counsel of Harrah's Entertainment, Inc., on behalf of HIIC, wrote to Mr. Burke
stating that, while HIIC and HIEC were willing
26
<PAGE>
to consider a reasonable proposal regarding changes to be made in the IEL
arrangements, HIIC was not interested in the idea of an amalgamation with Sky
Games without first being presented with a fully developed proposal.
Mr. Burke contacted Laurence Geller of Geller & Co., a Chicago based
international travel and lodging finance and advisory firm. In February 1996,
Mr. Burke began corresponding with Mr. Geller regarding Sky Games, its financing
needs and problems as well as the possible retention of Geller & Co. In mid
February, Sky Games retained Geller & Co. to assist Sky Games in restructuring
its investment in IEL, in preparing a long-term financing plan and in executing
the financing plan as ultimately adopted by the Board.
Mr. Geller and the personnel of Geller & Co. analyzed Sky Games, its
financial condition and its financing requirements. An initial recommendation by
Mr. Geller was that Sky Games make changes with respect to firms providing
professional services to the Company. This recommendation lead to Sky Games
retaining Altheimer & Gray as lead corporate and securities counsel in March
1996. On behalf of Sky Games, Mr. Geller began discussing the Company's
financing needs with potential investment banks and strategic investors to
determine both their possible interest in participating in a financing
transaction involving Sky Games and their impressions of the Company.
While this analysis and these conversations were being conducted, Sky Games
continued to pursue short-term measures to improve both its capital position and
enhance the liquidity of the market for the Common Stock for the benefit of its
shareholders. In an attempt to clarify the number of shares eligible for sale in
the market, Mr. Burke wrote to the British Columbia Securities Commission
requesting that the commission permit the release of the 3,525,000 Performance
Shares which were being held in escrow subject to being released upon
satisfaction of certain earnings requirements by Sky Games. Mr. Burke had been
informed on numerous occasions that the uncertainty as to whether these shares
would become available for sale into the market was having a negative effect on
trading in the market. Mr. Burke's request was rejected on April 29, 1996.
Sky Games also sought immediate short-term methods to address its liquidity
problems, given the need to provide capital to IEL pursuant to the scheduled
capital contributions required by the Shareholders Agreement. On April 17, 1996,
Sky Games continued discussions which had first begun in February 1996 with HIIC
regarding a proposed loan by HIIC to IEL in the amount of $2.25 million. The
purpose behind Sky Games' request for the loan was to make available to Sky
Games a source of funds which would allow it to satisfy its capital obligations
to IEL under the Shareholders Agreement while it attempted to arrange more
strategic, long-term financing.
By mid May 1996, Geller & Co. had developed a proposed strategic business
plan for Sky Games for consideration by the Board. The main proposal was that
Sky Games focus its efforts on becoming the world leader of international
entertainment technology to the transportation industry. To accomplish this goal
in the rapidly evolving market of interactive IFE technology in which Sky Games
was competing, Geller & Co. stated that Sky Games needed to be able raise
capital quickly and economically, to be able to make strategic decisions rapidly
and to streamline its corporate image in the minds of its airline customers.
Each of the changes required resolving the chronic under-funding of Sky Games
and the complex decision making structure which was inherent in the IEL
ownership and management structure.
Sky Games capital situation was again brought into sharp focus in June of
1996 as Sky Games tried to assemble the necessary funds to satisfy a scheduled
$800,000 capital contribution to IEL. Sky Games' cash reserves were not
sufficient to pay the contribution.
At a meeting of the Board on July 19, 1996, Mr. Geller informed the Board
of discussions with four investments banks regarding Sky Games' capital
structure. Mr. Geller reported that he had four meetings following conversations
with Goldman Sachs, Montgomery Securities, Everen Securities and Ladenburg
Thalmann. He said each investment bank was of the view that Sky Games
consolidated with its subsidiaries was of higher value than the Company as it
was currently structured with IEL as a majority-owned, indirect subsidiary.
Varying levels of interest were expressed with respect to working with Sky
Games.
27
<PAGE>
Based on the opinion of the investment banks regarding the need to simplify
the IEL structure, Mr. Geller reported that he had raised the issue with HIIC
again as to whether it would be willing to restructure IEL. Mr. Geller proposed
to HIIC and HIEC that IEL and HIEC's associated rights under the Management
Agreement and HIIC's rights under the Shareholders Agreement be merged into the
Amalgamated Company. He reported that while HIIC was now receptive to
considering the idea, it was not willing to make any commitments until a firm
proposal was made and it had studied the situation. It did, however, acknowledge
the need to recapitalize Sky Games, given Sky Games' current financial
situation, and that they believed that a consolidated entity would be of higher
value. He added that HIIC believed the Amalgamated Company should be marketed as
an entertainment technology company rather than a gaming company.
A primary issue with HIIC and HIEC in connection with such a restructuring
would be agreeing on a value for all of HIIC's and HIEC's rights and interests
in IEL, including the 20% of IEL and the Management Agreement. The goal was to
agree upon some percentage of Common Stock which would have same value to HIIC
and HIEC as did their ownership of 20% of IEL common stock and HIEC's expected
fees and economic control under the Management Agreement and HIIC's interests
under the Shareholders Agreement. HIIC and HIEC concurred that the ultimate
result should be a company having a more straightforward balance sheet. The
conclusion of the Sky Games Board was to endorse continuing the discussions with
HIIC and HIEC and the investment banks regarding both a restructuring and
recapitalization of IEL.
In late July 1996, after reaching agreement on the principal terms of the
loan, Sky Games informed HIIC that it was able to raise the equity necessary to
satisfy its capital contribution to IEL; therefore, the discussions of a loan
from HIIC were discontinued.
During August 1996, Mr. Geller continued his attempts to develop
restructuring alternatives and strategic alliances for Sky Games. In addition,
he discussed in detail the situation and needs of the Company with the
investment banks he had met with earlier. Sky Games, Mr. Geller and Sky Games
counsel continued to work with Harrah's counsel on behalf of HIIC to identify
and quantify the issues involved in restructuring IEL. Altheimer & Gray worked
with HIIC to develop a memo setting forth the relevant issues and the agreement
of the parties in the event any of the restructuring alternatives under
consideration materialized. These alternatives involved among other things
attempting to arrange a sale to a third party if an interested party could be
found and an acceptable price agreed upon or conducting an internal
restructuring followed by a capital raising event.
Sky Games and HIIC attempted to reach agreement regarding whether Sky Games
and HIIC should limit their efforts to one alternative over the other or proceed
simultaneously with respect to trying to arrange both a sale and retaining an
underwriter and commencing work to draft a prospectus or placement document so
as to be prepared to raise equity if a buyer could not be located. The parties
considered as part of evaluating whether to undertake a simultaneous effort, the
expense of running both efforts on a parallel track and how these expenses would
be paid given Sky Games' cash limitations. With respect to either course of
action, HIIC stated the parties needed to have an understanding of what value
HIIC and HIEC would require in order to consent to either form of transaction,
what rights would HIIC acquire regarding the IEL and Sky Games intellectual
property following any transaction and what would be the value of the Management
Agreement with IEL to HIEC. The timing of IEL's funding requirements was
acknowledged to be determinative of how quickly either alternative was
consummated since Sky Games needed some financing or strategic change in order
to satisfy its obligations to IEL. The critical determinations necessary to make
these decisions were discussed as being the following: (i) valuing the aggregate
rights, which HIIC and HIEC possessed through its ownership of IEL and under the
Shareholders Agreement and which HIEC possessed under the Management Agreement;
(ii) determining the amount and timing of IEL's and Sky Games' capital
requirements; (iii) settling HIIC's requirements as to intellectual property
rights going forward; (iv) reconciling HIIC's desires to receive cash or be able
to sell in a public offering and/or have immediate liquidity as part of any
transaction; and (v) resolving HIIC's preferences regarding management of IEL
going forward depending the form of and parties to a transaction.
28
<PAGE>
Sky Games and HIIC agreed that it was not worthwhile trying to negotiate
all conditions under which HIIC and HIEC would consent to any particular
transaction or draft an omnibus termination agreement regarding the Shareholders
Agreement and the Management Agreement. Rather, efforts should proceed along
both tracks based on the factors mentioned above, and the particulars of any
transaction would be negotiated and documented as developed.
In response to HIIC's requests for additional information to make a
determination regarding a restructuring of IEL, Messrs. Geller and Burke made a
presentation on September 12, 1996 to Mr. John Boushy and Mr. John McConomy of
Harrah's on behalf of HIIC and HIEC regarding a proposed valuation of HIIC's and
HIEC's interests in IEL, including HIIC's 20% equity ownership in IEL and its
rights under the Shareholders Agreement, and HIEC's expected income under the
Management Agreement. The analysis was based on the projected business under
IEL's only contract with Singapore Airlines, assuming successful implementation,
and various assumptions regarding possible future contracts. No agreement was
reached at the meeting regarding a value of IEL to HIIC and HIEC. However, it
was the consensus of the meeting that efforts should continue towards finding a
strategic partner, a third party buyer or arranging a financing while HIIC
reviewed the information so that efforts towards a restructuring did not stop in
the meantime.
By September of 1996, Sky Games capital shortages threatened to have
material negative effects on Sky Games and its shareholders. On September 20,
1996, Ms. Kit Milholland, Listing Director of Nasdaq Market Services, sent a
letter to Sky Games informing it that it was below the capital and surplus
requirements necessary to maintain the listing of the Common Stock on the NASDAQ
SmallCap Market. Under the NASDAQ SmallCap Market listing qualifications, Sky
Games must maintain capital and surplus of at least $1 million for continued
listing. The letter stated that Sky Games had until October 7, 1996 to show it
had the $1 million of capital and surplus or present an acceptable plan for
achieving compliance with the requirement. On September 23, 1996, Mr. Patrick
Lawless, Sky Games' Chief Financial Officer, sent a letter to Ms. Milholland
informing her that Sky Games had approximately $800,000 of cash reserves and
approximately 600,000 share purchase warrants which would result in
approximately $2 million of capital to Sky Games if they were exercised. At the
same time, Sky Games' officers were working on preparing a detailed response to
NASDAQ.
The problems with NASDAQ were formally brought to the Board's attention at
its September 30, 1996 meeting. The Board instructed Mr. Burke and Mr. Geller to
continue their work on a response to NASDAQ by the October 7, 1996 deadline. As
the purpose of the Board meeting was to discuss the Company's financial and
strategic position, possible alternatives to address compliance with the
SmallCap Market requirements were discussed during the course of the meeting.
At the September 30 Board meeting, Mr. Geller made a presentation which
began with an overview of the Company's current position. Mr. Geller stated that
IFE technology and gaming as a means of raising revenue had been accepted more
quickly than expected and, as a result, the Company now needed to focus first on
getting the contract with Singapore Airlines implemented and the product working
and second on seeking new contracts. Geller reported that given the cash
requirements of IEL, recent operational focus had been on reducing costs and
obtaining additional airline contracts as a means to obtain future revenue. IEL
had to be given the proper resources and support to focus on implementation of
IEL's only existing contract with Singapore Airlines.
At the September 30 Board meeting, Mr. Geller also reported that he had
approached Montgomery Securities with the financial forecasts which Geller & Co.
had prepared for Sky Games. Montgomery Securities had responded that it needed
additional information, but anticipated that it would propose an equity offering
if they thought a product launch was reasonably imminent and the product was
accepted. If not, they would most likely recommend a lesser amount in a private
placement. Other investment bankers had responded that it believed Sky Games
should grow faster through acquisitions of ancillary providers and additional
contracts and proposed a public offering, once they knew that the product was
working. Given that a successful product launch was a precondition from both
investment banks, Mr. Geller reiterated that the focus must be on IEL
successfully implementing the Singapore Airlines contract
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rather than getting new contracts. In addition, IEL would need to have made
available to it sufficient resources to accomplish this goal.
Mr. Geller said that, based on the forecasted future cash requirements of
the Company and the risk of the Company being unable to make regular payments to
service debt at this juncture, an equity offering of some type was the only
capital raising alternative available to Sky Games. He proposed that the minimum
of such equity financing required was $10 million in order to finance the
Company through 1997. He said a realistic minimum was more like $15 million,
with an upper limit of $20 million. He thought the Company might not be able to
use capital in excess of $20 million without expanding its existing business
plan.
Mr. Geller stated that the investment banks had advised Sky Games that its
corporate existence in Bermuda posed no problem, but that IEL needed to
physically separate itself from HIEC's facilities immediately. Moreover, it was
the strong consensus of each investment bank that IEL and Sky Games had to merge
to be able to conduct any equity financing. Therefore, in addition to getting
the contract with Singapore Airlines successfully implemented, reaching some
agreement with HIIC regarding restructuring its 20% equity ownership of IEL as
well as its rights under the Shareholders Agreement and with HIEC regarding the
termination of the Management Agreement was a precondition to Sky Games being
able to do anything to take advantage of the opportunities to solve its
problems.
At the conclusion of the September 30 meeting, the Board appointed Mr.
Geller Chairman and Chief Executive Officer of Sky Games so that he could use
his expertise, ability and contacts on behalf of Sky Games to help resolve the
impasse in which Sky Games was caught. Although Sky Games had not been able to
reach any agreement with HIIC and HIEC prior to the meeting, the Board endorsed
in principle a reorganization whereby IEL would merge with Sky Games, and, as
part of such transaction, HIIC or an affiliate would acquire a percentage
interest in the Amalgamated Company in exchange for HIIC's equity in IEL and
contractual interest under the Shareholder Agreement and for HIEC's contractual
interest under the Management Agreement. The Board authorized Sky Games to
retain either Montgomery Securities or CS First Boston as an investment banker
and lead underwriter for an offering in the event the restructuring could be
agreed to with HIIC.
In early October 1996, Sky Games began negotiations for engagement of
Montgomery Securities. Sky Games requested that Montgomery Securities assist Sky
Games in restructuring IEL, deliver a fairness opinion in connection with any
such restructuring transaction and, once the necessary restructuring had been
completed, assist the Company in conducting an equity financing. Montgomery
Securities continued its analysis of Sky Games to determine if it was willing to
accept such assignment.
On October 7, 1996, Sky Games made its submission to NASDAQ of how it
intended to comply with the $1 million of capital and surplus continued listing
requirement of the SmallCap Market. Sky Games explained that in the short term
it was going to have an increase in capital and surplus as a result of the
exercise of outstanding share purchase warrants. Sky Games had received
commitments for the exercise of approximately $300,000 of warrants and expected
additional warrants to also be exercised. To assist in long term compliance, Sky
Games also explained the financing alternatives being considered by the Board,
particularly the raising of equity capital following a reorganization to merge
IEL into the Amalgamated Company. Lastly, management explained that it appeared
that it should begin to recognize positive cash flow from its Singapore Airlines
contract in 1998 and the erosion of capital and surplus resulting from funding
the start-up expenses of IEL should stop. Sky Games and Altheimer & Gray
continued to work with NASDAQ throughout the month of October to provide back-up
and to refine the Company's plan for continued compliance.
On October 9, 1996, Mr. Andrew McCune of Altheimer & Gray sent a draft
letter agreement to Mr. McConomy pursuant to which it was proposed that HIIC
would agree to the merger in principal contingent upon a capital raise event of
$10 million or more. This agreement was an attempt to secure resolution of the
issues raised with HIIC beginning in August as to the value to HIIC of its
rights under the Shareholders Agreement and its equity interest in IEL and as to
the value to HIEC of its rights under the Management Agreement. HIIC rejected
this
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proposal on October 16, 1996 stating that it did not address what HIIC believed
to be all the relevant issues. Subsequently, Mr. Ed Schweitzer of Montgomery
Securities met with Messrs. Geller, Burke, Sims and Gordon to discuss financing
alternatives available to Sky Games.
On October 28, 1996 Montgomery Securities informed Mr. Geller that
Montgomery Securities was willing to advise Sky Games as its investment bank.
Sky Games first assignment to Montgomery Securities was to request a proposal of
some method for Sky Games to remedy its shortage of capital and surplus for
purposes of NASDAQ compliance. On November 15, 1996, Montgomery Securities
advised Sky Games that the conversion of Sky Games' existing promissory note to
B/EA for approximately $2.6 million (including accrued and unpaid interest) was
the best solution to maintaining the minimum net worth required by NASDAQ. Given
Sky Games' situation, short term raising of capital was not given as an option.
Mr. Burke approached B/EA to begin discussing what would become the B/E
Conversion.
Meanwhile, efforts were being made to secure financing from private
investors since the public markets were not an immediate option. On October 29,
1996, Mr. Burke discussed a potential investment with European Venture Partners
and was informed that institutional clients of European Venture Partners would
be interested. On November 29, 1996, Burke also discussed a potential
relationship with Ladenburg Thalmann. While interest was expressed, no
transactions were consummated.
The need to find financing was underscored by a November 10, 1996 letter
from NASDAQ which said Sky Games' efforts to get in compliance had not resulted
in a sufficient level of capital and surplus to give NASDAQ any comfort that Sky
Games would remain in compliance. Sky Games was given until November 22, 1996 to
deliver financial information showing it was in compliance at the close of the
last quarter, September 30, 1996. If the information was not furnished, Sky
Games would be deemed deficient and the Common Stock would be removed from the
SmallCap Market. NASDAQ stated it was continuing to evaluate Sky Games' long-
term compliance plan. On November 22, 1996, Sky Games presented financial
statements showing $1,000,583 of capital and surplus as of September 30, 1996,
sufficient to satisfy the requirement but not enough to insure long-term
compliance. On November 14, 1996, Sky Games received NASDAQ's reply to its long-
term compliance program. Sky Games was put on a monthly watch until it had
completed its contemplated equity financing through Montgomery Securities. Sky
Games is currently filing monthly financials with NASDAQ and is in compliance
with the SmallCap market continued listing requirements.
Work was also underway to develop a compensation program which would permit
Sky Games to attract the caliber of executives necessary to assist the
Amalgamated Company to complete the mission of IEL. The problem faced by Sky
Games was that it did not have funds with which to pay standard market salaries.
Therefore, alternative equity-based compensation schemes were considered. On
November 19, 1996, Mr. Phillip Gordon of Altheimer & Gray began discussions with
a compensation consultant regarding granting of options and restricted stock as
a substitute for current cash compensation.
In late November 1996, Sky Games and HIIC began to reach a consensus as to
some of the principal terms of a restructuring of IEL. The Board met on December
6, 1996. Mr. Geller reported on his discussions with HIIC and HIEC. Mr. Geller
stated that he had again spoken with Mr. McConomy and Mr. Boushy about a term
loan with equity features as a way to address Sky Games' immediate cash
concerns. He had proposed a structure whereby Sky Games would have the right to
redeem some or all of the warrants which would be issued to HIIC in the
transaction if the Company did not borrow all the available funds. He reported
that HIIC and HIEC had agreed in principle to an amalgamation transaction
whereby HIEC would amend or relinquish its rights under the Management Agreement
and HIIC would take an equity percentage of the Amalgamated Company in exchange
for its equity of IEL and its rights under the Shareholders Agreement subject to
two basic conditions: (i) a 30% interest in the restructured company was issued
to HIIC; and (ii) an agreement were entered into as part of the transaction
granting HIIC approval rights of certain agreed-upon corporate actions by Sky
Games, while HIIC was a major shareholder. Altheimer & Gray was requested to
draft a term sheet setting forth the proposal and a timetable for such a
transaction.
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At the December 6 meeting, the Board also discussed its capital obligations
with respect to IEL. Mr. Geller reported that Sky Games had an $800,000 capital
commitment due to IEL on December 15, 1996. The Board discussed a number of
alternative methods of funding the obligation, including negotiating with
warrant holders to induce them to exercise their warrants. Mr. Burke then added
that because the parties had previously agreed to an extension of time for
delivery of the business plan for IEL under the Management Agreement and because
the parties were still engaged in negotiating an amalgamation transaction, HIIC
could be asked to agree to break-up the $800,000 capital commitment due December
15, 1996 into installments, so that the balance would be paid over 45 to 60 days
in three tranches with nominal interest as had been done before. This would give
Sky Games additional time to raise capital.
At December 6, 1996, there remained 503,000 warrants outstanding
exercisable at $3.50 per share. Mr. Geller reported to the Board that IFT had
just made a public offer to reduce the exercise price of its outstanding
warrants from $9.50 per share to $7.50 per share. Mr. Geller stated that IFT did
this when its stock was trading around $10.50 to $11.00 per share as compared to
the roughly $3.50 per share for the Common Stock. Mr. Burke then added that in
order to induce the exercise of $800,000 of the warrants, the Board would need
both to extend the expiration date of the warrants and to reduce the purchase
price, the extension being consideration for the commitment to exercise. The
Board approved and authorized Sky Games to negotiate with the holders of the
503,000 warrants, to reduce the exercise price and to extend the expiration date
of the warrants as this was the only alternative to raise the necessary funds.
The Board then discussed the outstanding note due to B/EA by Sky Games. The
note was an agreed-upon payment by Sky Games when it terminated its relationship
with B/EA in December 1994. Montgomery Securities had recommended that this note
be converted into equity to improve Sky Games' capital and surplus position for
Nasdaq compliance purposes. B/EA had provided engineering and marketing services
to Sky Games. Mr. Geller reported that B/EA had agreed in principle to convert
the note as of October 30, 1996 into equity of Sky Games on the condition that
it was satisfied with the business condition of Sky Games after a review of its
finances.
At the December 6, 1996 Sky Games Board meeting, the Board also discussed
plans for equity compensation for management and directors in lieu of standard
cash compensation. Mr. Gordon reported on a proposed director's option plan. The
proposal involved the retirement of all 370,000 unissued options under Sky
Games' existing option plan for 1.5 million shares. The plan would be replaced
in part by the proposed plan which provided for an annual formula grant of
options to directors. Mr. Gordon recommended as reasonable compensation options
for 10,000 shares of Common Stock per director for each year in which the
director serves granted at the same time each year at the closing market price
on such date. After deliberation, the Board unanimously authorized Sky Games to
cancel the unissued shares under the current option plan and adopted the new
plan effective as of December 10, 1996 providing for the annual issuance to
directors of options for 10,000 shares on the closing price on the date of
grant.
Mr. Gordon then discussed a proposal for the MIP. He stated that under the
proposed MIP, twenty-five percent of the outstanding shares of Sky Games would
be set aside and options would be granted and the prevailing price on the
following terms: (i) 10% would vest if the market price met or exceeded $5.00
per share for 20 consecutive days; (ii) 20% would vest if the market price met
or exceeded $7.00 per share for 20 consecutive days (30% cumulative); (iii) 30%
would vest if the market price met or exceeded $9.00 per share for 20
consecutive days (60% cumulative); and (iv) 40% would vest if the market price
met or exceeded $12.00 per share for 20 consecutive days (100% cumulative). On
account of the dilution which would result from the proposed equity
compensation, it was agreed that HIIC's approval should be sought before the
options were allocated and the vesting schedule finalized.
The December 6, 1996 Board meeting concluded with Mr. Burke reporting on
his efforts to arrange a sale of the land owned by the Company as part of Sky
Games' efforts to focus attention on IEL and improve its cash position. The
land, however, had been designated as a watershed area under Canadian law making
any development difficult, and the only offer received had been an offer of
$400,000. This figure was below the book value of the land and thus a sale of
the land would negatively affect Sky Games' capital and surplus position.
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On December 18, 1996, Mr. McCune sent proposed term sheets for the merger
of Sky Games and IEL and for the loan from HIIC to IEL. On January 7, 1997, Mr.
McConomy responded with HIIC's and HIEC's issues regarding the term sheets. On
January 7, 1997, Mr. McCune and Mr. Gordon discussed the amalgamation of IEL and
Sky Games with Mr. McConomy. The parties discussed HIIC's and HIEC's interest in
the Amalgamations and the financing. With respect to the financing, HIIC stated
that it wanted the opportunity to acquire equity as part of the transaction. The
financing alternatives were either straight purchase of common stock at an
agreed upon price or a loan by HIIC with an equity purchase rights such as
warrants or a loan convertible into equity. However, HIIC was at least two weeks
from a final determination and approval. The parties agreed that the most
expeditious course was to finalize the primary points of the transactions so as
to be able to agree on terms of a deal which could be announced to the public.
A number of points were discussed which HIIC thought needed to be revised
before it could agree to the transactions. HIIC thought 25% for the MIP was too
generous to management in relation to industry norms, and objected in particular
to large allocations to a limited number of individuals. The parties discussed
whether the plan should be based on performance targets such as revenue or
earnings per share levels rather than trading price. HIIC wanted its board
representation somehow proportionate to its percentage ownership and its
approval rights to also relate to its percentage ownership, with such rights
declining as its ownership declines. A number of issues were discussed with
respect to HIIC's registration rights for its shares, but resolution of these
issues was postponed although HIIC acknowledged the general need by Sky Games to
have HIIC come behind Sky Game's equity raising needs in some manner. However,
HIIC did not agree at this time to additional limitations, such as minimum
offering price and effect on market price which Sky Games had proposed.
Additionally, licensing issues were discussed, including whether Sky Games would
pay a royalty to HIIC for use of the "Harrah's" name and, alternatively, whether
HIIC would pay a fee to Sky Games for the publication of the "Harrah's" name,
assuming the Amalgamated Company was successful.
HIIC was only interested in the technology and not the trademarks or trade
names of IEL, and the license was assumed to be a license for use by HIIC only.
However, HIIC argued that the license was part of the consideration for HIIC
agreeing to the Amalgamations and, therefore, should not be at any cost to HIIC.
It was agreed that what would constitute a non-competitive use by HIIC and the
royalty for such use would have to be agreed upon by the parties. In any event,
HIIC's license would be non-exclusive.
The remainder of January and the first two weeks of February, 1997 were
spent negotiating the issues and attempting to reach an agreement with HIIC as
to the capitalization of the Amalgamated Company.
Through late January 1997 and early February 1997, while the term sheets
were being negotiated, Sky Games began a due diligence review of IEL, and HIIC
began a due diligence review of Sky Games. On February 18, 1997 agreement was
reached as to some open points and revised term sheets were distributed to HIIC.
The next week was spent negotiating the open points and attempting to finalize
the term sheets.
On February 24, 1997, the Board met to approve an agreement with HIIC and
HIEC in principle and authorize the effort to finalize an agreement with HIIC
and HIEC. The transaction was viewed as permitting the Company to raise capital
more efficiently by rationalizing the corporate structure which investors had
found problematic. HIIC would receive 20% of the shares of Common Stock in
exchange for its stock in IEL and an additional 10% shares of Common Stock in
exchange for HIEC and HIIC relinquishing their rights under the Management
Agreement and the Shareholders Agreement, respectively. A portion of HIIC's
interest would be diluted by shares issued under the MIP, and the remaining
portion would not be diluted. Based upon HIIC's refusal to do the restructuring
if the MIP was for 25% of the outstanding shares as approved by the Board, the
Board agreed to reduce the MIP to 20%.
The Board discussed obtaining a fairness opinion from Montgomery Securities
regarding the fairness of the transactions in connection with the reorganization
of IEL. Montgomery Securities' engagement with Sky Games
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provided that Montgomery Securities would provide such an opinion if, after
analysis, they came to such an opinion. Since a primary motivation for all the
reorganization of IEL was to enable Sky Games to remedy its chronic under-
capitalization, the Board elected to forego a fairness opinion from Montgomery
Securities. Instead, they voted to retain Valuemetrics to do an analysis of the
reasonableness of the transaction to assist the Board in making an informed
final determination as whether to approve the transactions.
On February 25, 1997, Sky Games concluded with HIIC and HIEC an agreement
of the principle terms of the Amalgamations and the related loan from HIIC.
Promptly thereafter, Sky Games and HIIC and HIEC announced the proposed
consolidation of Sky Games with IEL and capital infusion from HIIC of up to
$1.65 million pursuant to HIIC Loan and the HIIC Equity Commitment.
In late February 1997, Messrs. Burke and Geller finalized the open points
of the agreed-upon conversion of the Company's note to B/EA into shares of 9%
Class A Preference Shares. The amount of the principal and accrued and unpaid
interest under the note was approximately $2.6 million. The conversion had an
immediate benefit to Sky Games compliance with the NASDAQ listing requirements
and fulfilled one of the compliance steps Sky Games had undertaken with NASDAQ
to maintain its compliance. The agreement with B/EA was announced March 21,
1997.
Also in March, the officers of Sky Games continued their efforts to secure
financing. The final $100,000 installment of the $800,000 capital commitment to
IEL was made on February 7, 1997. The payment depleted the Sky Games' cash
reserves. The capital infusion agreed to by HIIC as part of the restructuring of
IEL addressed the cash needs of IEL but did not provide any funds for Sky Games
to pay its other expenses. For these reasons, Mr. Burke continued to discuss a
potential investment with prospective financing sources. On March 3, 1997 he
contacted London Select Enterprises Ltd. On March 20, 1997, London Select
Enterprises Ltd. presented a term sheet of a proposed private placement of 8%
debentures of Sky Games which would be convertible into Common Stock at the
lower of 15% below average bid price of the Common Stock for five days prior to
date of the subscription for the debentures or 22.5% below average bid price of
the Common Stock for five days prior to the date of conversion of the
debentures.
On March 24, 1997, Sky Games gave notice to its transfer agent and
registrar, Montreal Trust, to begin search for beneficial owners of shares of
Common Stock. The Record Date for the shareholder meeting is set for April 21,
1997; and the meeting date is set for June 16, 1997.
The Board met on April 23, 1997, at which time a summary of negotiations
and description of open issues was presented to the Board. The Board was
informed as to the Company's results for the fiscal year just ended February 28,
1997. A substantially final draft of amalgamation agreement was reviewed by the
Board and counsel explained various provisions in response to questions. Counsel
to Sky Games reviewed the duties and obligations in connection with considering
the Amalgamations and responded to questions from the Board. Valuemetrics made
its presentation regarding factors affecting the Company's general industry and
the Company particulars. Valuemetrics outlined unique factors confronting Sky
Games given the IEL structure and relationship and presented the results of its
financial analyses.
Recommendation of the Board; Reasons for the Amalgamations
THE BOARD BELIEVES THAT THE AMENDMENTS AND THE ADDITIONAL ACTIONS ARE FAIR
TO AND IN THE BEST INTERESTS OF SKY GAMES AND ITS SHAREHOLDERS, AND HAS
UNANIMOUSLY APPROVED THE AMENDMENTS AND THE ADDITIONAL ACTIONS AND, THEREFORE,
RECOMMENDS THE APPROVAL AND ADOPTION OF THE SHAREHOLDER RESOLUTION BY THE SKY
GAMES SHAREHOLDERS.
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In reaching its conclusion, the Board considered, among other factors:
. The need to rationalize the structure of Sky Games in order to facilitate
capital raising.
. The value of HIIC'S 20% equity interest in IEL, in conjunction HIIC's and
HIEC's control over and management fees from IEL through the Management
Agreement and the Shareholders Agreement.
. The need to maintain HIEC as an integral partner in the development of Sky
Games' in-flight gaming technology.
. The need to maintain a business relationship with Harrah's Entertainment,
Inc. through its affiliates, HIIC and HIEC.
. The need to modify Sky Games Bye-Laws to provide certain shareholder
protections and to protect its future gaming licenses and the licenses of
HIIC Entities.
. The need to create the Class A Preference Shares in order to consummate
the conversion of the indebtedness to B/EA.
. The need to have share capital the par value of which reflects the
increased importance of the U.S. capital markets to Sky Games.
. The need to preserve the continuity of the corporate identity of IEL which
has surpassed that of Sky Games due to the efforts at establishing its name
recognition.
If the Shareholder Resolution providing for the Amendments and the
Additional Actions is not approved by the shareholders of Sky Games, the
Amalgamations will not be consummated and the structure of Sky Games will remain
multi-tiered and subject to the Management Agreement and the Shareholders
Agreement and the capital and surplus of Sky Games will be negatively affected
by the inability of Sky Games to consummate the B/E Conversion.
In determining that the Amalgamations are fair to and in the best interest
of Sky Games's shareholders, the Board has considered the factors above as a
whole and did not assign specific or relative weights to such factors. The Board
believes that the Amalgamations provide an opportunity for Sky Games's
shareholders to participate in a combined enterprise that has significantly
greater business and financial resources than Sky Games would have absent the
Amalgamations.
Analysis of Financial Advisor
Valuemetrics has been engaged as a financial advisor to perform a limited
analysis regarding the proposed Amalgamations regarding Sky Games and the other
related entities (the "Analysis"). Given the current financial standing, product
development stage and form of corporate organization of the Company,
Valuemetrics' analysis is that the proposed Amalgamations, the Amendments and
the Additional Actions in their entirety are reasonable given the current
circumstances of the Company. No analysis was done of the individual portions of
the Amalgamations to determine absolute fairness, and consequently Valuemetrics
has not rendered a fairness opinion. Valuemetrics has analyzed and reviewed
certain documents and held discussions with certain individuals regarding the
material aspects of the Amalgamation. In connection with the Analysis,
Valuemetrics did not assume any responsibility for independently verifying
information provided to it by Sky Games, and relied on all such information and
assumed all such information was complete and accurate in all material respects.
Set forth below is a brief summary of Valuemetrics' summary valuation analysis
dated April 22, 1997, for which Valuemetrics was retained on March 20, 1997. THE
FULL TEXT OF THE VALUEMETRICS ANALYSIS IS ATTACHED HERETO AS APPENDIX D.
SHAREHOLDERS ARE URGED TO READ CAREFULLY THE VALUEMETRICS ANALYSIS.
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Documents Reviewed. In connection with the Analysis, Valuemetrics
interviewed Messrs. Geller, Stevenson, Burke and Sims. Valuemetrics requested
information regarding the Company's business history, its current status, and
its forecasted financial performance. Valuemetrics reviewed the certain
documents supplied by Sky Games, including: Sky Games annual financial
statements from February 28, 1994 through February 28, 1997; IEL consolidated
balance sheets as of December 31, 1996; the Shareholders Agreement; the
Management Agreement; the Redemption Agreement dated February 25, 1997 by and
among Sky Games and certain holders of the Performance Shares; the Software
License and Software Services Agreement between IEL and Singapore Airlines
Limited dated November 7, 1995 and Amendments dated November 21, 1996 and
December 1, 1996; the Escrow Agreement; the April 1997 offer by London Select
Enterprises, Ltd. to place the Debentures; term sheet for the B/E Conversion;
term sheet for the HIIC Loan and HIIC Equity Commitment; the 1997 financial
business plan provided by Geller & Co.; the Director Stock Plan; and the MIP.
Valuemetrics also relied upon the following sources of public and private
information: the 1996 Boeing Current Market Outlook for the airline industry;
the Department of Transportation overview and analysis of the airline gaming
industry dated March, 1996; and information regarding Sky Games and Interactive
Flight Technologies from the electronic financial reporting system of Bloomberg.
The question addressed by Valuemetrics in its analysis was whether the
current market price for Common Stock reflected the fair market value of Sky
Games on a marketable minority basis. To test this, Valuemetrics researched the
individual characteristics of the Sky Games stock. A second method which
Valuemetrics employed involved testing independence of historical and future
rates of return.
Security Analysis. In the case of Sky Games, Valuemetrics examined the
following characteristics: Analyst Coverage, Exchange Listing, Historical
Trading Activity/Volume, and Access to Public Information. These factors
provided the initial evidence indicating an efficient or inefficient market for
the security. The information gathered from Valuemetrics' research and its
interpretation of such information is summarized below.
Analyst Coverage. Valuemetrics noted that there are currently no equity
analysts that follow and report on Sky Games. Valuemetrics found that this
reduced efficiency because without these analysts, investors have to examine the
security themselves.
Exchange Listing. Valuemetrics further noted that since March 1, 1994, the
Common Stock has traded in the SmallCap Market, which is not a major exchange.
By not being on a major exchange, liquidity and exposure to investors was
reduced. Valuemetrics found that liquidity and access to investors improve
efficiency because it allows investors to effectively market the security given
new information.
Historical Trading Activity & Volume. At July 17, 1996, there were 196
holders of record of the Common Stock. Of these holders, 159 had registered
addresses in the U.S. and held a total of 7,981,232 Common Stock or
approximately 62.81 percent of the total 12,706,309 shares of Common Stock
outstanding. An examination of historical trading activity indicates that Sky
Games is very thinly traded. The daily and monthly trading activity are
relatively small compared to the total shares outstanding.
Access to Public Information. Sky Games is a publicly-traded over-the-
counter stock and thus is required to file financial documents and to register
the Common Stock with the Securities and Exchange Commission. As a result,
Valuemetrics found that annual financial information and news is readily
available in the public market place. As a result, it concluded that investors
are able to make informed investing decisions given the availability of
information on Sky Games.
Summary of Security Analysis. The characteristics highlighted above
provided Valuemetrics with some evidence toward an inefficient market for the
Common Stock. Valuemetrics found that the primary factors indicating
inefficiency were the relatively thin market for the stock and lack of coverage
by equity analysts, the low daily trading
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activity and lack of equity specialists that follow the stock on an ongoing
basis. The low volume was also given being the cause for the quoted price being
unreliable in valuing a sizable block of Sky Games.
Statistical Market Efficiency Test. Valuemetrics tested for efficiency in
two ways: First, Valuemetrics looked at simple serial correlations in
continuously compounded daily returns. Second, Valuemetrics used multiple linear
regression to test for more complicated time series patterns. In each case,
Valuemetrics used standard statistical tests to indicate whether estimated
correlations were due merely to random chance. In an efficient market,
Valuemetrics expects to find no useful information in the sequence of past stock
prices.
Testing the Data for Evidence of Serial Correlation. First Valuemetrics
tested for evidence of serial correlation in Sky Games' daily stock returns.
Valuemetrics tested serial correlations in continuously compounded daily returns
over the period from April 16, 1996 to April 16, 1997. For each day Valuemetrics
examined 20 different returns for evidence of correlation and applied standard
statistical tests to indicate whether estimated correlations were due merely to
random chance. This technique effectively tested whether today's stock return is
correlated to the returns one period back, two periods back, and so on, up to 20
periods back. Of the 20 separate tests performed, 3 cases of statistically
significant correlations were found. Therefore, the market for Sky Games' stock
was judged by Valuemetrics to be inefficient in this manner.
Multiple Linear Regression Analysis. Valuemetrics also tested for more
complicated patterns using multivariate regression. Looking at continuously
compounded daily return from April 16, 1996 to April 16, 1997, a regression was
performed using each day's current period return as the dependent variable. The
stock returns from one, two, three, four and five days prior were used as the
five independent variables. Standard statistical tests were performed to
determine whether any significant relationship existed and whether the
regression equation has any significant predictive power. Valuemetrics' tests
found two instances of significant predictive power. Therefore, Valuemetrics
judged the market for Sky Games to be inefficient in this respect.
Conclusion on Market Efficiency. Given the results of the statistical
analysis and the specific characteristics Sky Games stock, Valuemetrics
concluded that the market for the shares of Sky Games is inefficient relative to
the pricing of Sky Games. Therefore, Valuemetrics concluded, the pricing of Sky
Games stock from the public market is not necessarily representative of fair
market value (on a marketable, minority interest basis).
Dilution Analysis. In order to assess the impact of the proposed
transactions on the value of the common shares that are owned by the public
shareholders of Sky Games, Valuemetrics estimated the probable change in
aggregate and per share value caused by the steps of the transaction outlined
above. Valuemetrics examined four cases to assess the accretive and dilutive
impacts of the transactions. Additionally, Valuemetrics examined the impact of
the transactions based on the total market capital value implied by the NASDAQ
quoted stock price as of approximately 10:00 a.m. on April 22, 1997.
Valuemetrics valued all management and directors stock options and outstanding
warrants using the Black-Scholes Option Pricing formula. Valuemetrics assumed a
stock price volatility of 70 percent, based on the observed volatility of the
stock price over the past two years. Valuemetrics assumed that all options and
warrants would be held to maturity. Additionally, Valuemetrics assumed that only
70 percent of the new management incentive options would vest prior to their
expiration. Valuemetrics was not requested to analyze the dilutive impact of the
placement of the Debentures by Broker.
Valuemetrics analysis indicated that the adjustment of the Performance
Shares is accretive to the current public shareholders of Sky Games, while the
subsequent steps of the Amalgamations are dilutive. The effective cancellation
of 2,350,000 escrowed Common Stock causes the value of the common shares to
increase by nearly 18 percent. The merger of HIIC's interest into Sky Games
dilutes the value of the Common Stock by approximately 3 percent because the
merger consideration has been adjusted to offset the expected dilutive impact of
the new management incentive option plan. When Sky Games' management is issued
4,070,105 options to purchase Common Stock of the Amalgamated Company at the
fair market value at the time of grant, Valuemetrics estimates that the value
per common share declines by approximately 8 percent. The issuance of Common
Stock to HIIC to release Sky
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Games and IEL from the Management Contract decreases the value of the shares by
an estimated 12 percent. However, the dilutive impact is overstated because
Valuemetrics conservatively assumes that releasing the Company from the
Management Contract does not materially increase the Company's value. Finally,
HIIC's additional $1,000,000 investment in the Amalgamated Company for the
equivalent of 1,000,000 shares causes dilution of approximately 4 percent.
Overall, Valuemetrics concluded that the accretive effect of the escrow
share adjustment is more than offset by the dilutive effects of the subsequent
steps of the transaction. The net impact of the Amalgamations to the current
public shareholders of Sky Games is an 11 percent decrease in per share value.
Although the amalgamation transaction decreases the value of the shares
currently held by the public shareholders of Sky Games, Valuemetrics concluded
that the dilution does not seem unreasonable based on the facts and
circumstances surrounding the Amalgamations. Valuemetrics concluded that while
it is clear that the current public shareholders are giving up a portion of the
value of their shares, they are also preserving the majority of their value.
Conclusions. Valuemetrics concluded that given the current financial
standing, product development stage and form of corporate organization of Sky
Games, the proposed Amalgamations and the HIIC Loan and the HIIC Equity
Commitment and the MIP in their entirety are reasonable given the current
circumstances of Sky Games. Valuemetrics also concluded that the restructuring
of the IEL subsidiary and conversion of HIIC's minority interest is necessary to
simplify the operating structure. This should induce outside equity to invest
needed capital. Without this restructuring step, Sky Games could be in jeopardy
of failing and going into bankruptcy. The issuance of performance based stock
options under the MIP is necessary to attract and retain the management
necessary to become involved with such a risky venture. Similarly, the Director
Stock Plan will induce those individuals with qualifying experience and
judgement to become involved with Sky Games, while reducing cash outlays of Sky
Games for directors fees. The conversion of HIEC's Management Agreement to
equity is necessary to reduce the monthly cost of doing business. This reduces
monthly expenditures, while also simplifying the corporate structure which
should make an investment in Sky Games more attractive. Finally, Valuemetrics
concluded that the Amalgamated Company needs capital in the short term. Because
HIIC already has the right to buy equity at $1.00 per share per the Shareholders
Agreement when SGIHC cannot make its capital contributions, the negotiations to
limit it at this time to a maximum of $1,650,000 is reasonable. Valuemetrics
concluded that this gives Sky Games current liquidity, time to restructure,
continue development and testing, and prepare to raise equity in the near
future.
Pursuant to the engagement letter with Valuemetrics, Sky Games has agreed
to pay Valuemetrics a fee of $30,000. Sky Games has also agreed to reimburse
Valuemetrics for certain expenses incurred in connection with its engagement and
to indemnify Valuemetrics and certain related persons against certain
liabilities and expenses relating to or arising out of its engagement, including
certain liabilities under the federal securities laws. See "- Interests of
Certain Persons in the Amalgamation."
Effective Time of the Amalgamations
The effective time of the Subsidiary Amalgamation shall be the date shown
in the Certificate of Amalgamation issued by the Registrar of Companies in
Bermuda and is expected to be the date of the Special General Meeting, (the
"Subsidiary Effective Time"). Upon the terms and conditions of the Amalgamation
Agreement and in accordance with the Bermuda Act, IEL shall be amalgamated with
and into SGIHC at the Subsidiary Effective Time and SGIHC shall be amalgamated
with and into Sky Games immediately thereafter (the "Parent Effective Time").
The application must be accompanied by the consent of the Minister of Finance,
the address of the registered office of the amalgamated company, the Memorandum
of Association of the amalgamated company and a statutory declaration.
The Amalgamation Agreement provides that the closing of the Amalgamations
(the "Closing") shall take place at 12:01 a.m. on a date to be specified by the
parties, which date shall be no later than the second business day after
satisfaction of (or waiver in accordance with the Amalgamation Agreement) the
latest to occur of the conditions
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set forth in Article VII of the Amalgamation Agreement (the "Closing Date"), at
the offices of Altheimer & Gray at 10 South Wacker Drive, Suite 4000, Chicago,
Illinois 60606, unless another date or place is agreed to in writing by the
parties. It is expected that the Closing will be June 16, 1997. See "Certain
Provisions of the Amalgamation Agreement -- Conditions to the Amalgamations."
Governance
Upon consummation of the Amalgamations and the effectiveness of the
Amendments, Sky Games anticipates that the Board will have 10 members and will
be comprised of six persons from the current Board, three persons as the HIIC
Appointees and one person as a new member of the Board.
Upon consummation of the Amalgamations, Laurence Geller will continue as
non-Management Chairman of Sky Games, and Gordon Stevenson will serve as
President and Chief Executive Officer. Sky Games is in the process of hiring a
new Chief Financial Officer, Secretary and Treasurer. See "-- Interests of
Certain Persons in the Amalgamation" and "the Amendments -- Board
Representation" and "-- Approval Rights."
Certain U.S. Federal Income Tax Consequences
The following discussion summarizes the material income tax considerations
of the Amalgamations that are generally applicable to holders of Common Stock.
This discussion does not deal with all income tax considerations that may be
relevant to particular Sky Games shareholders in light of their particular
circumstances, such as shareholders who are dealers in securities, foreign
persons, shareholders who acquired their shares in connection with previous
Amalgamations involving Sky Games or an affiliate, or shareholders who acquired
their shares in connection with stock option or stock purchase plans or in other
compensatory transactions. In addition, the following discussion does not
address the tax consequences of transactions effectuated prior to or after the
effectiveness of the Amalgamations (whether or not such transactions are in
connection with the Amalgamations), including, without limitation, transactions
in which shares of Common Stock were or are acquired or shares of Common Stock
were or are disposed of. Furthermore, no foreign, state or local tax
considerations are addressed herein. ACCORDINGLY, SKY GAMES SHAREHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF
THE AMALGAMATIONS, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES TO THEM OF THE AMALGAMATIONS.
The Amalgamations constitute, for U.S. federal income tax purposes, as to
Sky Games and SGIHC, liquidations under sections 332 and 337 of the Internal
Revenue Code of 1986, as amended. In general, under U.S. tax principles, no gain
or loss is recognized (i) to a liquidating corporation on the distribution of
property in a complete liquidation or (ii) to the recipient of property
distributed in a complete liquidation, if the recipient of such property owns
stock (A) possessing at least 80 percent of the total voting power of the stock
of such corporation and (B) which has a value equal to at least 80 percent of
the total value of the stock of such corporation. As regards the existing
shareholders of Sky Games, for U.S. federal income tax purposes, the such
shareholders should not recognize taxable income as a result of the
Amalgamations.
Anticipated Accounting Treatment
The basis of consolidation for the financial statements of the Amalgamated
Company will include the accounts of the Amalgamated company and its wholly-
owned subsidiaries, Sky Games International Corp. And Creator Island Equities.
The Amalgamations will be accounted for using the purchase method of accounting.
All other accounting policies will remain consistent with prior years as noted
in the Company's audited historical financials. For the pro forma financial
statement reflecting the Amalgamations, the HIIC Loan, the HIIC Equity
Commitment and the B/E Conversion, see "Unaudited Pro Forma Combined Condensed
Financial Statements."
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Resales of Common Stock and Registration Rights
The shares of Common Stock to be issued to HIIC pursuant to the
Amalgamation Agreement are not being registered under the Securities Act.
Pursuant to Rule 144 under the Securities Act, the sale of Common Stock acquired
by HIIC pursuant to the Amalgamation will be subject to certain restrictions.
HIIC may resell common stock under Rule 144 only if it has held such Common
Stock for one year or longer and (i) the Company has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding
twelve months, (ii) the Common Stock is sold in a "broker's transaction," which
is defined in Rule 144 under the Securities Act as a sale in which (a) the
seller does not solicit or arrange for orders to buy the securities, (b) HIIC
does not make any payment other than to the broker, (c) the broker does no more
than execute the order and receive a nominal commission and (d) the broker does
not solicit customer orders to buy the securities, and (iii) such sale and all
other sales made by such person within the preceding three months do not
collectively exceed the greater of (x) 1% of the outstanding shares of Common
Stock and (y) the average weekly trading volume of Common Stock on all national
securities exchanges during the four-week period preceding the sale. The HIIC
Entities will have the right to cause the Amalgamated Company to effect two
demand registrations and, under certain circumstances, to effect certain other
registrations of their shares of Common Stock. This right is subject to certain
conditions and limitations. See "The Amalgamations -- Related Agreements" and
"-- Shares Eligible for Future Sale."
Status as Foreign Private Issuer
As a foreign private issuer under the rules promulgated under the Exchange
Act, Sky Games is exempt from the Sections 14(a), 14(b), 14(c), 14(f) and 16 of
the Exchange Act. As a foreign private issuer, Sky Games files its annual report
on Form 20-F. As such, Sky Games is not required to comply with many of the
disclosure requirements of the Exchange Act in connection with the solicitation
of proxies and sales of the securities of Sky Games by officers, directors and
more than 10% shareholders of Sky Games ("Insiders"). Following the
Amalgamation, it is anticipated that Sky Games will no longer be a foreign
private issuer and will be subject to Sections 14(a), 14(b), 14(c), 14(f) and 16
of the Exchange Act and will be required to file its annual report on Form 10-K.
Additionally, following the Amalgamations and the loss of Sky Games' status
as a foreign private issuer, Sky Games will be required to file quarterly
reports on Form 10-Q. As a foreign private issuer, Sky Games currently files
interim reports on Form 6-K. Sky Games' Insiders currently are not required to
disclose changes in Sky Games' security ownership pursuant to Section 16 of the
Exchange Act. Following the Amalgamations and the loss of foreign private issuer
status, such Insiders will be required, among other things, to disclose changes
in security ownership at the close of each calendar month and will be subject to
shareholder suits to recover, on behalf of Sky Games, profit realized by such
Insider from any purchase and sale, or any sale and purchase, of any equity
security of the issuer (subject to certain exceptions) within any period of less
than six months.
Interests of Certain Persons in the Amalgamations
In considering the recommendation of the Board with respect to the
Amalgamations, shareholders should be aware that certain members of Sky Games's
management and the Board have certain interests in the Amalgamations that are in
addition to the interests of the shareholders of Sky Games generally. The Board
was aware of, and approved, these interests and considered them in connection
with the Board's consideration of the Amalgamations, the Amalgamation Agreement
and the transactions contemplated thereby. See "Summary -- The Amalgamations --
Effect of Amalgamations"; " -- Percentage Ownership of HIIC after the
Amalgamations"; "-- the Amendments" and "Risk Factors -- Discretion of Largest
Shareholder to Appoint Certain Directors and to Approve Certain Corporate
Actions."
Engagement of Geller & Co. Laurence Geller, Chairman and Chief Executive
Officer of Sky Games is principal of Geller & Co. Pursuant to Sky Games'
retainer agreement with Geller & Co. dated February 14, 1996, Geller & Co. has
been granted 200,000 shares of Common Stock. The 200,000 shares vest upon the
earlier of the
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end of 18 months after the date of the agreement or the closing of the first
major transaction, which the Board has determined to include the Amalgamations.
Therefore, upon consummation of the Amalgamations, the 200,000 share grant will
vest.
Engagement of Valuemetrics. Sky Games has retained Valuemetrics as its
financial advisor in connection with the Amalgamations and to help ensure that
the Board was fully informed regarding the Amalgamations and the Transaction
discussed in this Proxy Statement. Upon consummation of the Amalgamation,
Valuemetrics will receive a fee in this connection in an amount equal to
$30,000.
Indemnification of Directors and Officers. The Bermuda Act expressly
prohibits a company from indemnifying any officer or auditor of the company
against liability arising from the officer's or auditor's willful negligence,
willful default, fraud or dishonesty. The Bermuda Act provides, however, that a
company may indemnify an officer or auditor against any liabilities incurred by
him in defending any proceedings, whether civil or criminal, in which judgment
is given in his favor. Under the current Bye-Laws of Sky Games, every director,
officer and committee member of Sky Games is indemnified out of the funds of Sky
Games against all civil liabilities, loss, damage or expense (including but not
limited to all liabilities under contract, tort and statute or any applicable
foreign law or regulation and all reasonable legal and other costs and expenses
properly payable) incurred by him as a such director, officer of committee
member. Every director, officer and committee member of Sky Games is also
indemnified out of the funds of Sky Games against all liabilities incurred by
him as a director, officer or committee member in defending any proceedings,
whether civil or criminal, in which judgement is given in his favor, or in which
he is acquitted, or in connection with any application under the Bermuda Act in
which relief from liability is granted to him by the court. To the extent that
any director, officer or member of a committee duly constituted is entitled to
claim an indemnity pursuant to the Bye-Laws in respect of amounts paid or
discharged by him, the relative indemnity shall take effect as a obligation of
the Company to reimburse the person making such payment of effecting such
discharge. The Amalgamated Company also will enter into individual
indemnification contracts with each of its directors and officers affording them
the right to the fullest indemnification permitted under Bermuda law. The
Amalgamated Company will also have in place at or prior to the Subsidiary
Amalgamation reasonable and customary directors and officers insurance covering
each of the directors and officers of the Amalgamated Company.
Interests of HIIC Entities. The interests of the HIIC Entities in the
Amalgamations include: (i) the right to the Conversion Shares (ii) rights under
the HIIC Loan and HIIC Equity Commitment, including the right to receive
additional shares of Common Stock upon the automatic conversion of the HIIC Loan
at the Subsidiary Effective Time and upon exercise of the HIIC Equity Commitment
by the Amalgamated Company for 650,000 shares Common Stock at $1.00 per share;
(iii) the right to appoint a number of Board members and members of the
executive, compensation and audit committees of the Board generally
proportionate to their share ownership; (iv) rights to approve certain major
actions of the Board and of the shareholders of the Amalgamated Company; (v)
registration rights with respect to Voting Shares; (vi) rights to prevent the
dilution of their holdings of Voting Shares, including the right to receive
Common Stock upon issuance of B/EA of Common Stock upon conversion of the Class
A Preference Shares; (vii) the preemptive right, upon certain conditions, to
purchase certain securities offered by the Amalgamated Company, including the
Debentures and Common Stock issuable upon conversion of the Debentures; (viii)
rights under the Amalgamation Agreement, including indemnification for breach of
representation by Sky Games and SGIHC; (ix) termination of and a release of
claims under the Management Agreement, the Shareholders Agreement and the Cross-
License Agreement, including termination of the Amalgamated Company's ability to
use the name "Harrah's"; (x) receipt of a license of certain IEL intellectual
property; (xi) entry into a continuing services agreement with the Amalgamated
Company; and (xii) indemnification for their representatives on the Board. See
"Summary -- The Special General Meeting"; "Recent Developments -- Cancellation
of Preference Shares"; "The Amalgamations -- Adjustments to Amalgamation
Consideration"; "Effects of the Amalgamations"; "-- Interests of Certain Persons
in the Amalgamations"; "-- Related Agreements"; "-- Certain Provisions of the
Amalgamation Agreement"; "The Amendments -- Board Representation"; "-- Approval
Rights"; and "-- Shareholder Approval Rights." The HIIC Entities will also be
beneficiaries of the Amalgamated Company's rights to protect gaming licenses it
may hold
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through redemption of shares held by Disqualified Holders, including mandatory
redemption whenever the HIIC Entities own 10% or more of the Voting Shares, and
removal of disqualified directors and officers, which would also protect the
gaming licenses of the HIIC Entities. See "The Amendments -- Rights to Protect
Gaming Licenses and Integrity."
Related Agreements
Termination Agreements. The Amalgamation Agreement provides that, as
condition to the consummation of the Subsidiary Amalgamation, the parties shall
have entered into agreements to terminate the following agreements (i) the
Management Agreement as of the Subsidiary Effective Time; (ii) the Shareholders
Agreement as of the Subsidiary Effective Time; and (iii) the Cross-License
Agreement among Sky Games (f/k/a Creator Capital Inc., a Yukon Territory
corporation), IEL and HIEC dated December 30, 1994 as of the Effective Time
(collectively, the "Termination Agreements"). The Termination Agreements shall
provide for the mutual release of the parties to the terminated agreements.
Shareholder Rights Agreement. As a condition to the consummation of the
Subsidiary Amalgamation, the parties to the Amalgamation Agreement shall have
entered into a Shareholder Rights Agreement (the "Shareholder Rights
Agreement"). Pursuant to such agreement, the Amalgamated Company will agree that
for so long as the HIIC Entities own 20% or more of the outstanding Voting
Shares on a fully-diluted basis (as defined in the Bye-Laws as amended by the
Amendments (the "Amended Bye-Laws")), any of the following actions by the
Amalgamated Company would require the approval of the majority of the Board and
HIIC Appointees: (i) the sale of all or any material portion of the assets of
the Amalgamated Company together with its subsidiaries; (ii) the incurrence,
renewal, prepayment or amendment of the terms of indebtedness the Amalgamated
Company together with its subsidiaries in excess of $5 million in any one fiscal
year; (iii) the Amalgamated 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
Amalgamated Company or any of its subsidiaries, 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 Amalgamated
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 Amalgamated Company or any of its
subsidiaries; (vi) any material amendments to the MIP for 12 months following
the Subsidiary Amalgamation; (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 Amalgamated Company on a fully-diluted basis (as
defined in the Amended Bye-Laws), other than the MIP, in any one fiscal year;
and (ix) the creation or adoption of any shareholder rights plan. Also pursuant
to such agreement, for so long as the HIIC Entities own 10% or more of the
outstanding Voting Shares on a fully-diluted basis (as defined in the Amended
Bye-Laws), as to (x) 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 if such person held shares
of the Amalgamated Company) that would constitute or result in, or (y) any
action or inaction of or by the Amalgamated Company or any of its subsidiaries'
which the HIIC Entities determine in their 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 the HIIC Entities in any jurisdiction in which the
HIIC Entities are actively conducting business or as to which any of them 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 the HIIC Entities 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 the HIIC Entities.
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Registration and Preemptive Rights Agreement. It is also a condition to the
consummation of the Subsidiary Amalgamation, the parties to the Amalgamation
Agreement shall have entered into a Registration and Preemptive Rights Agreement
(the "Registration and Preemptive Rights Agreement"). Under such agreement, the
HIIC Entities would have two demand registration rights to cause the Amalgamated
Company to register the Common Stock owned by the HIIC Entities, provided, that
prior to June 30, 1998, no such demand registration could be brought for a
number of shares in excess of one million shares unless the Amalgamated 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 shall be
underwritten on a firm commitment basis by an underwriter chosen by the
Amalgamated Company. The demand rights would be subject to customary
restrictions such as 120 day blockage periods for corporate developments or
registered offerings by the Amalgamated Company, cut-backs and etc. The
Amalgamated Company would also agree pursuant to such agreement that until the
earlier of when the HIIC Entities own less than 5% of the outstanding Voting
Shares of the Amalgamated Company on a fully-diluted basis (as defined in the
Amended Bye-Laws), the HIIC Entities would have customary piggy-back rights to
include their shares of Common Stock in registered offerings by the Amalgamated
Company. The HIIC Entities would bear the costs of their legal counsel and any
underwriting discounts, commissions or allowances in connection with all sales
pursuant to the foregoing, and the Amalgamated Company would bear all other fees
and expenses of such registrations. The HIIC Entities would have the right to
purchase securities offered by the Amalgamated Company for as long as the HIIC
Entities own 20% or more of the outstanding Common Stock on a fully-diluted
basis (as defined in the Amended Bye-Laws) at the same price and terms such
securities are otherwise being offered which would include the Debentures and
shares issuable upon conversion of the Debentures. The HIIC Entities would also
have the right for as long as the HIIC Entities own 20% or more of the
outstanding Voting Shares on a fully-diluted basis (as defined in the Amended
Bye-Laws) to participate on a proportionate basis in any non-pro rata stock
repurchases or redemptions conducted by the Amalgamated Company. At any time
that the HIIC Entities own less than 10% of the outstanding Voting Shares, on a
fully-diluted basis (as defined in the Amended Bye-Laws), the Amalgamated
Company shall have the right to cause the HIIC Entities to sell their Voting
Shares pursuant to a registered sale and the HIIC Entities shall have the right
to cause the Amalgamated Company to file a registration statement to sell their
Voting Shares in the event (i) of any change in or conduct of the business or
proposed business of the Amalgamated Company or any of its subsidiaries or any
other action or inaction of the Amalgamated Company or any of its subsidiaries
which would constitute a Disqualifying Action or (ii) the Amalgamated Company
does not redeem a "Disqualified Holder" (as defined in the Amended Bye-Laws)
pursuant to the Amended Bye-Laws, in each case at the Amalgamated Company's
expense without being subject to the limitations on demand rights set forth
above. Upon any conversion of any Class A Preference Shares issued to B/EA as
part of the B/E Conversion, the Amalgamated Company shall issue to HIIC a number
of shares of Common Stock at no charge to HIIC such that such number of shares
plus the Conversion Shares plus the number of shares of Voting Shares issuable
to HIIC under the HIIC Loan and the HIIC Equity Commitment constitutes the same
percentage of the outstanding Common Stock on a fully-diluted basis (as defined
in the Amended Bye-Laws) as the number of Conversion Shares plus the number of
shares of Common Stock issuable to HIIC under the HIIC Loan and the HIIC Equity
Commitment constituted of the outstanding Common Stock on a fully-diluted basis
(as defined in the Amended Bye-Laws) prior to such issuance.
License Agreement. The Amalgamation Agreement will further provide that as
a condition to the consummation of Subsidiary Amalgamation, the parties shall
have entered into a License Agreement (the "License Agreement") regarding use by
the HIIC Entities of IEL intellectual property following the Amalgamations. The
Amalgamated Company would grant a fully paid and perpetual worldwide license to
the HIIC Entities to use IEL's gaming technology in non-competitive uses in
traditional casino venues which the HIIC Entities own, operate or manage. The
license would include source codes for all software, and neither party would
have any obligation to share or provide any improvements or modifications with
the other party. The license would contain customary provisions regarding
limitations on the use of and protections regarding the IEL intellectual
property.
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Continuing Services Agreement. Sky Games and HIEC shall as of the closing
have entered into a Continuing Services Agreement, terminated upon 60 days'
notice, regarding the provision of certain administrative and support services
by HIEC to Sky Games, provided that Sky Games bears the cost of termination.
Option Plans. At the December 6, 1996 meeting, the Board adopted the MIP
and the Directors Option Plan, in order address the need following the
Amalgamations for the Amalgamated Company to be able to attract and motivate
qualified management and directors. The MIP provides for the allocation of
4,070,105 options for shares of Common Stock to the management of the
Amalgamated Company. The Director Stock Plan provides for the automatic grant of
options for 10,000 shares of Common Stock to all directors holding office on
December 10 of each year at the trading price on such day. See "Recent
Developments -- Option Plans.
CERTAIN PROVISIONS OF THE AMALGAMATION AGREEMENT
The following description does not purport to be complete and is qualified
in its entirety by reference to the Amalgamation Agreement, a copy of which is
attached as Appendix A of this proxy statement, which is incorporated by
reference herein.
Conditions to the Subsidiary Amalgamation
Conditions to Obligation of HIIC, IEL, SGIHC and Sky Games to Consummate
the Subsidiary Amalgamation
The respective obligation of HIIC, SGIHC and Sky Games to consummate the
Subsidiary Amalgamation is subject to the fulfillment at or prior June 21, 1997
of the following conditions:
Sky Games Shareholder Approval. The shareholder resolutions necessary to
approve the transactions to be effected by the Subsidiary Amalgamation which
require shareholder approval shall have been approved by the requisite vote of
the shareholders of Sky Games.
Other Approvals. The Amalgamations and the transactions contemplated
thereby shall have been approved by Singapore Airlines Limited. All
authorizations of any governmental entity which the failure to obtain would have
the effect of making the Subsidiary Amalgamation or any of the transactions
contemplated thereby illegal (or ineffective) or would have a material adverse
effect on Sky Games or the Amalgamated Company shall have been obtained.
No Order. No government entity or court having jurisdiction over Sky Games,
SGIHC or IEL shall have enacted, issued, promulgated, enforced or entered any
law, rule, regulation, executive order, judgment, decree or other order which is
then in effect and has the effect of making the Subsidiary Amalgamation illegal
or prohibiting the Subsidiary Amalgamation or any of the transactions
contemplated by the Amalgamation Agreement.
Termination Agreements. The parties shall have entered into the Termination
Agreements, which shall provide for the mutual release of all parties to the
terminated agreements.
Litigation. There shall not have been instituted and be pending any suit,
action or proceeding by any governmental entity or shareholder of Sky Games as a
result of the Amalgamation Agreement or the transactions contemplated thereby
which would reasonably be expected to prevent or materially delay the Subsidiary
Amalgamation.
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Performance of Obligations. IEL shall have performed in all material
respects each of its agreements contained in the Amalgamation Agreement, each of
the representations and warranties of IEL shall be true and correct, and Sky
Games and HIIC shall have received a certificate to that effect.
Material Adverse Change. Since the date of the Amalgamation Agreement,
there shall have been no material adverse change to IEL, and Sky Games and HIIC
shall have received a certificate signed on behalf of IEL to such effect.
Continuing Services Agreement. Sky Games and HIEC shall have entered into
the Continuing Services Agreement regarding the provision of administrative and
support services by HIEC, terminable by the Amalgamated Company on 60 days'
notice and the payment of a termination fee.
Continued Listing of Sky Games Common Shares. There shall not have been a
cease trading order in effect as to the trading of the Common Stock through the
SmallCap Market, Sky Games' Common Stock shall be listed on the SmallCap Market
and Sky Games shall not have received a notice of non-compliance from Nasdaq as
to any applicable SmallCap Market continued listing requirement and such notice
shall not have been rescinded or such non-compliance remedied.
Receipt of Legal Opinion. HIIC, Sky Games and SGIHC shall have received the
legal opinion of Appleby, Spurling & Kempe addressed to each of them in such
form as is reasonably acceptable to each of HIIC, Sky Games and SGIHC.
Additional Conditions to Obligation of HIIC
Conditions to Obligation of HIIC to Consummate the Subsidiary Amalgamation.
The obligation of HIIC to consummate the Subsidiary Amalgamation shall be
subject to the fulfillment at or prior to the Subsidiary Effective Time of the
following additional conditions:
Approval of HIIC Board and HIIC. The board of directors of HIIC shall have
approved the Amalgamation Agreement and any ancillary agreements and HIIC shall
have approved the Subsidiary Amalgamation and the Amalgamation Agreement as a
shareholder of IEL.
Performance of Obligations; Representations and Warranties. Each of Sky
Games and SGIHC shall have performed in all material respects each of its
agreements prior to the Effective Time, each of the representations and
warranties of Sky Games and SGIHC contained in the Amalgamation Agreement shall
be true and correct at and as of the Subsidiary Effective Time, except as
contemplated or permitted by the Amalgamation Agreement. HIIC shall have
received a certificate signed on behalf of Sky Games by its chief executive
officer and its chief financial officer to such effect.
Consents Under Agreements. HIIC shall have obtained the consent or approval
of each person whose consent or approval shall be required in connection with
the transactions contemplated by the Amalgamation Agreement under any other
agreement or instrument, except where the failure to obtain the same would not
reasonably be expected, individually or in the aggregate, to have a material
adverse effect on HIIC or upon the consummation of the transactions contemplated
hereby.
Material Adverse Change. Since the date of the Amalgamation Agreement,
there shall have been no material adverse change with respect to Sky Games,
except as contemplated in the 1997 IEL Plan (as defined in the Amalgamation
Agreement) or as a result of the write-down of real estate assets owned by a
subsidiary of Sky Games. HIIC shall have received a certificate signed on behalf
of Sky Games by its Chief Executive Officer and its Chief Financial Officer to
such effect.
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Delivery of Agreements. Sky Games and HIIC shall have entered into the
following agreements as to the Closing: (i) Shareholder Rights Agreement; (ii)
Registration Rights and Preemptive Rights Agreement; and (iii) License
Agreement.
Performance Shares. Sky Games shall have entered into binding written
agreements with the record holders of all 3,525,000 Performance Shares being
held in escrow by Montreal Trust Company of Canada under an Escrow Agreement,
pursuant to which the holders of the Performance Shares have agreed to tender
their Performance Shares to the Sky Games and pursuant to which no more than
1,175,000 shares shall be issued as consideration for the tendering for
redemption and cancellation of the Performance Shares and HIIC shall have
received a certificate signed on behalf of Sky Games by its Chief Executive
Officer to such effect. Each holder of the Performance Shares shall have
executed and delivered to a national banking association, acceptable to Sky
Games and HIIC (the "Proxy Holder"), an irrevocable proxy appointing the Proxy
Holder proxy for such holder with respect to the Performance Shares. The Proxy
Holder shall further have entered into an agreement with Sky Games and HIIC not
to vote the Performance Shares. See "Recent Developments -- Cancellation of
Performance Shares."
Bye-Law Amendments. The Amendments shall have been approved by the
requisite vote of shareholders of Sky Games at the Special General Meeting in
accordance with applicable law and the Bye-Laws of Sky Games.
B/E Conversion. Sky Games shall have at or immediately prior to the
Subsidiary Effective Time consummated the B/E Conversion.
B.C. Securities Compliance Certificate. Sky Games shall have delivered to
HIIC a certificate of the British Columbia Securities Commission certifying that
Sky Games is in compliance with its filing obligations under the British
Columbia Securities Commission dated no more than ten (10) days prior to the
date of closing.
Additional Conditions to Obligation of Sky Games
Conditions to Obligations of Sky Games and SGIHC to Consummate the
Amalgamation.
The obligation of Sky Games and SGIHC to consummate the Subsidiary
Amalgamation shall be subject to the fulfillment at or prior to the Subsidiary
Effective Time of the following additional conditions:
Performance of Obligations; Representations and Warranties. HIIC shall have
performed in all material respects each of its agreements contained in the
Amalgamation Agreement required to be performed at or prior to the Subsidiary
Effective Time. Each of the representations and warranties of HIIC contained in
the Amalgamation Agreement that is qualified by materiality shall be true and
correct at and as of the Subsidiary Effective Time and each of such
representations and warranties that is not so qualified shall be true and
correct in all material respects at and as of the Subsidiary Effective Time. Sky
Games shall have received a certificate signed on behalf of HIIC by its
President and Treasurer to such effect.
Consents Under Agreements. Sky Games and SGIHC shall have obtained the
consent or approval of each person whose consent or approval shall be required
in connection with the transactions contemplated by the Amalgamation Agreement
or under any other agreement or instrument required thereunder, except where the
failure to obtain the same would not reasonably be expected to have a material
adverse effect on Sky Games or SGIHC or upon the consummation of the
transactions contemplated by the Amalgamation Agreement.
Representations and Warranties
The Amalgamation Agreement contains various representations and warranties
by Sky Games, SGIHC and IEL relating to among other things: (i) each of their
and certain of their subsidiaries corporate matters;(ii) each of their capital
structures; (iii) the authorization, execution, delivery, performance and
enforceability of the Amalgamation
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Agreement and related matters; (iv) the absence of conflicts, violations of or
defaults under the Memoranda of Association and Bye-laws of each of Sky Games
and SGIHC, any loan or credit agreement, note, bond, mortgage, indenture, lease,
agreement, instrument, permit, concession, franchise or license, or any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Sky Games or any of its subsidiaries; (v) the absence of certain changes or
events; (vi) compliance with certain laws; (vii) litigation; (viii) contracts;
and (ix) the absence of undisclosed liabilities.
Additionally, Sky Games and SGIHC represent and warrant as to (i)
compliance with U.S. federal law of all documents filed by Sky Games with the
U.S. Securities and Exchange Commission since January 4, 1994 and (ii) that the
purpose of the formation of SGIHC as a holding subsidiary for the stock of IEL.
IEL represents and warrants separately that the subsidiary of IEL was
formed solely for the purpose of conducting all operations required to be
conducted by IEL in Singapore pursuant to the agreements with Singapore Airlines
Limited and has engaged in no other business.
Certain Covenants; Conduct of Business of Sky Games
During the period from the date of the Amalgamation Agreement until the
Subsidiary Effective Time, Sky Games has agreed as to itself and its
subsidiaries that (except as expressly contemplated or permitted by the
Amalgamation Agreement, or to the extent that HIIC has otherwise consented in
writing):
Ordinary Course. Except as specifically disclosed to HIIC, each of Sky
Games and its subsidiaries shall carry on its businesses in the ordinary course
in substantially the same manner as heretofore conducted and shall use its
reasonable best efforts to preserve intact its present business organizations,
keep available the services of its current officers and employees, subject to
certain Sky Games employee matters, and endeavor to preserve its relationships
with customers, suppliers and others having business dealings with it to the end
that its goodwill and ongoing business shall not be impaired in any material
respect at the Subsidiary Effective Time.
Dividends; Changes in Stock. Sky Games shall not (i) declare or pay any
dividends on or make other distributions in respect of any of its capital stock
or (ii) repurchase, redeem or otherwise acquire, or permit any of its
subsidiaries to purchase, redeem or otherwise acquire, any shares of its capital
stock, except as required by the terms of its securities outstanding on the date
of the Amalgamation Agreement or as contemplated by any existing employee
benefit plan.
Issuance of Securities. Sky Games shall not and it shall not permit any of
its subsidiaries to issue, deliver sell, pledge, dispose of or otherwise
encumber, any shares of its capital stock (other than pursuant to the HIIC Loan
and the HIIC Equity Commitment), any other voting securities or equity
equivalent or any securities convertible into Common Stock, or any rights,
warrants or options to acquire, any such shares, voting securities, equity
equivalent or convertible securities, other than the issuance of Common Stock
prior to the Subsidiary Effective Time upon the conversion of the HIIC Loan and
the purchase pursuant to an exercise of the HIIC Equity Commitment, unless such
shares are issued to HIIC, such that the percentage of shares, on a fully-
diluted basis (as defined in the Amended Bye-Laws), to be issued to HIIC
pursuant to the conversion of the IEL Common Stock concurrent with the
Subsidiary Amalgamation and plus the number of shares of Common Stock issuable
pursuant to the HIIC Loan and the HIIC Equity Commitment, equals the percentage
to be issued to HIIC, on an fully-diluted basis (as defined in the Amended Bye-
Laws), prior to such issuance.
Governing Documents. Except as contemplated by the Amalgamation Agreement,
Sky Games shall not amend or propose to amend its charter or organization
documents or Bye-Laws, if such amendment would adversely affect the rights of
HIIC under the Amalgamation Agreement or upon consummation of the Amalgamation.
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No Acquisitions. Sky Games shall not, and it shall not permit any of its
subsidiaries to acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, other than
transactions that are not material.
No Dispositions. Sky Games shall not, and it shall not permit any of its
subsidiaries to, sell, lease, encumber or otherwise dispose of, or agree to
sell, lease, encumber or otherwise dispose of, any of its assets other than the
real property owned by a subsidiary of Sky Games.
Indebtedness. Sky Games shall not, and it shall not permit any of its
subsidiaries to incur any indebtedness (other than pursuant to the HIIC Loan and
to HIIC Equity Commitment) or make any loans or other investments in any other
person.
No Violation of Law. Sky Games shall not, and it shall not permit any of
its subsidiaries to violate or fail to perform any material obligation or duty
imposed upon Sky Games or any subsidiary of Sky Games by any applicable federal,
state, local, foreign or provincial law, rule, regulation, guideline or
ordinance;
Accounting Procedures. Sky Games shall not, and it shall not permit any of
its subsidiaries to take any action, other than reasonable and usual actions in
the ordinary course of business consistent with past practice, with respect to
accounting policies or procedures.
No Announcements or Commitments in Breach. Sky Games shall not, and it
shall not permit any of its subsidiaries to authorize, recommend, propose or
announce an intention to do any of the foregoing, or enter into any contract,
agreement, commitment or arrangement to do any of the foregoing items.
Material Adverse Effect. Sky Games shall promptly advise HIIC orally and in
writing of any change or event having, or which would reasonably be expected to
have, a material adverse effect on Sky Games.
Management of Business of IEL. During the period from the date of the
Amalgamation Agreement until the Subsidiary Effective Time, HIIC has agreed that
it shall cause HIEC to manage the business of IEL in accordance with the terms
of the Management, the Shareholders Agreement and the 1997 IEL Plan.
Employee Benefits. Except as expressly contemplated by the Amalgamation
Agreement, HIIC shall not, and shall not cause HIEC, to enter into or adopt any
existing employee benefit or welfare plan, except as required by law or as is
consistent with past practices.
Compensation. HIIC shall not, and shall not cause HIEC to, increase the
compensation payable to officers or employees (including severance) or alter any
employment, severance or consulting agreement or, except as may be required to
comply with applicable law or as is consistent with past practices, amend any
employee benefit plan.
Acquisition of Shares of Capital Stock of Sky Games. HIIC shall not, and
shall not cause HIEC to, acquire any shares of capital stock of Sky Games.
Amendment, Waiver and Termination
Termination. The Amalgamation Agreement may be terminated at any time prior
to the Subsidiary Effective Time, whether before or after any approval by the
stockholders of Sky Games of the matters presented in connection with the
Amalgamation: (i) by mutual written consent; (ii) by Sky Games, by written
notice to HIIC, (a) if HIIC shall have failed to comply in any material respect
with any of its covenants or agreements contained in Amalgamation Agreement; or
(b) the shareholders of Sky Games fail to approve the Amendments or the
Additional Actions; (iii) by HIIC, by written notice to Sky Games, (a) if Sky
Games or SGIHC shall have failed to comply in any uncured
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material respect with any of its respective covenants or agreements contained in
the Amalgamation Agreement; or (b) the shareholders of Sky Games shareholders
fail to approve the Amendments or the Additional Actions; (iv) by either Sky
Games or HIIC, by written notice from the terminating party to the other
parties, if there has been a material breach by the other of a representation or
warranty; (v) by either Sky Games or HIIC, by written notice from the
terminating party to the other parties, if there has been an uncured material
breach by IEL of any covenant, representation or warranty; (vi) by either Sky
Games or HIIC, by written notice from the terminating party to the other
parties, if the Amalgamation has not been effected on or prior to the close of
business on June 21, 1997.
Effect of Termination. In the event of the termination of the Amalgamation
Agreement by either Sky Games or HIIC the Amalgamation Agreement will become
void without any liability hereunder on the part of HIIC, IEL, Sky Games, or
SGIHC or their respective directors or officers, except for Section 6.2 and 6.4
of the Amalgamation Agreement which survive termination, provided no party is
released from liability for breach of the Amalgamation Agreement, which
liability shall not include liability for consequential damages.
Amendment. The Amalgamation Agreement may be amended by the parties
thereto, at any time before or after approval by the stockholders of Sky Games
of the matters presented to them in connection with the Subsidiary Amalgamation;
provided, however, that after any such approval, no amendment shall be made if
applicable law would require further approval by such stockholders, unless such
further approval shall be obtained. The Amalgamation Agreement may not be
amended except by an instrument in writing.
Waiver. At any time prior to the Subsidiary Effective Time, Sky Games,
SGIHC, IEL and HIIC (i) may extend the time for the performance of any of the
obligations or other acts of the other parties the Amalgamation Agreement, (ii)
waive any inaccuracies in the representations and warranties contained or in any
instrument delivered pursuant to the Amalgamation Agreement, and (iii) waive
compliance with any of the agreements or conditions contained in the
Amalgamation Agreement which may legally be waived.
Indemnification Provisions
Indemnification Obligations of Sky Games. From and after the Closing, Sky
Games shall indemnify, defend, save and keep the HIIC Entities forever harmless
against and from all loss, cost, damage and expense (collectively, "Damages")
sustained or incurred by HIIC and HIEC as a result of or arising out of or by
virtue of or in connection with any inaccuracy in or breach of any
representation and warranty made by Sky Games or SGIHC under the Amalgamation
Agreement.
Limitations on Sky Games's Indemnification Obligations. Sky Games shall not
have any indemnification obligation and the HIIC Entities shall not be entitled
to recover, unless a claim has been asserted by written notice, specifying the
details of the alleged inaccuracy in or breach of any representation or
warranty, delivered to Sky Games on or prior to the end of the period
terminating on the date of the first report of Sky Games's independent auditors
on the audited financial statements of Sky Games for the period ending December
31, 1997; provided, however, that indemnification claims with respect to any
alleged inaccuracy in or breach of any representation or warranty in Section 2.4
of the Amalgamation Agreement may be asserted by such written notice, delivered
to Sky Games on or prior to the end of the period terminating 36 months after
the date of the closing.
Third Party Claims. Subject to certain requirements, Sky Games has agreed
to defend the HIIC Entities with respect to third party claims for which the
HIIC Entities would be entitled to indemnification.
Tax and Insurance Benefits. All indemnification or reimbursement payments
required pursuant to the Amalgamation Agreement shall be made net of all cash,
tax and insurance benefits received by the HIIC Entities.
Remedies and Undertakings. Except as otherwise specifically provided in the
Amalgamation Agreement, the sole and exclusive remedy of the HIIC Entities under
the Amalgamation Agreement for a breach of a
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representation or warranty by Sky Games shall be restricted to the
indemnification rights set forth therein. Prior to the assertion of any claims
for indemnification under the Amalgamation Agreement, the HIIC Entities shall
utilize all reasonable efforts, consistent with normal practices and policies
and good commercial practice, to mitigate such Damages. The limitation in the
preceding sentence shall not apply to action resulting from a default or an
alleged default in the performance of the Amalgamation Agreement other than a
default under a representation or warranty under the Amalgamation Agreement.
THE AMENDMENTS
In order to consummate the Amalgamations and the B/E Conversion, the Bye-
Laws of the Company will be required to be amended. Adoption and approval of the
Shareholder Resolution will result in the Amendments being made to the Bye-laws.
If the Shareholder Resolution is not approved, the Amendments will not be made,
and the Amalgamations and the B/E Conversion will not occur.
The rights of the HIIC Entities under the Amended Bye-Laws of the
Amalgamated Company will vary depending on their aggregate ownership of Voting
Shares on a fully-diluted basis as such terms is defined in the Amended Bye-
Laws. For purposes of the Amended Bye-Laws, "fully-diluted basis" shall mean at
any time that number of (A) shares of Common Stock equal to the sum, without
duplication, of (i) the total number of shares of Common Stock then outstanding
(other than the 3,525,000 Performance Shares), plus (ii) the total number of
shares of Common Stock into which all then outstanding Preference Shares or any
other shares of the Amalgamated Company are then convertible directly or
indirectly, provided that shares of Common Stock issuable upon conversion of
Class A Preference Shares shall not be included until such conversion occurs,
plus (iii) the total number of shares of Common Stock then issuable directly or
indirectly upon exercise of all then outstanding options, warrants (including
pursuant to the HIIC Equity Commitment), unexercised stock subscriptions,
convertible debentures and other convertible securities plus (B) Voting Shares
(other than Common Stock) equal to the sum, without duplication (including
without duplication of any Common Stock) of (i) the total number of Voting
Shares (other than Common Stock) then outstanding, plus (ii) the total number of
Voting Shares (other than Common Stock) into which all then outstanding
Preference Shares or any other shares of the Company are then convertible
directly or indirectly, plus (iii) the total number of Voting Shares (other than
Common Stock) then issuable directly or indirectly upon exercise of all then
outstanding options, warrants, unexercised stock subscriptions, convertible
debentures and other convertible securities. The number of Voting Shares on a
fully-diluted basis may be different from or the same as the number of Voting
Shares on an Adjusted Outstanding Basis.
Board Representation
The Bye-Laws of Sky Games are proposed to be amended to provide board
representation rights, which apply to the HIIC Entities in accordance with
specified percentages of equity ownership by HIIC Entities. These board
representation amendments provide that: (i) at any time at which the HIIC
Entities own 10% or more of the Voting Shares of Sky Games on a fully-diluted
basis (as defined in the Amended Bye-Laws), the HIIC Entities shall be entitled
to appoint a percentage of directors (rounded up to the nearest 10%) which bears
the same proportion to the size of the entire Board as the number of Voting
Shares held by the HIIC Entities bears to the total number of Voting Shares of
the Amalgamated Company on a fully-diluted basis (as defined in the Amended
Bye-Laws), and the HIIC Entities would be entitled to proportionate
representation on the Executive, Compensation and Audit Committees of the Board;
(ii) at any time at which the HIIC Entities own 5% or more, but less than 10%,
of the Voting Shares of the Amalgamated Company on a fully-diluted basis (as
defined in the Amended Bye-Laws), the HIIC Entities would be entitled to appoint
one director to the Board and one member of the Executive, Compensation and
Audit Committees of the Board; (iii) the Amalgamated Company may in a general
meeting authorize the Board to fill any vacancy on the Board, other than a
vacancy in the office of a HIIC Appointee; (iv) the size of the Board shall be
fixed at 10 members until the HIIC Entities ownership interest falls below 5% of
the Voting Shares of the Amalgamated Company on a fully-diluted basis (as
defined in the Amended Bye-Laws); (v) at such time as the HIIC Entities own less
than 5% of the Voting Shares of the Amalgamated Company on a fully-diluted basis
(as defined in the Amended
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Bye-Laws) the Board shall consist of not less than 3 directors; (vi) at least 2
of the directors sitting on the Board, other than the HIIC Appointees, shall be
outside directors; and (vii) the Compensation Committee will be comprised of
non-management directors.
Approval Rights
The Amendments will also cause the Bye-Laws to provide that at any time
that the HIIC Entities own 20% or more of the Voting Shares of the Amalgamated
Company on a fully-diluted basis (as defined in the Amended Bye-Laws), any of
the following actions would require the approval of a majority of the HIIC
Appointees as part of the necessary majority of the Board of directors and the
HIIC Entities' consent, as part of the necessary shareholder approval: (i) the
amalgamation, merger or consolidation of the Amalgamated Company; and (ii) any
amendment to the Amended Bye-Laws of the Amalgamated Company which would have a
material adverse effect on HIIC Entities' rights under the Amended Bye-Laws
including their right to Board or committee representation or Board or
shareholder approval rights.
Shareholder Approval Rights
The Bye-Laws of Sky Games are further proposed to be amended to provide for
certain approval rights to the HIIC Entities as a shareholder of Amalgamated
Company. At any time that the HIIC Entities own 20% or more of the Voting Shares
of the Amalgamated Company on a fully-diluted basis (as defined in the Amended
Bye-Laws), any of the following actions would require the HIIC Entities'
consent, as part of the necessary shareholder approval: (i) the dissolution or
winding up of the Amalgamated Company; and (ii) the appointment of the
Amalgamated Company's independent auditors.
Rights to Protect Gaming Licenses and Integrity
The gaming industry is highly regulated and gaming service providers are
dependent on public perception and regulatory licensing in order to conduct
their business. Because public perception and regulatory licenses can be
jeopardized by the acquisition by certain persons of material portions of the
capital stock of entities engaged in providing gaming, it is customary for
participants in the gaming industry to include in their charter documents
provisions which enable them to redeem the shares of persons whose acquisition
of stock would put such participant's public perception and regulatory gaming
licenses at risk. Additionally, as a relatively new venue for gaming, in-flight
gaming is, to a great degree, as of yet, unregulated. Because in-flight gaming
is not, in many instances, subject to intense regulatory scrutiny that other
sectors of the gaming industry are subject, Sky Games anticipates that it is
incumbent upon market participants to be highly vigilant in protecting its
public perception and operational integrity. Sky Games proposes to adopt
provisions described above for its Bye-Laws to protect its public perception and
operational integrity and ability to obtain the anticipated regulatory licenses.
Therefore, the Amendments would cause the Amended Bye-Laws to provide that the
Amalgamated Company would be required to redeem, for cash at fair market value,
the shares of any holder of the shares of capital stock of the Amalgamated
Company (1) who, either individually or when taken together with any other
holders of shares of the Amalgamated Company, is or would reasonably be expected
to be determined by any gaming regulatory agency to be unsuitable, or has or
would reasonably be expected to have an application for a gaming license or
permit or other necessary regulatory approval rejected, or has or would
reasonably be expected to have a previously issued gaming license or permit or
other necessary regulatory approval rescinded, suspended, revoked, not renewed
or not reinstated, as the case may be, whether or not any of the foregoing is or
would reasonably be expected to be final and nonappealable, or (2) whose holding
of shares, either individually or taken together with the holdings of others,
could reasonably be expected to cause the Amalgamated Company (or any other
company engaged in the gaming business in any jurisdiction if such holder of
shares were a shareholder of that company) to be denied a license, permit or
other necessary regulatory approval to engage in any aspect of the gaming
business or the serving or sale of alcoholic beverages in connection with the
operation of a gaming business. A Disqualified Holder's shares shall (i) be
required to be redeemed whenever the HIIC Entities own 10% or more of the Voting
Shares on a fully-diluted basis (as defined in the Amended
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Bye-Laws) and (ii) be subject to redemption by action of the Board whenever the
HIIC Entities own less than 10% of the Voting Shares on a fully-diluted basis
(as defined in the Amended Bye-Laws). Additionally, the Bye-Laws would be
amended to provide for the automatic disqualification of any director or officer
of the Amalgamated Company who would be a Disqualified Holder if he were to own
shares of the Amalgamated Company. For a discussion of the HIIC Entities right
to cause the Amalgamated Company to register their shares as long as the HIIC
Entities owned 10% or more of the Voting Shares of the Amalgamated Company
pursuant to the Registration and Preemptive Rights Agreement, see "The
Amalgamations -- Related Agreements."
Rights Attaching to Preference Shares
As part of its efforts to improve the capital situation of Sky Games, Sky
Games has negotiated with B/EA to convert its indebtedness in the amount of U.S.
$2.6 million (including accrued and unpaid interest) into 2,600 Class A
Preference Shares. In order to consummate the B/E Conversion and issue the Class
A preference shares, the Bye-Laws of Sky Games are required to be amended to
permit the Board to designate the rights attaching to the Class A Preference
Shares. In order to permit the Board to designate the rights attaching to the
5,000,000 Class B Preference Shares it is proposed that Bye-Laws be amended to
permit the Board to designate the rights attaching to the Class B Preference
Shares. Therefore, the Amendments would cause the Amended Bye-Laws to provide
that the Board shall be authorized to issue the Class A Preference Shares and
the Class B Preference Shares (collectively, the "Preference Shares") on such
terms as it deems appropriate, including, without limitation, the following: (i)
the number of shares of the Preference Shares; (ii) whether dividends, if any,
shall be cumulative or non-cumulative and the dividend rate of the Preference
Shares; (iii) the dates at which dividends, if any, shall be payable; (iv) the
redemption rights of the Preference Shares; (v) the terms and amount of any
sinking fund provided for the purchase or redemption of shares of the Preference
Shares; (vi) the amounts payable on shares of the Preference Shares in the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Amalgamated Company; (vii) whether the shares of the Preference
Shares shall be convertible into shares of any other class or preference shares,
or any other security, of the Company or any other company, and if so, the
specification of such other class of preference shares or such other security,
the conversion price or prices or rate or rates, any adjustments thereof, the
date or dates as of which such shares shall be convertible and all other terms
and conditions upon which such conversion may be made; and (viii) the voting
rights, if any, of the holders of the Preference Shares, provided that the Class
A Preference Shares shall be non-voting.
Amendment to the Bye-Laws by a Simple Majority; Irrevocable Proxy; Technical
Amendments.
In order to simplify the procedures for amending the Bye-Laws of
Amalgamated Company, it is proposed that the Bye-Laws be amended to permit
amendment to the Amended Bye-Laws by a vote of a simple majority of the votes
cast at a general meeting of the shareholders of Sky Games except for those
Amended Bye-Laws setting forth the Board or shareholder approval rights of the
HIIC Entities. In order to effect the agreements in connection with the agreed
upon cancellation of the Performance Shares, it is proposed that the Bye-Laws be
amended to permit shareholders of the Amalgamated Company to issue an
irrevocable proxy with respect to their holdings of Common Stock. Finally, in
order to improve the Bye-Laws of the Amalgamated Company, it is proposed that
the Bye-Laws be amended to correct certain technical errors contained therein.
ADDITIONAL ACTIONS
The Name Change
Since its formation in 1994, IEL has developed a corporate identity in the
market for In-flight entertainment services which is an important part of the
marketing strategy of Sky Games. The directors of Sky Games believe that the
value of the "Interactive Entertainment Limited" name exceeds the value to the
Company of its current name "Sky Games International Ltd." Therefore, in order
to preserve this identity and convey to Sky Games customers and
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potential customers the continuity of IEL's development and operations it is
proposed to change the name of Sky Games to "Interactive Entertainment Limited,"
contingent upon consummation of the Amalgamations.
The Change in Par Value
Sky Games was originally incorporated pursuant to the laws of the Province
of British Columbia on February 28, 1981 under the name Tu-Tahl Petro 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.
Effective February 22, 1995, Sky Games continued its corporate existence from
the Yukon territory to Bermuda as an exempted company under the Bermuda Act. See
"Summary -- The Companies." Until December 31, 1994, the Common Stock was listed
and trading on the Vancouver Stock Exchange. Since January 1, 1995, Sky Games
shares have been listed and trading on the SmallCap Market. Following the
Amalgamations, Sky Games will lose its status as a "foreign private issuer"
under U.S. securities laws. Changing the par value of the Common Stock of Sky
Games to U.S.$.01 per share each is intended to reflect the increasing
importance of U.S. capital markets to the capital needs of Sky Games and the
decreasing relevance of Canadian capital markets to the affairs of Sky Games.
The Capitalization Change
In order to improve the capital and surplus position of Sky Games, and upon
the advice of Sky Games' investment bankers Montgomery Securities, Sky Games has
negotiated the conversion of the debt of Sky Games to B/EA. See "Recent
Developments -- B/E Conversion." In order to consummate the conversion, an
increase in the authorized share capital by the creation of 3,000 Class A
Preference Shares of U.S.$.01 par value is necessary. Additionally, in order to
permit Sky Games added flexibility with respect to equity financing, the
creation of a 5,000,000 Class B Preference Shares is also necessary. See "The
Amendments -- Rights Attaching to Preference Shares."
53
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed financial statements appearing
on pages 54-56 give effect to the Amalgamations.
The unaudited pro forma combined condensed statements of earnings assume
that the Amalgamations had occurred on February 28, 1997. The unaudited pro
forma combined condensed balance sheet assumes that the Amalgamations had
occurred on February 28, 1997.
The pro forma financial information is provided for comparative purposes
only and does not purport to be indicative of the results that would have been
obtained if the Amalgamations had been effected on the date indicated or of
those results that may be obtained in the future.
IEL and Sky Games
Unaudited Pro Forma Combined Condensed Balance Sheet
February 28, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current
Cash......................... $ 1,689,514
Accounts receivables......... 76,000
Prepaid expenses............. 61,975
Notes receivable............. 43,768
-----------
1,871,257
Computer gaming technology..... --
Due from affiliated company.... --
Software development........... 1,357,869
Capital assets................. 1,358,890
-----------
$ 4,588,016
===========
LIABILITIES
Current
Payables and accruals........ $ 393,388
Loans payable................ --
-----------
393,388
-----------
SHAREHOLDERS' EQUITY
Common shares.................. 162,152
Contributed surplus............ 17,569,057
Preferred shares............... 2,600,000
Deficit........................ (16,136,581)
-----------
4,194,628
-----------
$ 4,588,016
============
</TABLE>
See accompanying notes to the consolidated pro-forma financial statements.
54
<PAGE>
IEL and Sky Games
Unaudited Pro Forma Combined Condensed Statement Of Income
Year Ended February 28, 1997
<TABLE>
<CAPTION>
<S> <C>
EXPENSES
Consulting and contract labor............... $ 1,108,492
Travel, and advertising and promotion....... 625,945
Office and administration................... 443,908
Professional fees........................... 315,929
Interest and bank charges................... 300,388
Management fees............................. 211,000
Investors relations and corporate awareness. 120,082
Amortization................................ 87,976
Exchange loss............................... 20,793
Filing and listing fees..................... 20,301
Repairs and maintenance..................... 18,236
Transfer agent.............................. 4,551
Finance fees................................ --
Miscellaneous............................... --
------------
3,277,601
------------
LOSS FROM OPERATIONS.......................... (3,277,601)
------------
OTHERS
Interest income............................. 63,738
Write-down of assets........................ (1,796,554)
------------
(1,732,816)
------------
Net loss for the year......................... (5,010,417)
DEFICIT, beginning of year.................... (11,126,164)
------------
DEFICIT, end of year.......................... $(16,136,581)
============
LOSS per share................................ $ 0.211
------------
WEIGHTED average common shares outstanding.... 23,735,000
------------
</TABLE>
See accompanying notes to the consolidated pro-forma financial statements.
55
<PAGE>
Notes to Unaudited Pro Forma Combined Condensed Financial Statements
1) The consolidated pro forma financial statements have been prepared to give
effect to the following transactions as if they had occurred on March 1, 1996:
a) Amalgamation of IEL up and into SGIHC with the 20% interest in IEL
held by HIIC being converted into 5,879,040 common shares of Sky
Games. The Parent Amalgamation immediately following the Subsidiary
Amalgamation. The conversion of the 20% interest in IEL held by HIIC
into shares of Common Stock is accounted for under the purchase
method.
b) Subscription and issue of 1,000,000 shares of Common Stock at a price
of US $1.00 per share by HIIC as a result of conversion of the HIIC
Loan and exercise of a warrant pursuant to the HIIC Loan to bring the
total number of shares of Common Stock up to 1,000,000 shares.
c) Subscription and issue of 650,000 shares of Common Stock at a price of
$1.00 per share by HIIC pursuant to the HIIC Equity Commitment
exercisable at the request of the Amalgamated Company.
d) The $400,000 investment in IEL by HIIC in the year ended February 28,
1997 is assumed to have occurred immediately prior to the Subsidiary
Amalgamation.
e) The Class A Preference Shares allotted as at February 28, 1997 in the
conversion of the Note Payable to B/EA are assumed to have been
issued.
f) Loss per share has been computed on the weighted average number of
common shares excluding shares held in escrow.
2) The authorized share capital after giving effect to the proposed changes in
capital structure will be:
50,000,000 Common shares of par value $0.01 per share
3,000 Class A Preference Shares of par value $0.01 per share
5,000,000 Class B Preference Shares of par value $0.01 per share
Issued share capital reconciled to give effect to the transactions
contemplated in Note 1 is as follows:
<TABLE>
<CAPTION>
Common shares:
--------------
<S> <C> <C>
Common shares, as reported 13,314,020 $ 106,752
Issue of shares related to transactions
contemplated in Note 1 7,529,040 55,400
---------- ----------
Common shares, as restated 20,843,060 $ 161,152
========== ==========
Class A Preference Shares:
--------------------------
Issued on conversion of note payable B/EA 2,600 $2,600,000
========== ==========
</TABLE>
56
<PAGE>
SHARE OWNERSHIP OF OFFICERS, DIRECTORS, EMPLOYEES
AND SIGNIFICANT SHAREHOLDERS OF THE COMPANY
The following table sets forth information as of May 9, 1997 with respect
to the total amount of Common Stock owned by officers, directors and employees,
individually and as a group, and holders of 10% or more of the outstanding
Common Stock of which Sky Games is aware.
<TABLE>
<CAPTION>
Officers, Directors, Employees Prior to the Following the
and Significant Shareholders Amalgamations Percent Amalgamations Percent
--------------------------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C>
HIIC (1)............................. -- * 6,879,040 38.1%
Laurence Geller (2).................. -- * 200,000 1.1
Malcolm P. Burke (3)................. 111,500 1.0% 111,500 *
Anthony Clements (4)................. 333,333 3.1 333,333 1.9
James Grymyr (5)..................... 844,094 7.7 844,094 4.7
Deborah Fortescue-Merrin (6)......... 53,000 * 53,000 *
Phillip Gordon (7)................... -- * -- *
Patrick J. Lawless (8)............... 150 * 150 *
All directors, officers and employees 1,345,077 12.3 1,545,077 8.6
as a group (8 persons)
</TABLE>
- - ----------------------
* Less than 1%
(1) Includes the 5,879,040 Conversion Shares and the 1,000,000 shares of Common
Stock issued upon conversion of the HIIC Loan.
(2) It is anticipated that the entire 200,000 shares of the share grant to
Geller & Co. will vest upon consummation of the Amalgamations. Also does
not include 210,000 shares for which Mr. Geller has received options which
are currently exercisable.
(3) Includes 2,000 shares owned by Mr. Burke's wife and 40,000 shares over
which Mr. Burke has shared voting and investment power. Does not include
options to purchase 300,000 shares held by Mr. Burke which are currently
exercisable.
(4) Does not include 1,000,000 Performance Shares which are to be redeemed and
as to which Mr. Clements has agreed to grant an irrevocable proxy to a
financial institution which will agree not to vote such shares. See "Recent
Developments -- Cancellation of Performance Shares." Does not include
options to purchase 160,000 shares.
(5) Does not include 2,000,000 Performance Shares which are to be cancelled
pursuant to the Redemption and Cancellation Agreement and as to which SGII
has agreed to grant an irrevocable proxy to a national banking association
which will agree not to vote such shares. Includes the 586,077 shares which
Sky Games has agreed to issue to Mr. Grymyr pursuant to the Consulting
Agreement, and the Redemption and Cancellation Agreement. Does not include
options to purchase 110,000 shares, which are currently exercisable.
(6) Does not include options to purchase 160,000 shares, which are currently
exercisable.
(7) Does not include options to purchase 10,000 shares, which are currently
exercisable.
(8) Does not include options to purchase 30,000 shares, which are currently
exercisable.
57
<PAGE>
MANAGEMENT AND OTHER INFORMATION
Certain information relating to the management, executive compensation,
voting securities and the principal holders thereof, certain relationships and
related transactions and other related matters pertaining to Sky Games is set
forth in or incorporated by reference in it Annual Report on Form 20-F for the
year ended February 29, 1996. Such Annual Report is incorporated in this Proxy
Statement. See "Incorporation of Certain Documents By Reference." Shareholders
who wish to obtain copies of this document may contact Sky Games at its
addresses or telephone numbers as set forth under "Incorporation of Certain
Documents By Reference."
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Amalgamations and the conversion of the HIIC Loan,
the Amalgamated Company will have outstanding 20,183,445 shares of Common Stock.
Of these shares, 9,434,328 shares of Common Stock are freely tradeable without
restriction or further registration under the Securities Act, except for shares
purchased by an existing "affiliate" of the Amalgamated Company which will be
subject to the volume of sale, manner of sale and notice limitations of Rule 144
under the Securities Act. The 10,749,117 remaining shares of Common Stock are
"restricted" shares under the Securities Act. The holders of the 3,525,000
Performance Shares for redemption by pursuant to separate agreements (the
Redemption Agreement and the Redemption and Cancellation Agreement) have agreed
to tender such Performance Shares for redemption by the Amalgamated Company when
and to the extent they are released from the escrow pursuant to which they are
held. Upon receipt of any of the Performance Shares, Sky Games has agreed to
cancel such shares. In addition, such holders have agreed to grant an
irrevocable proxy to a national banking association which will agree not to vote
the Performance Shares. See "Recent Developments -- Cancellation of Performance
Shares." As a result of the foregoing, the 3,525,000 Performance Shares should
not become available for future sale.
In general, Rule 144 provides a person, including affiliates of the
Amalgamated Company, may sell an amount of shares which were last purchased from
the issuer or an affiliate of the issuer a minimum of one year prior to such
sales, such that, within any three-month period, such person's sales do not
exceed the greater of 1% of the then outstanding shares of the Common Stock or
the average weekly trading volume in composite trading on all exchanges during
the four calendar weeks preceding such sale. In addition, sales under Rule 144
may be made only through unsolicited "broker's transactions" or transactions
directly with a "market maker" and are subject to various other conditions. A
person who is not deemed an affiliate is entitled to sell shares which were last
purchased from the issuer or an affiliate of the issuer a minimum of at least
two years prior to such sale under Rule 144 without regard to the volume and
other limitations described above.
Prior to the Amalgamations, the market for the Common Stock has been thinly
traded and may be inefficient. See "The Amalgamations -- Analysis of Financial
Advisor." There can be no assurance that a more meaningful trading market will
develop after the Amalgamations or that the trading market will be any more
efficient. No prediction can be made as to the effect, if any, that market sales
of shares of Common Stock or the availability of such shares of Common Stock for
sale will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of substantial amounts of Common Stock in the public
market may have an adverse impact on such market price.
Registration Rights
HIIC Entities. Pursuant to a Registration and Preemptive Rights Agreement,
the Amalgamated Company will grant the HIIC Entities the right to require the
Amalgamated Company to register their stock under the Securities Act. See "The
Amalgamations -- Related Agreements."
58
<PAGE>
B/EA. Pursuant to a Registration Rights Agreement, Sky Games has granted
B/EA the right to require the Amalgamated Company to register their stock under
the Securities Act. See "Recent Developments -- B/E Conversion."
Other. As part of terminating Sky Games' relationship with its prior
financial relations firm, Corporate and Financial Relations, Sky Games has
agreed that under certain circumstances it will include in registrations by Sky
Games under the Securities Act shares of Common Stock owned by Jay Jacobson. Mr.
Jacobson owns 22,000 shares of Common Stock and warrants and options for the
purchase of an additional 40,000 shares of Common Stock.
59
<PAGE>
APPENDICES:
- - ----------
Appendix A - Agreement and Plan of Merger and Amalgamation
Appendix B - Amendments to the Bye-Laws
Appendix C - Shareholder Resolution
Appendix D - Analysis of Valuemetrics, Inc. dated as of April 22, 1997
60
<PAGE>
[EXECUTION COPY]
PLAN AND AGREEMENT OF MERGER AND AMALGAMATION
---------------------------------------------
PLAN AND AGREEMENT OF MERGER AND AMALGAMATION dated as of May 13, 1997
(this "Agreement") among Sky Games International Ltd., a Bermuda exempted
company ("Parent"), SGI Holding Corporation Limited, a Bermuda exempted company
and a wholly-owned subsidiary of Parent ("Sub"), and Interactive Entertainment
Limited, a Bermuda exempted company ("IEL") (Sub and IEL being hereinafter
collectively referred to as the "Amalgamating Companies") and Harrah's
Interactive Investment Company, a Nevada corporation ("HIIC").
W I T N E S S E T H:
-------------------
WHEREAS, Parent, Sub, IEL and HIIC desire IEL to amalgamate with and into
Sub (the "Amalgamation"), upon the terms and subject to the conditions herein
set forth, whereby each issued and outstanding share of common stock, U.S.$1.00
par value per share, of IEL ("IEL Common Shares"), not owned directly or
indirectly by Sub or Parent, will be converted into shares of common stock,
Cdn.$.01 par value, of Parent ("Parent Common Shares");
WHEREAS, the Board of Directors of Parent has determined that the
Amalgamation is in furtherance of and consistent with its long-term business
strategies and is fair to and in the best interests of its shareholders;
WHEREAS, the respective Boards of Directors of Parent and Sub have approved
and declared advisable the Amalgamation;
WHEREAS, Sub has approved as a shareholder of IEL and Parent has approved
as the sole shareholder of Sub this Agreement and the Amalgamation;
NOW, THEREFORE, in consideration of the premises, representations,
warranties and agreements herein contained, the parties hereto agree as follows:
ARTICLE I
THE AMALGAMATION
----------------
Section 1.1 The Amalgamation. Upon the terms and subject to the
conditions herein set forth, and in accordance with The Companies Act 1981
("CA"), the Amalgamating Companies shall make the appropriate filings with the
Registrar of Companies in Bermuda and IEL shall be amalgamated with and into Sub
at the Effective Time (as hereinafter defined). Following the Amalgamation, the
separate corporate existence of IEL shall cease and IEL and Sub shall continue
as the amalgamated company (the "Amalgamated Company") and shall continue to
exist as a company incorporated and governed by the laws of Bermuda.
Section 1.2 Effective Time. The Amalgamation shall be effective on the
date shown in the Certificate of Amalgamation issued by the Registrar of
Companies in Bermuda (the "Effective Time").
Section 1.3 Effects of the Amalgamation. At the Effective Time, the
effect of the Amalgamation shall be as provided in the applicable provisions of
the CA and as set forth in this Agreement. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time, except as otherwise
provided herein:
(a) the amalgamation of the Amalgamating Companies and their
continuance as one company shall become effective;
1
<PAGE>
(b) all of the property, rights, privileges, powers and franchises of
Sub and IEL shall vest in the Amalgamated Company;
(c) all debts, liabilities and duties of Sub and IEL shall become the
debts, liabilities and duties of the Amalgamated Company;
(d) any existing cause of action, claim or liability to prosecution
shall be unaffected;
(e) any civil, criminal or administrative action or proceeding by or
against an Amalgamating Company may be continued to be prosecuted by or against
the Amalgamated Company; and
(f) any conviction against, or ruling, order or judgment in favor of
or against, an Amalgamating Company may be enforced by or against the
Amalgamated Company.
Section 1.4 Memorandum of Association; Bye-laws; Directors and Officers.
(a) At the Effective Time, the Memorandum of Association of Sub, as in effect
immediately prior to the Effective Time, shall be the Memorandum of Association
of the Amalgamated Company until thereafter changed or amended as provided
therein or by applicable law.
(b) The Bye-Laws of Sub, as in effect immediately prior to the
Effective Time, shall be the Bye-laws of the Amalgamated Company until
thereafter changed or amended as provided therein or as provided by applicable
law.
(c) The Board of Directors of the Amalgamated Company shall consist
of not less than three (3) directors to be designated by Parent, who shall serve
until their respective successors are duly elected and qualified. The names and
addresses of each of the individuals to serve as directors of the Amalgamated
Company are as follows:
(i) Gordon Stevenson, 1023 Cherry Road, Memphis, Tennessee
38117;
(ii) Laurence Geller, 10 South Wacker Drive, Suite 3500,
Chicago, Illinois 60606; and
(iii) John Boushy, 1023 Cherry Road, Memphis, Tennessee 38117.
(d) The officers of IEL immediately prior to the Effective Time shall
be the officers of the Amalgamated Company until their respective successors are
duly elected and qualified.
Section 1.5 Conversion of Securities. As of the Effective Time, by virtue
of the Amalgamation and without any action on the part of the shareholders of
either of the Amalgamating Companies:
(a) All IEL Common Shares owned by Sub or Parent shall be cancelled
without any repayment of capital in respect thereof and no capital stock of
Parent or other consideration shall be delivered in exchange therefor.
(b) Each IEL Common Share issued and outstanding immediately prior to
the Effective Time (other than shares to be cancelled in accordance with Section
1.5(a)) shall be converted into 5.879040 (such number being hereinafter referred
to as the "Conversion Number") validly issued and fully paid shares of Parent
Common Shares. All such IEL Common Shares, when so converted, shall no longer be
outstanding and shall automatically be cancelled and retired without any
repayment of capital in respect thereof; and each holder prior to the Effective
Time of any such IEL Common Shares shall cease to have any rights with respect
thereto, except the right to receive (i) certificates representing the shares of
Parent Common Shares into which such IEL Common Shares have been converted and
(ii) any dividends and other distributions in accordance with Section 1.7.
2
<PAGE>
Section 1.6 Parent to Make Stock Certificates Available. (a) Exchange of
Certificates. As soon as practicable after the Effective Time, Parent shall
cause its Transfer Agent and Registrar (the "Transfer Agent") to issue to the
holders of IEL Common Shares converted in the Amalgamation, certificates (the
"Parent Certificates") representing the shares of Parent Common Shares issuable
pursuant to Section 1.5(b) in exchange for the outstanding IEL Common Shares.
(b) Status of Company Certificates. Subject to the provisions of
Section 1.7, each certificate which immediately prior to the Effective Time
represented IEL Common Shares to be converted in the Amalgamation (the "IEL
Certificates") shall, from and after the Effective Time and until surrendered in
exchange for Parent Certificate(s) in accordance with this Section 1.6, be
deemed for all purposes to represent the number of shares of Parent Common
Shares into which such IEL Common Shares shall have been so converted. For
purposes of this Section 1.6, Parent may rely conclusively on the shareholder
records of IEL in determining the identity of, and the number of IEL Common
Shares held by, each holder of an IEL Certificate at the Effective Time.
Section 1.7 Dividends; Transfer Taxes; Withholding. (a) No dividends or
other distributions that are declared on or after the Effective Time on Parent
Common Shares, or are payable to the holders of record thereof who became such
on or after the Effective Time, shall be paid to any person entitled by reason
of the Amalgamation to receive Parent Certificates representing Parent Common
Shares until such person shall have surrendered its IEL Certificate(s) as
provided in Section 1.6. Subject to applicable law, there shall be paid to each
person receiving a Parent Certificate representing such shares of Parent Common
Shares: (i) at the time of such surrender or as promptly as practicable
thereafter, the amount of any dividends or other distributions theretofore paid
with respect to the shares of Parent Common Shares represented by such Parent
Certificate and having a record date on or after the Effective Time and a
payment date prior to such surrender; and (ii) at the appropriate payment date
or as promptly as practicable thereafter, the amount of any dividends or other
distributions payable with respect to such shares of Parent Common Shares and
having a record date on or after the Effective Time but prior to such surrender
and a payment date on or subsequent to such surrender. In no event shall the
person entitled to receive such dividends or other distributions be entitled to
receive interest on such dividends or other distributions.
(b) If any Parent Certificate representing shares of Parent Common
Shares is to be issued in a name other than that in which IEL Certificate
surrendered in exchange therefor is registered, it shall be a condition of such
exchange that the IEL Certificate so surrendered shall be properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange shall pay to the Transfer Agent any transfer or other taxes required by
reason of the issuance of such Parent Certificate in a name other than that of
the registered holder of IEL Certificate so surrendered, or shall establish to
the satisfaction of the Transfer Agent that such tax has been paid or is not
applicable.
Section 1.8 No Further Ownership Rights in IEL Common Shares. All
certificates representing Parent Common Shares delivered upon the surrender for
exchange of any IEL Certificate in accordance with the terms hereof shall be
deemed to have been delivered in full satisfaction of all rights pertaining to
IEL Common Shares represented by such IEL Certificate.
Section 1.9 Closing of Company Transfer Books. At the Effective Time, the
transfer books of IEL for IEL Common Shares shall be closed, and no transfer of
IEL Common Shares shall thereafter be made. If, after the Effective Time, IEL
Certificates are presented to the Amalgamated Company, they shall be cancelled
and exchanged as provided in this Article I.
Section 1.10 Further Assurances. If, at any time after the Effective
Time, the Amalgamated Company shall consider or be advised that any deeds, bills
of sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (i) to vest, perfect or confirm, of record or otherwise, in
the Amalgamated Company its right, title and interest in, to or under any of the
rights, privileges, powers, franchises, properties or assets of either of the
Amalgamating Companies or (ii) otherwise to carry out the purposes of this
Agreement, the Amalgamated
3
<PAGE>
Company and its proper officers and directors or their designees shall be
authorized to execute and deliver, in the name and on behalf of either
Amalgamating Company, all such deeds, bills of sale, assignments and assurances
and to do, in the name and on behalf of either Amalgamating Company, all such
other acts and things as may be necessary, desirable or proper to vest, perfect
or confirm the Amalgamated Company's right, title and interest in, to and under
any of the rights, privileges, powers, franchises, properties or assets of such
Amalgamating Company and otherwise to carry out the purposes of this Agreement.
Section 1.11 Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall be deemed to take place at the offices of
Altheimer & Gray, 10 South Wacker Drive, Suite 4000, Chicago, Illinois at 12:01
p.m., Central Daylight Savings Time, on the first business day on which each of
the conditions set forth in Article VII shall have been (and continue to be)
fulfilled or waived, or at such other time and place as Parent and HIIC may
agree.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
------------------------------------------------
Parent and Sub represent and warrant, jointly and severally, to HIIC as
follows:
Section 2.1 Organization, Standing and Power. Each of Parent and Sub is
an exempted company duly organized, validly existing and in good standing under
the laws of Bermuda; and each of Parent and Sub has the requisite corporate
power and authority to carry on its business as now being conducted. Each
Subsidiary (as hereinafter defined) of Parent is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated and has the requisite corporate power and authority to
carry on its business as now being conducted. Parent and each of its
Subsidiaries are duly qualified to do business, and are in good standing, in
each jurisdiction where the character of their properties owned or held under
lease or the nature of their activities makes such qualification necessary,
except where the failure to be so qualified would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect (as
hereinafter defined) on Parent. Parent and its Subsidiaries are not subject to
any material joint venture, joint operating or similar arrangement or any
material shareholders agreement relating thereto other than the Shareholders
Agreement among Sub, HIIC and IEL dated December 30, 1994 (the "Shareholders
Agreement") and the Management Agreement between IEL and Harrah's Interactive
Entertainment Company, a Nevada corporation ("HIEC"), dated December 30, 1994
(the "Management Agreement"). For purposes of this Agreement: (i) "Material
Adverse Change" or "Material Adverse Effect" means, when used with respect to
Parent or HIIC, as the case may be, any change or effect that is materially
adverse to the business, properties, assets, liabilities, condition (financial
or otherwise) or results of operations of Parent and its Subsidiaries and IEL
taken as a whole, or HIIC and its Subsidiaries taken as a whole, as the case may
be, except, in the case of a Material Adverse Change, for any change resulting
from conditions or circumstances generally affecting the industry as a whole in
which Parent or HIIC, as the case may be, operates; and (ii) "Subsidiary" means
any corporation, partnership, joint venture or other legal entity of which
Parent or HIIC, as the case may be (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 interests 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, other than, with respect to
Parent and Sub, IEL and its Subsidiary.
Section 2.2 Capital Structure. As of the date hereof, the authorized
capital stock of Parent consists of: 50,000,000 shares of Parent Common Shares.
At the close of business on April 21, 1997, 13,304,405 shares of Parent Common
Shares were issued and outstanding, all of which were validly issued and are
fully paid and are free of preemptive rights. All of the shares of Parent Common
Shares issuable in exchange for IEL Common Shares at the Effective Time in
accordance with this Agreement will be, when so issued, duly authorized, validly
issued and fully paid. As of the date of this Agreement, other than outstanding
options for 1,190,000 shares of Parent Common
4
<PAGE>
Shares; the authority to issue options for 4,070,105 additional shares of Parent
Common Shares; outstanding share purchase warrants for the purchase of 308,528
shares of Parent Common Shares; the rights of HIIC pursuant to that certain
convertible secured promissory note and that certain warrant issued to HIIC in
connection with the Funding Agreement among Parent, Sub, IEL and HIIC dated May
13, 1997 (the "Funding Agreement"); and the agreement to issue, subject to
necessary shareholder approvals to create a class of preference shares and
authorize such issuance, up to 3,000 shares of convertible redeemable preference
shares of Parent to B/E Aerospace, Inc., a Delaware corporation ("B/EA"), which
are convertible into Parent Common Shares at a percentage of the trading price
of the Parent Common Shares as previously disclosed to HIIC (the "B/E
Conversion") (collectively, the "Parent Stock Rights"), there are no options,
warrants, calls, rights or agreements to which Parent or any of its Subsidiaries
is a party or by which any of them is bound obligating Parent or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of Parent or any such Subsidiary or
obligating Parent or any such Subsidiary to grant, extend or enter into any such
option, warrant, call, right or agreement. Each outstanding share of capital
stock of each Subsidiary of Parent is duly authorized, validly issued, fully
paid and nonassessable and each such share is beneficially owned by Parent or
another Subsidiary of Parent, free and clear of all security interests, liens,
claims, pledges, options, rights of first refusal, agreements, limitations on
voting rights, charges and other encumbrances of any nature whatsoever, other
than those interests granted to HIIC pursuant to the Funding Agreement. All of
Sub's outstanding shares of capital stock are owned directly by Parent. Sub owns
four million (4,000,000) shares of IEL Common Shares in the aggregate
represented by IEL Certificate numbers 3, 8, 10, 12, 14, 16, 18, 20, 22, 33, 34,
37, 38, 39 and 40 issued in the name of Sub and neither Parent nor any of its
Subsidiaries owns any other IEL Common Shares or, except pursuant to the
Shareholders Agreement, any option, warrant, call, right or agreement to receive
any other IEL Common Shares.
Section 2.3 Authority. The Board of Directors of Parent has declared as
advisable and fair to and in the best interests of the shareholders of Parent
(and, in the case of clauses (b) and (c) below, has resolved to recommend to
such shareholders for approval) (a) the Amalgamation and the transactions to be
effected thereby, (b) amendments to the Bye-Laws of Parent set forth on Exhibit
A attached hereto (collectively, the "Bye-Law Amendments") and (c) the
resolutions to be adopted by the shareholders of Parent set forth on Exhibit B
attached hereto (the "Resolutions"). The Boards of Directors of Parent and Sub
have each approved this Agreement and all agreements to be entered into by
Parent or Sub in connection therewith (collectively, "Parent Ancillary
Agreements"). Parent has approved the Amalgamation and this Agreement as the
sole shareholder of Sub. The Board of Directors of Sub has declared the
Amalgamation advisable, and Sub has approved the Amalgamation and this Agreement
as a shareholder of IEL. Parent has all requisite power and authority to enter
into this Agreement and the Parent Ancillary Agreements to which it is a party
and (subject to (x) approval of the Resolutions by a majority of the votes cast
at the Parent Shareholder Meeting (as hereinafter defined) by the holders of
Parent Common Shares, and (y) adoption of the Bye-Law Amendments by seventy-five
percent (75%) of the votes cast at the Parent Shareholder Meeting by the holders
of Parent Common Shares) to consummate the transactions contemplated hereby and
thereby. Sub has all requisite power and authority to enter into this Agreement
and the Parent Ancillary Agreements to which it is a party and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the Parent Ancillary Agreements by Parent and Sub and the consummation by
Parent and Sub of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action on the part of Parent and Sub,
subject, in the case of this Agreement, to (x) approval of the Resolutions by a
majority of the votes cast at the Parent Shareholder Meeting by the holders of
Parent Common Shares, and (y) adoption of the Bye-Law Amendments by seventy-five
percent (75%) of the votes cast at the Parent Shareholder Meeting by the holders
of Parent Common Shares. This Agreement and the Parent Ancillary Agreements have
been duly executed and delivered by Parent and Sub and (assuming the valid
authorization, execution and delivery hereof and thereof by HIIC and any other
parties hereto and thereto and the validity and binding effect hereof and
thereof on HIIC and any other parties thereto) each constitutes the valid and
binding obligation of Parent and Sub enforceable against Parent and Sub in
accordance with its terms, except as to the effect, if any, of (a) applicable
bankruptcy and other similar laws affecting the rights of creditors generally,
(b) rules of law governing specific performance, injunctive relief and other
equitable remedies, and (c) the enforceability of provisions requiring
indemnification in connection with the offering, issuance or sale of securities.
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Section 2.4 Consents and Approvals; No Violation. The execution and
delivery of this Agreement and the Parent Ancillary Agreements do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a material benefit under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
Parent or any of its Subsidiaries under: (i) subject to adoption of the
Resolutions and Bye-Law Amendments as described in Section 2.3, any provision of
the Memorandum of Continuance and Bye-laws of Parent or the comparable charter
or organization documents or by-laws of any of its Subsidiaries, (ii) assuming
approval by HIIC under the Shareholders Agreement and HIEC under the Management
Agreement and the consent of Singapore Airlines Limited ("SAL") to IEL as
previously furnished by IEL to HIIC and Parent (the "SAL Consent"), any loan or
credit agreement, note, bond, mortgage, indenture, lease, agreement, instrument,
permit, concession, franchise or license applicable to Parent or any of its
Subsidiaries or (iii) assuming adoption of the Resolutions and Bye-law
Amendments as described in Section 2.3, any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Parent or any of its
Subsidiaries or any of their respective properties or assets, other than, in the
case of clauses (ii) and (iii), any such violations, defaults, rights, liens,
security interests, charges or encumbrances that, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect on
Parent and would not materially impair the ability of Parent or Sub to perform
their respective obligations hereunder or under the Parent Ancillary Agreements
or prevent the consummation of any of the transactions contemplated hereby or
thereby. No filing or registration with, or authorization, consent or approval
of, any domestic (federal and state), foreign (including provincial) or
supranational court, commission, governmental body, regulatory agency, authority
or tribunal (a "Governmental Entity") is required by or with respect to Parent
or any of its Subsidiaries in connection with the execution and delivery of this
Agreement or the Parent Ancillary Agreements by Parent and Sub, or is necessary
for the consummation of the Amalgamation and the other transactions contemplated
by this Agreement or the Parent Ancillary Agreements, except: (i) for the filing
with the Registrar of Companies in Bermuda of an application for consent and an
application for registration of the Amalgamation and appropriate documents with
the relevant authorities of other states in which IEL or any of its Subsidiaries
is qualified to do business; (ii) for receipt of consent of the Minister of
Finance in Bermuda and such other consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under the laws of any
foreign country (including, without limitation, any political subdivision
thereof) in which Parent or its Subsidiaries conducts any business or owns any
property or assets; and (iii) for such other consents, orders, authorizations,
registrations, declarations and filings the failure of which to obtain or make
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on Parent and would not materially impair the ability of
Parent or Sub to perform their respective obligations hereunder or under the
Parent Ancillary Agreements or prevent the consummation of any of the
transactions contemplated hereby or thereby.
Section 2.5 SEC Documents and Other Reports. As of their respective
dates, all documents filed by Parent with the U. S. Securities and Exchange
Commission (the "SEC") on or after January 4, 1994 (the "Parent SEC Documents"),
copies of which have been delivered to HIIC, complied in all material respects
with the requirements of the U. S. Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as the case may be, and none of the Parent SEC Documents
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
Section 2.6 Absence of Certain Changes or Events. Except as set forth in
the Parent SEC Documents filed prior to the date hereof, on or after January 4,
1994: (i) Parent and its Subsidiaries have not incurred any material liability
or obligation (indirect, direct or contingent), or entered into any material
oral or written agreement or other transaction, that is not in the ordinary
course of business or that has resulted or would reasonably be expected to
result in a Material Adverse Effect on Parent; (ii) Parent and its Subsidiaries
have not sustained any loss or interference with their business or properties
(whether or not covered by insurance) that has had or that would reasonably be
expected to have a Material Adverse Effect on Parent; (iii) there has been no
material change in the indebtedness of Parent and its Subsidiaries (other than
changes in the ordinary course of business or as a result of a contemplated
private
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placement by Parent of 8% convertible debentures in an amount not to exceed $3.5
million (the "Debentures"), no change in the outstanding shares of capital stock
of Parent except for the issuance of Parent Common Shares pursuant to the Parent
Stock Rights and no dividend or distribution of any kind (including stock
dividends, stock splits and the like) declared, paid or made by Parent on any
class of its capital stock and (iv) there has been no Material Adverse Change
with respect to Parent, nor any event or development that would, individually or
in the aggregate, reasonably be expected to result in a Material Adverse Change
with respect to Parent.
Section 2.7 No Existing Violation, Default, Etc. Neither Parent nor any
of its Subsidiaries is in violation of (i) its Memorandum of Continuance,
Memorandum of Association or Bye-laws, (ii) any applicable law, ordinance or
administrative or governmental rule or regulation or (iii) any order, decree or
judgment of any Governmental Entity having jurisdiction over Parent or any of
its Subsidiaries, except for any violations that, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect on
Parent. Assuming consummation of the B/E Conversion, there is no existing event
of default or event that, but for the giving of notice or lapse of time, or
both, would constitute an event of default under any loan or credit agreement,
note, bond, mortgage, indenture or guarantee of indebtedness for borrowed money
and there is no existing event of default or event that, but for the giving of
notice or lapse of time, or both, would constitute an event of default under any
lease, other agreement or instrument to which Parent or any of its Subsidiaries
is a party or by which Parent or any such Subsidiary or any of their respective
properties, assets or business is bound, in the case of each clause immediately
above, which, individually or in the aggregate, has had or would reasonably be
expected to have a Material Adverse Effect on Parent.
Section 2.8 Actions and Proceedings. There are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental Entity against
Parent or any of its Subsidiaries, any of its or their properties, assets or
business, or, to the knowledge of Parent, any of its or their current or former
directors or officers, as such, that would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Parent. Other
than continuing monthly review by the National Association of Securities Dealers
of Parent's compliance with the continued listing requirements of the Nasdaq
SmallCap Market, there are no actions, suits or claims or legal, administrative
or arbitration proceedings or investigations pending or, to the knowledge of
Parent, threatened against Parent or any of its Subsidiaries, any of its or
their properties, assets or business, or, to the knowledge of Parent, any of its
or their current or former directors or officers, as such, that would reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on Parent. As of the date hereof, there are no actions, suits or claims or
legal, administrative or arbitration proceedings or investigations pending or,
to the knowledge of Parent, threatened against Parent or any of its
Subsidiaries, any of its or their properties, assets or business, or, to the
knowledge of Parent, any of its or their current or former directors or
officers, as such, relating to the transactions contemplated by this Agreement.
Section 2.9 Contracts. All of the material contracts of Parent and its
Subsidiaries that are required to be described in the Parent SEC Documents or to
be filed as exhibits thereto have been described or filed as required. Neither
Parent or any of its Subsidiaries nor, to the knowledge of Parent, any other
party is in breach of or default under any such contracts which are currently in
effect, except for such breaches and defaults which would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect on
Parent. Except as set forth in the Parent SEC Documents, neither Parent nor any
of its Subsidiaries is a party to or bound by any non-competition agreement or
any other agreement or obligation which purports to limit in any material
respect the manner in which, or the localities in which, Parent or any such
Subsidiary is entitled to conduct all or any material portion of the business of
Parent and its Subsidiaries taken as whole.
Section 2.10 Liabilities. Except as fully reflected or reserved against
in the most recent audited consolidated financial statements for the fiscal year
ended February 28, 1997, or disclosed in the footnotes thereto, Parent and its
Subsidiaries had no liabilities (including, without limitation, liabilities for
income, use or any other taxes) at the date of such consolidated financial
statements, absolute or contingent, of a nature which are required by generally
accepted accounting principles to be reflected on such consolidated financial
statements or disclosed in the footnotes thereto, that were material, either
individually or in the aggregate, to Parent and its Subsidiaries and IEL taken
as a whole.
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Except as so reflected, reserved, disclosed or set forth, Parent and its
Subsidiaries have no commitments which are reasonably expected to be materially
adverse, either individually or in the aggregate, to Parent and its Subsidiaries
and IEL taken as a whole.
Section 2.11 Operations of Sub. Sub was formed solely for the purpose of
owning its interest in IEL and has engaged in no other business activities and
has conducted its operations only as contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HIIC
--------------------------------------
HIIC represents and warrants to Parent and Sub as follows:
Section 3.1 Organization, Standing and Power. HIIC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada; owns one million (1,000,000) shares of IEL Common Shares in the
aggregate represented by IEL Certificates numbers 5, 6, 25, 26, 27, 28, 29, 30,
31, 32, 35 and 36 issued in the name of HIIC and neither HIIC nor any of its
Affiliates (as hereinafter defined) owns any other IEL Common Shares; or, except
pursuant to the Shareholders Agreement, any option, warrant, call, right or
agreement to receive any other IEL Common Shares and has the requisite corporate
power and authority to carry on its business as now being conducted. For
purposes of this Agreement, "Affiliates" means, any Person which Controls a
party to this Agreement, which that party Controls or which is under common
Control with that party; "Person" means an individual, partnership, limited
partnership, corporation, limited liability company, association, joint stock
company, trust, joint venture or 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; and "Control" means the power, direct
or indirect, to direct or cause the direction of the management and policies of
a Person through voting securities, contract or otherwise.
Section 3.2 Authority. Subject to the approval of the Board of Directors of
HIIC, prior to the Effective Time, HIIC shall have approved the Amalgamation and
this Agreement as a shareholder of IEL. Subject to the approval by the Board of
Directors of each of HIIC and HIEC, HIIC and, as applicable, HIEC have all
requisite power and authority to enter into this Agreement and all agreements to
be entered into by HIIC and HIEC in connection therewith (collectively, "HIIC
Ancillary Agreements") and to consummate the transactions contemplated hereby
and thereby. Subject to the approval of the Board of Directors of each of HIIC
and HIEC, prior to the Effective Time, the execution and delivery of this
Agreement and the HIIC Ancillary Agreements by HIIC and HIEC and the
consummation by HIIC and HIEC of the transactions contemplated hereby and
thereby shall have been duly authorized by all necessary corporate action on the
part of HIIC and, as applicable, HIEC. Subject to the approval by the Board of
Directors of each of HIIC and HIEC, prior to the Effective Time, this Agreement
and the HIIC Ancillary Agreements shall have been duly executed and delivered by
HIIC and HIEC, as applicable, (assuming the valid authorization, execution and
delivery hereof by Parent, Sub and any other parties hereto and thereto and the
validity and binding effect hereof on Parent, Sub and any other parties thereto)
and each constitutes the valid and binding obligation of HIIC and HIEC, as
applicable, enforceable against HIIC and HIEC, as applicable, in accordance with
its terms, except as to the effect, if any, of (a) applicable bankruptcy and
other similar laws affecting the rights of creditors generally, (b) rules of law
governing specific performance, injunctive relief and other equitable remedies,
and (c) the enforceability of provisions requiring indemnification in connection
with the offering, issuance or sale of securities.
Section 3.3 Consents and Approvals; No Violation. The execution and
delivery of this Agreement and the HIIC Ancillary Agreements does not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a material benefit under, or result in the creation of any lien,
security interest, charge or encumbrance
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upon any of the properties or assets of HIIC or HIEC under: (i) any provision of
the Articles of Incorporation or By-Laws of HIIC or its Affiliates, (ii)
assuming approval by the other parties thereto under the Shareholders Agreement
and the Management Agreement and the SAL Consent, any loan or credit agreement,
note, bond, mortgage, indenture, lease, agreement, instrument, permit,
concession, franchise or license applicable to HIIC or HIEC or (iii) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to HIIC or HIEC or any of its properties or assets, other than, in the case of
clauses (ii) and (iii), any such violations, defaults, rights, liens, security
interests, charges or encumbrances that, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect on HIIC or HIEC and
would not materially impair the ability of HIIC or, as applicable, HIEC to
perform its obligations hereunder or under the HIIC Ancillary Agreements or
prevent the consummation of any of the transactions contemplated hereby or
thereby. No filing or registration with, or authorization, consent or approval
of, any Governmental Entity is required by or with respect to HIIC or HIEC in
connection with the execution and delivery of this Agreement or the HIIC
Ancillary Agreements by HIIC or HIEC or is necessary for the consummation of the
Amalgamation and the other transactions contemplated by this Agreement or the
HIIC Ancillary Agreements, except: (i) for the filing with the Registrar of
Companies in Bermuda of an application for approval and for registration of the
Amalgamation, (ii) for receipt of consent of the Minister of Finance in Bermuda
and such other consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under the laws of any foreign
country (including, without limitation, any political subdivision thereof) in
which HIIC or HIEC conducts any business or owns any property or assets and
(iii) for such other consents, orders, authorizations, registrations,
declarations and filings the failure of which to obtain or make would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on HIIC or HIEC and would not materially impair the ability of
HIIC or HIEC to perform its obligations hereunder or under the HIIC Ancillary
Agreements or prevent the consummation of any of the transactions contemplated
hereby and thereby.
Section 3.4 Actions and Proceedings. As of the date hereof, there are no
actions, suits or claims or legal, administrative or arbitration proceedings or
investigations pending or, to the knowledge of HIIC, threatened against HIIC or
any of its Subsidiaries or Affiliates, any of its or their properties, assets or
business relating to the transactions contemplated by this Agreement.
Section 3.5 Ownership of Parent Capital Stock. Neither HIIC nor any of its
Affiliates owns any shares of the capital stock of Parent.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF IEL
-------------------------------------
IEL represents and warrants to HIIC, Parent and Sub as follows:
Section 4.1 Organization, Standing and Power. IEL is an exempted company
duly organized, validly existing and in good standing under the laws of Bermuda;
and IEL has the requisite corporate power and authority to carry on its business
as now being conducted. Each Subsidiary of IEL is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated and has the requisite corporate power and authority to
carry on its business as now being conducted. IEL and each of its Subsidiaries
are duly qualified to do business, and are in good standing, in each
jurisdiction where the character of their properties owned or held under lease
or the nature of their activities makes such qualification necessary, except
where the failure to be so qualified would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on IEL. IEL is not
subject to any material joint venture, joint operating or similar arrangement or
any material shareholders agreement relating thereto other than the Shareholders
Agreement and the Management Agreement.
Section 4.2 Capital Structure. As of the date hereof, the authorized
capital stock of IEL consists of: 5,000,000 shares of IEL Common Shares, all of
which are issued and outstanding, were validly issued, are fully paid
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and are free of preemptive rights, except for rights under the Shareholders
Agreement. As of the date of this Agreement, other than rights and options
which may arise under the Shareholders Agreement (collectively, the "IEL Stock
Rights"), there are no options, warrants, calls, rights or agreements to which
IEL or any of its Subsidiaries is a party or by which any of them is bound
obligating IEL or any of its Subsidiaries to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock of IEL or
obligating IEL to grant, extend or enter into any such option, warrant, call,
right or agreement. Each outstanding share of capital stock of each Subsidiary
of IEL is duly authorized, validly issued, fully paid and nonassessable and each
such share is beneficially owned by IEL, free and clear of all security
interests, liens, claims, pledges, options, rights of first refusal, agreements,
limitations on voting rights, charges and other encumbrances of any nature
whatsoever.
Section 4.3 Authority. Prior to the Effective Time, the Board of
Directors of IEL shall have approved this Agreement, and subject to approval of
the Board of Directors of IEL and the approval of Sub and HIIC as the only
shareholders of IEL, IEL has all requisite power and authority to enter into
this Agreement and all agreements to be entered into by IEL in connection
therewith (collectively, "IEL Ancillary Agreements") to which it is a party and
to consummate the transactions contemplated hereby and thereby. Prior to the
Effective Time, the execution and delivery of this Agreement and the IEL
Ancillary Agreements by IEL and the consummation by IEL of the transactions
contemplated hereby and thereby shall have been duly authorized by all necessary
corporate action on the part of IEL. Subject to approval of the Board of
Directors of IEL and the approval of Sub and HIIC as the only shareholders of
IEL, this Agreement and the IEL Ancillary Agreements has been duly executed and
delivered by IEL and (assuming the valid authorization, execution and delivery
hereof and thereof by the other parties hereto and thereto and the validity and
binding effect hereof and thereof on the other parties thereto) each constitutes
the valid and binding obligation of IEL enforceable against IEL in accordance
with its terms , except as to the effect, if any, of (a) applicable bankruptcy
and other similar laws affecting the rights of creditors generally, (b) rules of
law governing specific performance, injunctive relief and other equitable
remedies, and (c) the enforceability of provisions requiring indemnification in
connection with the offering, issuance or sale of securities.
Section 4.4 Consents and Approvals; No Violation. The execution and
delivery of this Agreement and the IEL Ancillary Agreements do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a material benefit under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
IEL or any of its Subsidiaries under: (i) any provision of the Memorandum of
Association and Bye-laws of IEL or the comparable charter or organization
documents or by-laws of any of its Subsidiaries, (ii) assuming approval by the
other parties thereto under the Shareholders Agreement and the Management
Agreement and the SAL Consent, any loan or credit agreement, note, bond,
mortgage, indenture, lease, agreement, instrument, permit, concession, franchise
or license applicable to IEL or any of its Subsidiaries (other than (a) the
Mutual Confidentiality and Non-Disclosure Agreement, dated March 22, 1996, by
and between IEL and the In-Flight Entertainment Division of B/E Aerospace, Inc.,
(b) the Software Integration Assistance Agreement, dated as of June 1, 1995, by
and between IEL and Matsushita Avionics Systems Corporation, (c) the Public
Relations Services Agreement dated March 28, 1996, by and between Karen Weiner
Escalera Associates, Inc. and IEL) and (d) Sublicense Agreement effective as of
October 11, 1996 between Harrah's Operating Company, Inc. and IEL or (iii) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to IEL or any of its Subsidiaries or any of their respective properties or
assets, other than, in the case of clauses (ii) and (iii), any such violations,
defaults, rights, liens, security interests, charges or encumbrances that,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on IEL and would not materially impair the ability of
IEL to perform its obligations hereunder or under the IEL Ancillary Agreements
or prevent the consummation of any of the transactions contemplated hereby or
thereby. No filing or registration with, or authorization, consent or approval
of any Governmental Entity is required by or with respect to IEL or any of its
Subsidiaries in connection with the execution and delivery of this Agreement or
the IEL Ancillary Agreements by IEL, or is necessary for the consummation of the
Amalgamation and the other transactions contemplated by this Agreement or the
IEL Ancillary Agreements, except: (i) for the filing with the Registrar of
Companies in Bermuda of an application for approval and for registration of the
Amalgamation and appropriate documents with the relevant authorities of other
states in which IEL
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or any of its Subsidiaries is qualified to do business; (ii) for receipt of
consent from the Minister of Finance in Bermuda and such other consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under the laws of any foreign country (including, without
limitation, any political subdivision thereof) in which IEL or any of its
Subsidiaries conducts any business or owns any property or assets; and (iii) for
such other consents, orders, authorizations, registrations, declarations and
filings the failure of which to obtain or make would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on IEL and
would not materially impair the ability of IEL to perform its obligations
hereunder or under the IEL Ancillary Agreements or prevent the consummation of
any of the transactions contemplated hereby or thereby.
Section 4.5 Absence of Certain Changes or Events. Since December 30, 1994,
(i) IEL has not incurred any material liability or obligation (indirect, direct
or contingent), or entered into any material oral or written agreement or other
transaction, that is not in the ordinary course of business or as otherwise
authorized by the Management Agreement or the 1995 business plan of IEL, the
1996 business plan of IEL or the 1997 business plan of IEL (the "1997 IEL Plan")
or reflected or reserved against in the annual audited consolidated financial
statements of IEL or disclosed in the footnotes thereto for the fiscal years
ending December 31, 1995 and 1996, each as approved by the Board of Directors of
IEL, or that has resulted or would reasonably be expected to result in a
Material Adverse Effect on IEL; (ii) IEL and its Subsidiaries have not sustained
any loss or interference with their business or properties (whether or not
covered by insurance) that has had or that would reasonably be expected to have
a Material Adverse Effect on IEL; (iii) there has been no material change in the
indebtedness of IEL and its Subsidiaries (other than changes in the ordinary
course of business or pursuant to the Funding Agreement), no change in the
outstanding shares of capital stock of IEL, except for any increases in the
authorized share capital approved by Sub and HIIC, and no dividend or
distribution of any kind (including stock dividends, stock splits and the like)
declared, paid or made by IEL on any class of its capital stock and (iv) there
has been no Material Adverse Change with respect to IEL, nor any event or
development that would, individually or in the aggregate, reasonably be expected
to result in a Material Adverse Change with respect to IEL.
Section 4.6 No Existing Violation, Default, Etc. IEL is not in violation
of (i) its Memorandum of Association or bye-laws, (ii) any applicable law,
ordinance or administrative or governmental rule or regulation or (iii) any
order, decree or judgment of any Governmental Entity having jurisdiction over
IEL or any of its Subsidiaries, except for any violations that, individually or
in the aggregate, would not reasonably be expected to have a Material Adverse
Effect on IEL. There is no existing event of default or event that, but for the
giving of notice or lapse of time, or both, would constitute an event of default
under any loan or credit agreement, note, bond, mortgage, indenture or guarantee
of indebtedness for borrowed money and there is no existing event of default or
event that, but for the giving of notice or lapse of time, or both, would
constitute an event of default under any lease, other agreement or instrument to
which IEL or any of its Subsidiaries is a party or by which IEL or any such
Subsidiary or any of their respective properties, assets or business is bound,
in the case of each of clause (i) and (ii) immediately above, which,
individually or in the aggregate, has had or would reasonably be expected to
have a Material Adverse Effect on IEL.
Section 4.7 Actions and Proceedings. There are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental Entity against IEL
or any of its Subsidiaries, any of its or their properties, assets or business,
or, to the knowledge of IEL, any of its or their current or former directors or
officers, as such, that would reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect on IEL. There are no actions, suits or
claims or legal, administrative or arbitration proceedings or investigations
pending or, to the knowledge of IEL, threatened against IEL or any of its
Subsidiaries, any of its or their properties, assets or business, or, to the
knowledge of IEL, any of its or their current or former directors or officers,
as such, that would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on IEL. As of the date hereof, there are no
actions, suits or claims or legal, administrative or arbitration proceedings or
investigations pending or, to the knowledge of IEL, threatened against IEL or
any of its Subsidiaries, any of its or their properties, assets or business, or,
to the knowledge of IEL, any of its or their current or former directors or
officers, as such, relating to the transactions contemplated by this Agreement.
Section 4.8 Contracts. Neither IEL or any of its Subsidiaries nor, to the
knowledge of IEL, any other party is in breach of or default under any material
contract to which it is a party which is currently in effect, except for such
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breaches and defaults which would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on IEL. Neither IEL
nor any of its Subsidiaries is a party to or bound by any non-competition
agreement or any other agreement or obligation which purports to limit in any
material respect the manner in which, or the localities in which, IEL or any
such Subsidiary is entitled to conduct all or any material portion of the
business of IEL and its Subsidiaries taken as whole (other than the Shareholders
Agreement).
Section 4.9 Liabilities. Except as fully reflected or reserved against in
the most recent audited consolidated financial statements of IEL for the year
ended December 31, 1996, or disclosed in the footnotes thereto, IEL had no
liabilities (including, without limitation, liabilities for income, use or other
taxes) at the date of such consolidated financial statements, absolute or
contingent, of a nature which are required by generally accepted accounting
principles to be reflected on such consolidated financial statements or
disclosed in the footnotes thereto, that were material, either individually or
in the aggregate, to IEL and its Subsidiaries taken as a whole, except for
amounts owed to HIEC pursuant to and in accordance with the terms and provisions
of the Management Agreement. Except as so reflected, reserved, disclosed or set
forth, IEL and its Subsidiaries have no commitments which are reasonably
expected to be materially adverse, either individually or in the aggregate, to
IEL and its Subsidiaries taken as a whole, assuming IEL has adequate financial
resources to fulfill its obligations to SAL under the Software License and
Software Service Agreement dated November 7, 1995 with SAL and the Services
Agreement dated November 7, 1995 and SAL (collectively, the "SAL Agreements").
Section 4.10 Operations of Subsidiary. The Subsidiary of IEL was
formed solely for the purpose of conducting all operations required to be
conducted by IEL in Singapore pursuant to the SAL Agreements and attempting to
secure additional contracts with other Asian airlines and has engaged in no
other business activities.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
-----------------------------------------
Section 5.1 Conduct of Business Pending the Amalgamation. (a)
Actions by Parent. During the period from the date of this Agreement through the
Effective Time, except as otherwise expressly required by this Agreement and the
Parent Ancillary Documents, Parent shall, and shall cause each of its
Subsidiaries to, in all material respects carry on its business in, and not
enter into any material transaction other than in accordance with, the ordinary
course of its business as currently conducted and, to the extent consistent
therewith, use its reasonable best efforts to preserve intact its current
business organization, keep available the services of its current officers and
employees and preserve its relationships with customers, suppliers and others
having business dealings with it, all to the end that its goodwill and ongoing
business shall be unimpaired at the Effective Time. Without limiting the
generality of the foregoing, and except as otherwise expressly contemplated by
this Agreement and the Parent Ancillary Documents, Parent shall not, and shall
not permit any of its Subsidiaries to, without the prior written consent of
HIIC:
(i) (A) declare, set aside or pay any dividends (including any stock
dividends) on, or make any other actual, constructive or deemed
distributions or stock splits or similar actions in respect of, any of its
capital stock, or otherwise make any payments to its shareholders in their
capacity as such; or (B) purchase, redeem or otherwise acquire any shares
of its capital stock or those of any Subsidiary or any other securities
thereof or any rights, warrants or options to acquire any such shares or
other securities;
(ii) issue, deliver, sell, pledge, dispose of or otherwise encumber
any shares of its capital stock (other than pursuant to the Funding
Agreement), any other voting securities or equity equivalent or any
securities convertible into, or any rights, warrants or options to acquire,
any such shares, voting securities, equity equivalent or convertible
securities (other than the issuance of Parent Common Shares during the
period from the date of this Agreement through the Effective Time upon the
exercise of Parent Stock Rights, except for the issuance of Parent Common
Shares upon conversion of the convertible redeemable preference shares of
Parent issued upon the B/E Conversion) unless a number of voting shares of
Parent are issued to
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HIIC upon payment by HIIC of the par value thereof such that such number of
shares plus the number of Parent Common Shares into which HIIC's IEL Common
Shares are to be converted pursuant to Section 1.5 plus the number of
shares of Parent Common Shares issuable to HIIC under the Funding Agreement
constitutes the same percentage of the outstanding voting shares of Parent
on a fully diluted basis (as used in this Agreement, "fully diluted basis"
shall be as defined in the bye-laws of Parent as to be amended by the Bye-
Law Amendments in substantially the form attached hereto as Exhibit A) as
the number of Parent Common Shares into which HIIC's IEL Common Shares are
to be converted pursuant to Section 1.5 plus the number of shares of Parent
Common Shares issuable to HIIC under the Funding Agreement constituted of
the outstanding voting shares of Parent on a fully diluted basis prior to
such issuance;
(iii) amend its Memorandum of Association; or amend its bye-laws if
such amendment would adversely affect the rights of HIIC hereunder or upon
consummation of the Amalgamation;
(iv) acquire or agree to acquire, by amalgamating, merging or
consolidating with, by purchasing a substantial portion of the assets of or
equity in or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof
or otherwise acquire or agree to acquire any assets, other than
transactions that are not material to Parent and its Subsidiaries taken as
a whole;
(v) sell, lease or otherwise dispose of, or agree to sell, lease or
otherwise dispose of, any of its assets (other than the real property owned
by a Subsidiary of Parent), other than transactions that are not material
to Parent and its Subsidiaries taken as a whole;
(vi) incur or assume any indebtedness for borrowed money or
guarantee any such indebtedness (other than pursuant to the Funding
Agreement or as a result of the issuance of the Debentures) or make any
loans, advances or capital contributions to, or other investments in, any
other person;
(vii) violate or fail to perform any material obligation or duty
imposed upon Parent or any Subsidiary by any applicable federal, state,
local, foreign or provincial law, rule, regulation, guideline or ordinance;
(viii) take any action, other than reasonable and usual actions in
the ordinary course of business consistent with past practice, with respect
to accounting policies or procedures; or
(ix) authorize, recommend, propose or announce an intention to do
any of the foregoing, or enter into any contract, agreement, commitment or
arrangement to do any of the foregoing.
Parent shall promptly advise HIIC orally and in writing of any change
or event having, or which would reasonably be expected to have, a Material
Adverse Effect on Parent.
(b) Actions by HIIC. During the period from the date of this
Agreement through the Effective Time, except as otherwise expressly required by
this Agreement or the HIIC Ancillary Agreements, HIIC shall cause HIEC to manage
the business of IEL in accordance with the terms of the Management Agreement,
the Shareholders Agreement and the 1997 IEL Plan and to cause IEL not to enter
into any material transaction, contract or agreement other than as authorized by
the Management Agreement, the Shareholders Agreement, the 1997 IEL Plan or by
the Board of Directors of IEL in writing. Without limiting the generality of the
foregoing, and except as otherwise expressly contemplated by this Agreement,
HIIC shall not, and shall cause HIEC not to, without the prior written consent
of Parent, during the period from the date of this Agreement through the
Effective Time:
(i) with respect to any employees or agents of IEL or employees or
agents used to conduct the business of IEL, enter into or adopt any
employee benefit or welfare plan, or amend in any material respect
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any existing employee benefit or welfare plan, other than as required by
law or in the ordinary course of business consistent with past practices;
(ii) with respect to any employees or agents of IEL or employees or
agents used to conduct the business of IEL, increase the compensation
payable or to become payable to its officers or employees or grant any
severance or termination pay to, or enter into, or amend or modify, any
employment, severance or consulting agreement with, any director, officer,
employee or agent of IEL or any of its Subsidiaries, or, except in the
ordinary course of business consistent with past practices, establish,
adopt, enter into or, except as may be required to comply with applicable
law or, except in the ordinary course of business consistent with past
practices, amend in any material respect or take action to enhance in any
material respect or accelerate any rights or benefits under, any collective
bargaining, bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any director, officer or employee; or
(iii) acquire any shares of capital stock of Parent.
HIIC shall promptly advise Parent orally and in writing of any change
or event having, or which would reasonably be expected to have, a Material
Adverse Effect on IEL.
ARTICLE VI
ADDITIONAL AGREEMENTS
---------------------
Section 6.1 Shareholder Meetings. Parent shall call a meeting of its
shareholders (the "Parent Shareholder Meeting") to be held as promptly as
practicable (but in no event prior to the fulfillment of the conditions
specified in Section 7.1(c) to each party's obligation to effect the
Amalgamation) for the purpose of voting upon the Bye-Law Amendments and the
Resolutions.
Section 6.2 Access to Information. Parent shall, and shall cause
each of its Subsidiaries to, afford, during normal business hours during the
period from the date of this Agreement through the Effective Time, to the
accountants, counsel, financial advisors, officers and other representatives of
HIIC reasonable access to, and permit them to make such inspections as may
reasonably be requested of, its properties, books, contracts, commitments and
records (including, without limitation, the work papers of independent public
accountants), and also permit such interviews with its officers and employees as
may be reasonably requested; and, during such period, Parent shall, and shall
cause each of its Subsidiaries to, furnish promptly to HIIC (i) a copy of each
report, schedule, registration statement and other document filed by it during
such period pursuant to the requirements of federal or state securities laws and
(ii) all other information concerning its properties, assets, business and
personnel as the other may reasonably request.
Section 6.3 Stock Exchange Listings. Parent shall use its reasonable
best efforts to list on the Nasdaq SmallCap Market, upon official notice of
issuance, the Parent Common Shares to be issued in connection with the
Amalgamation.
Section 6.4 Fees and Expenses. Except as otherwise provided in this
Section 6.4, whether or not the Amalgamation shall be consummated, all costs and
expenses incurred in connection with this Agreement, the Parent Ancillary
Agreements and the HIIC Ancillary Agreements and the transactions contemplated
hereby and thereby, including, without limitation, the fees and disbursements of
counsel, financial advisors, accountants, actuaries and consultants, shall be
paid by the party incurring such costs and expenses. Parent and HIIC hereby
acknowledge and agree that IEL has not incurred any costs and expenses in
connection with this Agreement, the Parent Ancillary
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Agreements and the HIIC Ancillary Agreements and the transactions contemplated
hereby and thereby; provided, HIEC may receive reimbursement in accordance with
the terms and provisions of the Management Agreement for services provided to
IEL solely for the benefit of IEL which involved any of the foregoing.
Section 6.5 Reasonable Best Efforts. (a) Upon the terms and subject to
the conditions set forth in this Agreement, each of the parties hereto agrees to
use its reasonable best efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, and to assist and cooperate with the other parties
in doing, all things necessary, proper or advisable, to consummate and make
effective, as soon as reasonably practicable, the Amalgamation and the other
transactions contemplated by this Agreement, including, but not limited to: (i)
the obtaining of all necessary actions or non-actions, waivers, consents and
approvals from all Governmental Entities and the making of all necessary
registrations and filings with, and the taking of all other reasonable steps as
may be necessary to obtain an approval or waiver from, or to avoid an action or
proceeding by, any Governmental Entity; (ii) the obtaining, of all necessary
consents, approvals or waivers from persons other than Governmental Entities;
(iii) the defending of any lawsuits or other legal proceedings, whether judicial
or administrative, challenging this Agreement, the Parent Ancillary Agreements
and HIIC Ancillary Agreements, or the consummation of the transactions
contemplated hereby or thereby, including seeking to have any stay or temporary
restraining order entered by any court or other Governmental Entity vacated or
reversed; and (iv) the execution and delivery of any additional instruments
necessary to consummate the transactions contemplated by this Agreement.
(b) Each party hereto shall use its reasonable best efforts not to take any
action, or to enter into any transaction, which would cause any of its
representations or warranties contained in this Agreement to be untrue or to
result in a breach of any of its covenants in this Agreement.
(c) Notwithstanding any provision in this Agreement to the contrary neither
Parent nor HIIC shall be obligated to use its reasonable best efforts or to take
any action (or omit to take any action) pursuant to this Agreement if the Board
of Directors of Parent or HIIC, as the case may be, shall conclude in good faith
on the basis of the advice of its outside counsel that such action would be
inconsistent with the fiduciary obligations of such Board of Directors under
applicable law.
Section 6.6 Public Announcements. Parent and HIIC shall consult with each
other before issuing any press release or otherwise making any public statement
with respect to the transactions contemplated by this Agreement and shall not
issue any such press release or make any such public statement prior to such
consultation and without the written approval (which shall not unreasonably be
withheld) of the other, except as may be required by applicable law or
regulation or by existing obligations pursuant to any listing agreement with any
national securities exchange.
Section 6.7 Notification of Certain Matters. Parent shall give prompt
notice to HIIC and HIIC shall give prompt notice to Parent, of: (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which does or would be likely to cause (A) any representation or warranty
contained in this Agreement to be untrue or inaccurate in any material respect
or (B) any covenant, condition or agreement contained in this Agreement not to
be complied with or satisfied; and (ii) any failure of Parent, Sub, HIIC or IEL,
as the case may be, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder; provided, however,
that the delivery of any notice pursuant to this Section 6.7 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
Section 6.8 Amalgamation of Parent and Sub. Parent and Sub agree to
use their reasonable best efforts to take, or cause to be taken, all actions,
and to do, or cause to be done all things necessary, proper or advisable, to
consummate and make effective, as soon as reasonably practicable after the
Effective Time, the amalgamation of the Amalgamated Company with and into Parent
and, as part of such transaction, to change the name of Parent to "Interactive
Entertainment Limited, " in accordance with the CA (the "Parent Amalgamation").
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ARTICLE VII
CONDITIONS PRECEDENT TO THE AMALGAMATION
----------------------------------------
Section 7.1 Conditions to Each Party's Obligation to Consummate the
Amalgamation. The respective obligations of each party hereto to consummate the
Amalgamation shall be subject to the fulfillment at or prior to the Effective
Time of the following conditions:
(a) Shareholder Approval. The Resolutions shall have been duly
approved by a majority of the votes cast at the Parent Shareholder Meeting by
the holders of shares entitled to vote thereon, in accordance with applicable
law and the Bye-laws of Parent, and the Bye-Law Amendments shall have been duly
adopted by seventy-five percent (75%) of the votes cast at the Parent
Shareholder Meeting by the holders of shares entitled to vote thereon in
accordance with applicable law and the Bye-laws of Parent.
(b) SAL and Other Approvals.
-----------------------
(i) IEL shall have received the written consent of SAL to the
Amalgamations and the transactions contemplated thereby, including, without
limitation, termination of the Management Agreement; and
(ii) all authorizations, consents, orders, declarations or
approvals of, or filings with, or terminations or expirations of waiting
periods imposed by, any Governmental Entity, which the failure to obtain,
make or occur would have the effect of making the Amalgamation or any of
the transactions contemplated hereby illegal (or without which the
Amalgamation could not become effective) or would have a Material Adverse
Effect on Parent or IEL (as the Amalgamated Company), assuming the
Amalgamation had taken place, shall have been obtained, shall have been
made or shall have occurred.
(c) No Order. No court or other Governmental Entity having
jurisdiction over IEL or Parent, or any of their respective Subsidiaries, shall
have enacted, issued, promulgated, enforced or entered any law, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is then in effect and has the effect
of making illegal or prohibiting the Amalgamation or any of the transactions
contemplated hereby.
(d) Termination Agreements. The parties thereto shall have entered
into agreements reasonably satisfactory to the parties thereto to terminate the
following agreements:
(i) the Management Agreement effective as of the Effective Time
(which shall contain a mutual release by the parties thereto);
(ii) the Shareholders Agreement effective as of the Effective
Time (which shall contain a mutual release by the parties thereto); and
(iii) the Cross-License Agreement among Parent (f/k/a Creator
Capital Inc., a Yukon Territory corporation), IEL and HIEC dated December
30, 1994 effective as of the effective time of the Parent Amalgamation.
(e) Litigation. There shall not have been instituted and be pending
any suit, action or proceeding by any Governmental Entity or any shareholder of
Parent (including any shareholder derivative action) with proper standing to
bring such suit, action or proceeding as a result of this Agreement or any of
the transactions contemplated hereby which, if such Governmental Entity or
shareholder of Parent were to prevail, would reasonably be expected to have the
effect of preventing or materially delaying the Amalgamation.
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(f) Performance of Obligations; Representations and Warranties. IEL
shall have performed in all material respects each of its agreements contained
in this Agreement required to be performed at or prior to the Effective Time,
each of the representations and warranties of IEL contained in this Agreement
that is qualified by materiality shall be true and correct at and as of the
Effective Time as if made at and as of the Effective Time and each of such
representations and warranties that is not so qualified shall be true and
correct in all material respects at and as of the Effective Time as if made at
and as of the Effective Time, in each case except as contemplated or permitted
by this Agreement; and each of Parent and HIIC shall have received a certificate
signed on behalf of IEL by its President and its Treasurer to such effect.
(g) Material Adverse Change. Since the date of this Agreement, there
shall have been no Material Adverse Change with respect to IEL, except as
contemplated in the 1997 IEL Plan; and each of Parent and HIIC shall have
received a certificate signed on behalf of IEL by Gordon Stevenson, President,
and Laurence Geller, Vice President, to such effect.
(h) Continuing Services Agreement. Parent and HIEC shall as of the
Closing have entered into a Continuing Services Agreement regarding the
provision of certain administrative and support services by HIEC to Parent after
the Closing on terms reasonably satisfactory to the parties and terminable by
Parent upon sixty (60) days' notice; provided Parent bears the cost of
termination.
(i) Continued Listing of Parent Common Shares. There shall not be a
cease trading order in effect as to the trading of the Parent Common Shares
through the Nasdaq SmallCap Market, the Parent Common Shares shall be listed on
the Nasdaq SmallCap Market and Parent shall not have received a written or an
official oral notice of non-compliance from Nasdaq as to any applicable SmallCap
Market continued listing requirement and such notice shall not have been
rescinded or such non-compliance remedied.
(j) Receipt of Legal Opinion. HIIC, Parent and Sub shall have
received the legal opinion of Appleby, Spurling & Kempe addressed to each of
them in such form as is reasonably acceptable to each of HIIC, Parent and Sub.
Section 7.2 Conditions to Obligation of HIIC to Consummate the
Amalgamation. The obligation of HIIC to consummate the Amalgamation shall be
subject to the fulfillment at or prior to the Effective Time of the following
additional conditions:
(a) Approval of HIIC Board and HIIC. The Board of directors of HIIC
shall have approved this Agreement and the HIIC Ancillary Agreements and HIIC
shall have approved the Amalgamation and this Agreement as a shareholder of IEL.
(b) Performance of Obligations; Representations and Warranties. Each
of Parent and Sub shall have performed in all material respects each of its
agreements contained in this Agreement required to be performed at or prior to
the Effective Time, each of the representations and warranties of Parent and Sub
contained in this Agreement that is qualified by materiality shall be true and
correct at and as of the Effective Time as if made at and as of the Effective
Time and each of such representations and warranties that is not so qualified
shall be true and correct in all material respects at and as of the Effective
Time as if made at and as of the Effective Time, in each case except as
contemplated or permitted by this Agreement; and HIIC shall have received a
certificate signed on behalf of Parent by its Chief Executive Officer and its
Chief Financial Officer to such effect.
(c) Consents Under Agreements. HIIC shall have obtained the consent
or approval of each person (other than SAL and the Governmental Entities
referred to in Section 7.1(c)) whose consent or approval shall be required in
connection with the transactions contemplated hereby under any indenture,
mortgage, evidence of indebtedness, license, lease or other agreement or
instrument, except where the failure to obtain the same would not
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reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect on HIIC or upon the consummation of the transactions contemplated
hereby.
(d) Material Adverse Change. Since the date of this Agreement, there
shall have been no Material Adverse Change with respect to Parent, except as
contemplated in the 1997 IEL Plan or as a result of the write-down of real
estate assets owned by a Subsidiary of Parent; and HIIC shall have received a
certificate signed on behalf of Parent by its Chief Executive Officer and its
Chief Financial Officer to such effect.
(e) Delivery of Agreements. Parent and HIIC shall have entered into
the following agreements as of the Closing:
(i) a Shareholder Rights Agreement between HIIC and Parent, in
such form as is reasonably acceptable to HIIC and Parent, regarding
approval by HIIC and the Affiliates of HIIC for as long as they
collectively own:
(A) twenty percent (20%) or more of the outstanding voting
shares of Parent, on a fully diluted basis, as to:
(1) the sale of all or any material portion of the
assets of Parent together with its Subsidiaries;
(2) the incurrence, renewal, refinancing, prepayment or
amendment of the terms of indebtedness of Parent together
with its Subsidiaries in excess of $5 million in any one
fiscal year;
(3) Parent or any of its Subsidiaries entering into any
material joint venture or partnership agreement outside of
its previously approved scope of business;
(4) any material acquisition of assets by Parent 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 Parent or any of its Subsidiaries of the
stock of another entity, in each case involving an
acquisition valued at $5 million or more;
(5) any material change in the nature of the business
conducted by Parent or any of its Subsidiaries;
(6) any material amendments to the management incentive
plan covering 4,070,105 Parent Common Shares (the "MIP") for
12 months following the Closing;
(7) the adoption of any stock option plans for greater
than 5% of the then outstanding Parent Common Shares on a
fully diluted basis, other than the MIP, in any one fiscal
year;
(8) material changes in accounting policies; and
(9) the creation or adoption of any shareholder rights
plan; and
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(B) 10% or more of the outstanding voting shares of Parent
on a fully diluted basis, as to (1) any change in or conduct of
Parent'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 such term is defined in the
bye-laws of Parent (as to be amended by the Bye-Law Amendments in
substantially the form attached hereto as Exhibit A) if such
Person held shares of Parent) that would constitute or result in,
or (2) any action or inaction of or by Parent or any of its
Subsidiaries' which HIIC or the Affiliates of HIIC determine in
their reasonable business judgment would result in, in the case
of either (1) or (2), 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
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 referred
to herein as a "Disqualifying Action"); provided, the reasonable
business judgment 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 Parent 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;
(ii) a Registration and Preemptive Rights Agreement on
substantially the following terms:
(A) HIIC would have two (2) demand registration rights to
cause Parent to register Parent Common Shares owned by HIIC
and/or the Affiliates of HIIC, provided, prior to June 30, 1998,
no such demand registration shall be brought for a number of
shares in excess of one million (1,000,000) unless Parent
receives the opinion of its investment banker that the trading
price of the Parent Common Shares would not fall by more than
twenty-five percent (25%) for more than fifteen (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 Parent
Common Shares as would not cause the market price to fall below
such level. Each such offering shall be underwritten on a firm
commitment basis by an underwriter chosen by Parent. The demand
rights would be subject to customary restrictions such as 120 day
blockage periods for corporate developments or registered
offerings by Parent, cut-backs and etc.;
(B) Parent would also agree pursuant to such registration
rights agreement that until HIIC and the Affiliates of HIIC
collectively own less than 5% of the outstanding voting shares of
Parent on a fully diluted basis, HIIC and the Affiliates of HIIC
shall have customary piggy-back rights to include their Parent
Common Shares in registered offerings by Parent;
(C) HIIC and the Affiliates of HIIC would bear the costs of
their legal counsel and any underwriting discounts, commissions
or allowances in connection with all sales pursuant to the
foregoing, and Parent would bear all other fees and expenses of
such registrations;
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(D) HIIC and/or the Affiliates of HIIC would have the right
to purchase voting shares of Parent (or securities convertible
into voting shares of Parent) offered by Parent for as long as
HIIC and the Affiliates of HIIC collectively owned twenty percent
(20%) or more of the outstanding voting shares of Parent on a
fully diluted basis at the same price and terms such securities
are otherwise being offered. HIIC and/or the Affiliates of HIIC
would also have the right for as long as HIIC and the Affiliates
of HIIC collectively owned twenty percent (20%) or more of the
outstanding voting shares of Parent on a fully diluted basis to
participate on a proportionate basis in any non-pro rata stock
repurchases or redemptions conducted by Parent;
(E) at any time that HIIC and the Affiliates of HIIC
collectively own less than ten percent (10%) of the outstanding
voting shares of Parent, on a fully diluted basis, (1) Parent
shall have the right to cause HIIC and the Affiliates of HIIC to
sell their voting shares of Parent pursuant to a registered sale
and (2) HIIC shall have the right to cause Parent to file a
registration statement to sell its and its Affiliates' voting
shares of Parent, in each case of (1) and (2), in the event (x)
of any change in or conduct of the business or proposed business
of Parent or any of its Subsidiaries or any other action or
inaction of Parent or any of its Subsidiaries which would
constitute or result in a Disqualifying Action or (y) Parent does
not redeem a "Disqualified Holder" pursuant to Bye-law 4B of its
bye-laws (as to be amended by the Bye-Law Amendments in
substantially the form attached hereto as Exhibit A), and in each
case of (1) and (2), at Parent's expense (other than HIIC's and
the Affiliates of HIIC underwriting discounts, commissions or
allowances) without being subject to the limitations set forth in
the foregoing paragraph (A); and
(F) upon any conversion of any shares of convertible
redeemable preference shares of Parent issued to B/EA as part of
the B/E Conversion, Parent shall issue to HIIC and/or the
Affiliates of HIIC a number of Parent Common Shares upon payment
by HIIC of the par value thereof such that such number of shares
plus the number of Parent Common Shares into which HIIC's IEL
Common Shares are to be converted pursuant to Section 1.5 plus
the number of shares of Parent Common Shares issuable to HIIC
under the Funding Agreement collectively constitutes the same
percentage of the outstanding voting shares of Parent on a fully-
diluted basis as the number of Parent Common Shares into which
HIIC's IEL Common Shares are to be converted pursuant to Section
1.5 plus the number of shares of Parent Common Shares issuable to
HIIC under the Funding Agreement constituted of the outstanding
voting shares of Parent on a fully diluted basis prior to such
issuance; and
(iii) a License Agreement regarding use by HIIC and its
Affiliates of IEL intellectual property on substantially the following
terms: Parent would grant a fully paid and perpetual worldwide license
to Harrah's to use IEL's gaming technology in non-competitive uses in
traditional casino venues which it or its Affiliates own, operate or
manage. The license would include source codes for all software, and
neither party would have any obligation to share or provide any
improvements or modifications with the other party. The license would
contain customary provisions regarding limitations on the use of and
protections regarding the IEL intellectual property.
(f) Escrow Shares. Parent shall have entered into binding written
agreements with the record holders of all 3,525,000 Parent Common Shares being
held in escrow by Montreal Trust Company of Canada under an Escrow Agreement
dated May 27, 1992 ("Performance Shares"), pursuant to which such holders have
agreed to allow Parent to redeem and/or cancel such Parent Common Shares. In
connection with such redemption and/or cancellation of the Performance Shares,
Parent shall not issue or agree to issue more than 1,175,000 Parent Common
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Shares, and HIIC shall have received a certificate signed on behalf of Parent by
its Chief Executive Officer to such effect. Each record holder of Performance
Shares shall have executed and delivered to a national banking association
selected by HIIC and acceptable to Parent (the "Proxy Holder") an irrevocable
proxy appointing the Proxy Holder proxy for such holder with respect to the
Performance Shares. The Proxy Holder shall have entered into an agreement with
Parent and HIIC regarding the Proxy Holder's agreement not to vote the
Performance Shares.
(g) Bye-Law Amendments. The Bye-Law Amendments substantially in the
form attached hereto as Exhibit A shall have been approved and adopted by
seventy-five percent (75%) of the votes cast at the Parent Shareholder Meeting
by the holders of shares entitled to vote thereon in accordance with applicable
law and the Bye-Laws of Parent.
(h) B/E Conversion. Parent shall have prior to or at the Effective
Time consummated the B/E Conversion.
(i) B.C. Securities Compliance Certificate. Parent shall have
delivered to HIIC a certificate of the British Columbia Securities Commission
certifying that Parent is in compliance with its filing obligations under the
British Columbia Securities Commission dated no more than ten (10) days prior to
the date of the Closing.
Section 7.3 Conditions to Obligations of Parent and Sub to Consummate the
Amalgamation. The obligation of Parent and Sub to consummate the Amalgamation
shall be subject to the fulfillment at or prior to the Effective Time of the
following additional conditions:
(a) Performance of Obligations; Representations and Warranties. HIIC
shall have performed in all material respects each of its agreements contained
in this Agreement required to be performed at or prior to the Effective Time,
each of the representations and warranties of HIIC contained in this Agreement
that is qualified by materiality shall be true and correct at and as of the
Effective Time as if made at and as of the Effective Time and each of such
representations and warranties that is not so qualified shall be true and
correct in all material respects at and as of the Effective Time as if made at
and as of the Effective Time, in each case except as contemplated or permitted
by this Agreement; and Parent shall have received a certificate signed on behalf
of HIIC by its President and its Treasurer to such effect.
(b) Consents Under Agreements. Parent and Sub shall have obtained the
consent or approval of each person (other than SAL and the Governmental Entities
referred to in Section 7.1(c)) whose consent or approval shall be required in
connection with the transactions contemplated hereby under any indenture,
mortgage, evidence of indebtedness, license, lease or other agreement or
instrument, except where the failure to obtain the same would not reasonably be
expected, in the good faith opinion of Parent, individually or in the aggregate,
to have a Material Adverse Effect on Parent or Sub or upon the consummation of
the transactions contemplated hereby.
ARTICLE VIII
TERMINATION; AMENDMENT AND WAIVER
---------------------------------
Section 8.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after any approval by the
stockholders of Parent of the matters presented in connection with the
Amalgamation:
(a) by mutual written consent of Parent and HIIC;
(b) by Parent, by written notice to HIIC, if (i) HIIC shall have
failed to comply in any material respect with any of its covenants or agreements
contained in this Agreement required to be complied with prior to the
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date of such termination, which failure to comply has not been cured within five
(5) business days of written notice of such failure to comply, (ii) the
shareholders of Parent shall not approve and adopt the Resolutions at the Parent
Shareholder Meeting or any adjournment thereof or by written consent or (iii)
the shareholders of Parent shall not approve and adopt the Bye-Law Amendments at
the Parent Shareholder Meeting or any adjournment thereof or by written consent;
(c) by HIIC, by written notice to Parent, if (i) Parent or Sub shall
have failed to comply in any material respect with any of its respective
covenants or agreements contained in this Agreement required to be complied with
prior to the date of such termination, which failure to comply has not been
cured within five (5) business days after written notice of such failure to
comply, (ii) the shareholders of Parent shall not approve and adopt the
Resolutions at the Parent Shareholder Meeting or any adjournment thereof or
(iii) the shareholders of Parent shall not approve and adopt the Bye-Law
Amendments at the Parent Shareholder Meeting or any adjournment thereof or by
written consent;
(d) by either Parent or HIIC, by written notice from the terminating
party to the other parties, if there has been (i) a material breach by the other
(and/or by Sub if HIIC is the terminating party) of any representation or
warranty that is not qualified as to materiality or (ii) a breach by the other
(and/or by Sub if HIIC is the terminating party) of any representation or
warranty that is qualified as to materiality, in each case which breach has not
been cured within five (5) business days after receipt by the breaching party of
written notice of the breach;
(e) by either Parent or HIIC, by written notice from the terminating
party to the other parties, if there has been (i) a failure by IEL to comply in
any material respect with any of its covenants or agreements contained in this
Agreement required to be complied with prior to the date of such termination,
which failure to comply has not been cured within five (5) business days of
written notice of such failure to comply, (ii) a material breach by IEL of any
representation or warranty that is not qualified as to materiality or (iii) a
breach by IEL of any representation or warranty that is qualified as to
materiality, in each case which breach has not been cured within five (5)
business days after receipt by the breaching party of written notice of the
breach;
(f) by either Parent or HIIC, by written notice from the terminating
party to the other parties, if: (i) the Amalgamation has not been effected on or
prior to the close of business on June 21, 1997; provided, however, that the
right to terminate this Agreement pursuant to this clause (e) shall not be
available to any party whose failure to fulfill any obligation of this Agreement
has been the cause of, or resulted in, the failure of the Amalgamation to have
occurred on or prior to such date or (ii) any court or other Governmental Entity
having jurisdiction over a party hereto shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and nonappealable.
The right of Parent or HIIC to terminate this Agreement pursuant to this
Section 8.1 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of such party, whether prior to or after
the execution of this Agreement. Notwithstanding Sections 7.1(f) and 8.1(e), in
the event a party has failed to fulfill a material obligation under this
Agreement and such failure is the direct or proximate cause of the failure by
IEL to satisfy any of the conditions set forth in Section 7.1(f), such party
shall not be released from its obligation to consummate the Amalgamation
pursuant to Section 7.1(f) and shall not have the right to terminate this
Agreement pursuant to Section 8.1(e).
Section 8.2 Effect of Termination. In the event of the termination of
this Agreement by either Parent or HIIC as provided in Section 8.1, this
Agreement shall forthwith become void without any liability hereunder on the
part of HIIC, IEL, Parent, Sub or their respective directors or officers, except
for Section 6.2 and Section 6.4, which shall survive any such termination;
provided, however, that nothing contained in this Section 8.2 shall relieve any
party hereto from any liability for any breach of this Agreement.
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Section 8.3 Amendment. This Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
at any time before or after approval by the stockholders of Parent of the
matters presented to them in connection with the Amalgamation; provided,
however, that after any such approval, no amendment shall be made if applicable
law would require further approval by such stockholders, unless such further
approval shall be obtained. This Agreement shall not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 8.4 Waiver. At any time prior to the Effective Time, the parties
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any instrument delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein which may legally be waived. Any agreement on the
part of any party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
ARTICLE IX
GENERAL PROVISIONS
------------------
Section 9.1 Survival of Representations and Warranties. The
representations and warranties in this Agreement and in each instrument
delivered pursuant hereto shall survive the Effective Time (i) for a period of
thirty-six (36) months solely with respect to the representations and warranties
set forth in Section 2.5 and for (ii) the period terminating on the date of the
first report of Parent's independent auditors on the audited financial
statements of Parent for the period ending December 31, 1997, with respect to
all other representations and warranties in this Agreement and in each
instrument delivered pursuant hereto.
Section 9.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given when delivered personally, one day after
being delivered prepaid to an overnight courier or when telecopied (with a
confirmatory copy sent by overnight courier) to the other parties hereto at the
following addresses (or at such other address for any party as shall be
specified by like notice):
(a) if to Parent or Sub, to:
Sky Games International Ltd.
1115-595 Howe Street
Vancouver, British Columbia V6C 2T5
Attention: Malcolm P. Burke
Facsimile: (604) 689-8678
with a copy to:
Laurence Geller
10 S. Wacker Drive, Suite 4000
Chicago, Illinois 60606
Facsimile: (312) 715-4212
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and to:
Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606
Attention: Phillip Gordon, Esq.
Facsimile: (312) 715-4800
(b) if to IEL, to:
Interactive Entertainment Limited
1023 Cherry Road
Memphis, Tennessee 38117
Attention: Gordon Stevenson
Facsimile: (901) 537-3801
(c) if to HIIC, to:
Harrah's Interactive Investment 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, Esq.
Facsimile: (901) 762-8735
and to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
Attention: Harry Boadwee, Esq.
Facsimile: (415) 494-1417
Section 9.3 Interpretation. When reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
Section 9.4 Counterparts. This Agreement may be executed in any number of
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts shall have been signed by
each of the parties hereto and delivered to the other parties.
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Section 9.5 Entire Agreement; No Third-Party Beneficiaries. This
Agreement (and the schedules and attachments to the foregoing) constitutes the
entire agreement of the parties hereto and supersede all prior agreements and
understandings, both written and oral, among such parties with respect to the
subject matter hereof.
Section 9.6 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.
Section 9.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by operation of law or
otherwise by any of the parties hereto without the prior written consent of the
other parties.
Section 9.8 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 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.
Section 9.9 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 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.
Section 9.10 Indemnification Obligations of Parent. From and after the
Closing, Parent shall indemnify, defend, save and keep HIIC, HIEC and the
Affiliates of HIIC (including their respective directors, officers, employees
and agents) (each, an "Indemnitee") forever harmless against and from all loss,
cost, damage, liability and expense, including reasonable attorney's fees and
expenses (collectively, "Damages"), sustained or incurred by any Indemnitee as a
result of or arising out of or by virtue of or in connection with any inaccuracy
in or breach of any representation or warranty made by Parent or Sub in Article
II of this Agreement.
(a) Limitations on Parent's Indemnification Obligations. Parent shall
not have any indemnification obligation and no Indemnitee shall be entitled to
recover under this Section 9.10, unless a claim for indemnification has been
asserted by written notice, specifying the details of the alleged inaccuracy in
or breach of any representation or warranty, delivered to Parent on or prior to
the end of the period terminating on the date of the first report of Parent's
independent auditors on the audited financial statements of Parent for the
period ending December 31, 1997; provided, however, that claims under this
Section 9.10 with respect to any alleged inaccuracy in or breach of any
representation or warranty in Section 2.5 may be asserted by such written
notice, delivered to Parent on or prior to the end of the period terminating
thirty-six (36) months after the date of the Closing.
(b) Third Party Claims. Within thirty (30) days following the receipt
of notice of a Third Party Claim, and in any event within the period necessary
to respond to such pleading, if applicable, the party receiving the notice of
the Third Party Claim shall (i) notify Parent of the existence of such Third
Party Claim setting forth with reasonable specificity the facts and
circumstances of which such party has received notice, and (ii) specifying the
basis hereunder upon which the Indemnitee's claim for indemnification is
asserted. As used herein, "Third Party Claim"
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shall mean any claim, action,suit, proceeding, investigation, or like matter
which is asserted or threatened by any party other than the parties hereto,
their successors and permitted assigns, against an Indemnitee. The failure to
deliver the notice described in the first sentence of this Section 9.10(b)
within the time frame required shall relieve Parent of any liability with
respect to such Third Party Claim. Each Indemnitee shall, upon reasonable
notice, tender the defense of a Third Party Claim to Parent if so requested by
Parent in writing. Then, except as hereinafter provided, such Indemnitee shall
not, and Parent shall, have the right to contest, defend, litigate or settle
such Third Party Claim. Each Indemnitee shall have the right to be represented
by counsel and to participate at its own expense in any such contest, defense,
litigation or settlement conducted by Parent. Parent shall have the exclusive
right to contest and defend the Third Party Claim and shall have the right, upon
receiving the prior written approval of such Indemnitee (which shall not be
unreasonably withheld) and which shall be deemed automatically given if a
response has not been received within the ten (10) day period following a
written request for such consent), to settle any such matter, either before or
after the initiation of litigation, at such time and upon such terms as it deems
fair and reasonable. If an Indemnitee is entitled to indemnification against a
Third Party Claim, and Parent fails to accept a tender of, or assume, the
defense of a Third Party Claim pursuant to this Section 9.10(b), such Indemnitee
shall have the right, without prejudice to its right of indemnification
hereunder, in its discretion exercised in good faith and upon the advice of
counsel, to contest, defend, litigate and settle such Third Party Claim, either
before or after the initiation of litigation, at such time and upon such terms
as such Indemnitee deems fair and reasonable, provided that written notice of
its intention to settle is given to Parent at least ten (10) days prior to
settlement. If, pursuant to this Section 9.10(b), such Indemnitee so contests,
defends, litigates or settles a Third Party Claim for which it is entitled to
indemnification hereunder as hereinabove provided, such Indemnitee shall be
reimbursed by Parent for the reasonable attorneys' fees and other expenses of
defending, contesting, litigating and/or settling the Third Party Claim which
are incurred from time to time, forthwith following the presentation to Parent
of itemized bills for said attorneys' fees and other expenses.
(c) Tax and Insurance Benefits. All indemnification or reimbursement
payments required pursuant to this Agreement shall be made net of all cash, tax
and insurance benefits received by HIIC, HIEC or their Affiliates. In the event
that any claim for indemnification asserted hereunder is, or may be, the subject
of any insurance coverage or other right to indemnification or contribution from
any third person, HIIC, HIEC and their Affiliates shall be required to, and HIIC
expressly agrees that it shall, promptly notify the applicable insurance
carrier of any such claim or loss and tender defense thereof to such carrier,
and shall also promptly notify any potential third party indemnitor or
contributor which may be liable for any portion of such losses or claims. HIIC,
HIEC and their Affiliates shall be required to, and HIIC expressly agrees that
it shall, promptly pursue, at the cost and expense of Parent, such claims
diligently and to reasonably cooperate, at the cost and expense of Parent, with
each applicable insurance carrier and third party indemnitor or contributor.
Notwithstanding Section 9.10(b) and this Section 9.10(c), no Indemnitee shall be
required to tender the defense of a Third Party Claim more than once unless so
requested by Parent and Parent has acknowledged in writing its liability
pursuant to Section 9.10(b) for such Third Party Claim.
(d) Remedies and Undertakings. Except as otherwise specifically
provided in this Agreement, the sole and exclusive remedy after the Closing of
HIIC, HIEC and their Affiliates under this Agreement for an inaccuracy in or
breach of any representation or warranty made by Parent or Sub in Article II of
this Agreement shall be restricted to the indemnification rights set forth in
this Section 9.10. Prior to the assertion of any claims for indemnification
under this Agreement, each Indemnitee shall utilize all reasonable efforts,
consistent with normal practices and policies and good commercial practice, to
mitigate such Damages. Notwithstanding anything to the contrary contained
herein, the foregoing limitations set forth in this Section 9.10(d) shall not
apply to actions arising from a default or an alleged default in the performance
of any provision of this Agreement (other than a representation or warranty in
Article II of this Agreement), and the parties hereto shall have all remedies
available to them at law and equity with respect to any such default or alleged
default.
Section 9.11 Limitation of Liability. Notwithstanding Section 8.2 and
Section 9.10, no party to this Agreement or any of its Affiliates shall be
liable to any other party for such damage, loss or injury due to a breach of
this Agreement which does not flow directly and immediately from the act or
omission of the party or any of its
26
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Affiliates and each party hereto hereby waives all rights to bring any action in
respect of such liability. Such limitation of liability shall apply to, among
other things, liability arising from tort (including negligence) and liability
for lost revenues or profits, and such limitation of liability shall apply even
if the party or its Affiliates causing damage, loss or liability to which this
limitation of liability applies have been advised of the possibility of such
damage, loss or liability.
27
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IN WITNESS WHEREOF, Parent, Sub, IEL and HIIC have caused this Agreement to
be executed and attested by their respective officers thereunto duly authorized,
all as of the date first written above.
SKY GAMES INTERNATIONAL LTD.
By: /s/ Malcolm Burke
Its: President
Attest: /s/ P.J. Lawless
----------------
SGI HOLDING CORPORATION LIMITED
By: /s/ Malcolm Burke
Its:President
Attest: /s/ P.J. Lawless
----------------
INTERACTIVE ENTERTAINMENT LIMITED
By: /s/ Malcolm Burke
Its: President
Attest: /s/ P.J. Lawless
----------------
HARRAH'S INTERACTIVE INVESTMENT COMPANY
By: /s/ John Boushy
Its: Sr. Vice President
Attest: /s/ P.J. Lawless
----------------
28
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Exhibit A
---------
Form of Bye-Law Amendments
29
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Appendix B
SCHEDULE OF
PROPOSED AMENDMENTS TO THE BYE-LAWS OF
SKY GAMES INTERNATIONAL LTD.
The Board of Directors is recommending the following Bye-law amendments to
the shareholders for approval at the Special General Meeting:
Bye-Law 1
The following definitions are inserted in alphabetical order in Bye-law 1:
"Affiliates" means, with respect to any person or entity, any person or entity
that directly or indirectly Controls such person or entity, or any person or
entity which is Controlled by or under common Control with such person or
entity.
"Common Shares" has the meaning set forth in Bye-law 3(B).
"Control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of a person or entity,
whether through the ownership of voting securities, by contract or otherwise.
"Director" means a director of the Company.
"fully diluted basis" means at any time that number of (A) Common Shares equal
to the sum, without duplication, of (i) the total number of Common Shares then
outstanding (other than 3,525,000 shares of Common Shares held in escrow
pursuant to that Escrow Agreement dated May 27, 1992, as amended, among Montreal
Trust Company of Canada, the Company and certain shareholders), plus (ii) the
total number of Common Shares into which all then outstanding Preference Shares
or any other shares of the Company are then convertible directly or indirectly,
provided that Common Shares issuable upon conversion of Class A Preference
Shares shall not be included until such conversion occurs, plus (iii) the total
number of Common Shares then issuable directly or indirectly upon exercise of
all then outstanding options, warrants (including the warrant for 650,000 Common
Shares exercisable at $1 per Common Share issued to Harrah's Interactive
Investment Company, a Nevada corporation, and exercisable at the option of the
Company), unexercised stock subscriptions, convertible debentures and other
convertible securities, plus (B) Other Voting Shares equal to the sum, without
duplication (including without duplication of any Common Shares) of (i) the
total number of Other Voting Shares then outstanding, plus (ii) the total number
of Other Voting Shares into which all then outstanding Preference Shares or any
other shares of the Company are then convertible directly or indirectly, plus
(iii) the total number of Other Voting Shares then issuable directly or
indirectly upon exercise of all then outstanding options, warrants, unexercised
stock subscriptions, convertible debentures and other convertible securities.
"HIIC Entities" means Harrah's Interactive Investment Company, a Nevada
corporation, and any of its Affiliates owning shares in the Company.
"HIIC Directors" means the Directors appointed pursuant to Bye-law 54(B) or the
second sentence of Bye-law 55.
"Other Voting Shares" means shares of the Company having the right to vote for
election of directors other than Common Shares or securities convertible into
Common Shares.
"Preference Shares" has the meaning set forth in Bye-law 3(B).
B-1
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"Special Board Majority" means (i) a majority of the Directors voting at a
meeting of the Board which also includes a majority of the HIIC Directors then
in office or (ii) a written resolution executed by all the members of the Board.
"Special Shareholders Majority" means a majority of the votes cast at a general
meeting which also includes the votes attaching to a majority of the Voting
Shares of the Company on a fully diluted basis then heir by the HIIC Entities.
"Voting Shares" means Common Shares having the right to vote for election of or
to appoint Directors and any shares convertible directly or indirectly into such
Common Shares and Other Voting Shares and any shares convertible directly or
indirectly into Other Voting Shares.
Bye-Law 3(B)
Bye-law 3(B) is replaced with the following:
"The authorised share capital of the Company at the date of the adoption of
these Bye-laws is US$550,030 divided into 50,000,000 common shares of par value
US$0.01 each (the "Common Shares"), 3,000 non-voting convertible redeemable
preference shares of par value US$0.01 each (the "Class A Preference Shares")
and 5,000,000 redeemable preference shares of par value US$0.01 each (the "Class
B Preference Shares" and together with the Class A Preference Shares, the
"Preference Shares")."
Bye-Law 4
Delete paragraph (c) and the word "and" immediately preceding it.
Delete the last sentence of Bye-law 4 and insert the following as Bye-law 4A:
The Board shall be authorised to issue from time to time in one or more series
the Preference Shares on such terms as it deems appropriate, including, without
limitation, the following:
(a) the number of shares of the Preference Shares, less than or equal to
the total number of Preference Shares authorised in Bye-law 3(B) for each class
of Preference Shares, respectively;
(b) whether dividends, if any, shall be cumulative or noncumulative and
the dividend rate of the Preference Shares;
(c) the dates at which dividends, if any, shall be payable;
(d) the redemption rights of the Preference Shares;
(e) the terms and amount of any sinking fund provided for the purchase or
redemption of shares of the Preference Shares;
(f) the amounts payable on shares of the Preference Shares in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Company;
(g) whether the shares of the Preference Shares shall be convertible into
shares of any other class or preference shares, or any other equity security, of
the Company or any other company, and, if so, the specification of such other
class or preference shares or such other equity security, the conversion price
or prices or rate or rates, any adjustments thereof, the date or dates as of
which such shares shall be convertible and all other terms and conditions upon
which such conversion may be made; and
B-2
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(h) the voting rights, if any, of the holders of shares of the Preference
Shares; provided that the Class A Preference Shares shall be not-voting.
Insert the following as Bye-law 4B:
"(A) Any Common Shares, Preference Shares or shares of any other class shall
always (i) be redeemed whenever the HIIC Entities own 10% or more of the Voting
Shares on a fully diluted basis and (ii) be subject to redemption by the Company
in accordance with the Companies Act, by action of the Board whenever the HIIC
Entities own less than 10% of the Voting Shares on a fully diluted basis, if any
holder of such shares is a Disqualified Holder or if such action otherwise
should be taken pursuant to any applicable provision of law, to the extent
necessary to avoid any regulatory sanctions against, or to prevent the loss of,
inability to obtain or secure the reinstatement of any license, franchise or
entitlement from any governmental agency held by, the Company, any Affiliate of
the Company, any entity in which the Company or such Affiliate is an owner or
the HIIC Entities or their Affiliates which license, franchise or entitlement
is (i) conditioned upon some or all of the holders of the Company's shares of
any class or series possessing prescribed qualifications, or (ii) needed to
allow the conduct of any portion of the business of the Company or any such
Affiliate or other entity or the HIIC Entities or their Affiliates.
The terms and conditions of such redemption shall be as follows:
(a) the redemption price of the Common Shares and the shares convertible
into Common Shares to be redeemed pursuant to this Bye-law shall be equal to the
Fair Market Value of such shares, and as to such convertible shares, as if any
such convertible shares were converted into Common Shares, (or such other
redemption price as required by any applicable law, regulation or rule) and the
redemption price of shares of the Company of any class (or classes) or series
other than Common Shares or shares convertible into Common Shares shall be the
Fair Market Value of such shares; provided that in both of the previous cases
there shall be excluded any dividends thereon not entitled to be received
pursuant to paragraph (e) of this Bye-law;
(b) the redemption price of such shares may be paid only in cash;
(c) if less than all the shares held by Disqualified Holders are to be
redeemed, the shares to be redeemed shall be selected in such manner as shall be
determined by the Board, which may include selection first of the most recently
purchased shares thereof, selection by lot or selection in any other manner
determined by the Board;
(d) at least 30 days' written notice of the Redemption Date shall be given
to the record holders of the shares selected to be redeemed pursuant to this
Bye-law (unless waived in writing by any such holder), provided that the
Redemption Date may be the date on which written notice shall be given to record
holders if the cash necessary to effect the redemption shall have been deposited
in trust for the benefit of such record holders and subject to immediate
withdrawal by them upon surrender of the share certificates for their shares to
be redeemed together with any other documentation required to effect such
redemption; and
(e) from and after the Redemption Date or such earlier date as required by
any applicable law, regulation or rule, any and all rights of whatever nature,
which may be held by the owners of shares selected for redemption (including
without limitation any rights to vote or participate in dividends declared on
stock of the same class or series as such shares), shall cease and terminate and
they shall thenceforth be entitled only to receive the cash upon redemption.
As used in these Bye-laws:
(i) "Disqualified Holder" shall mean any holder of shares of the Company of
any class (or classes) or series: (1) who, either individually or when taken
together with any other holders of shares of the Company of any class (or
classes) or series is or would reasonably be expected to be determined by any
gaming regulatory agency to be unsuitable, or has or would reasonably be
expected to have an application for a gaming license, permit or other
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<PAGE>
necessary regulatory approval rejected, or has or would reasonably be expected
to have a previously issued gaming license, permit or other necessary regulatory
approval rescinded, suspended, revoked, not renewed or not reinstated, as the
case may be, whether or not any of the foregoing is or would reasonably be
expected to be final and nonappealable; or (2) whose holding of such shares,
either individually or when taken together with the holding of shares of the
Company of any class (or classes) or series by any other holder could reasonably
be expected to cause the Company (or any other company engaged in the gaming
business in any jurisdiction if such holder of shares were a shareholder of that
company) to be denied a licence, permit or other necessary regulatory approval
to engage in any aspect of the gaming business or the serving or sale of
alcoholic beverages in connection with the operation of a gaming business.
(ii) "Fair Market Value" of a share of (1) the Common Shares shall mean the
average Closing Price for such share for each of the 45 most recent days of
which Common Shares shall have been traded preceding the day on which notice of
redemption shall be given pursuant to paragraph (d) of this Bye-law; provided,
however, that "Fair Market Value" as to any shareholder who purchased any Common
Shares subject to redemption within 120 days of a Redemption Date need not
(unless otherwise determined by the Board) exceed the purchase price paid by him
for any Common Shares purchased within such 120 days and (2) shares of the
Company of any class (or classes) or series other than Common Shares or shares
convertible into Common Shares (including, Other Voting Shares) shall be
determined by the Board in good faith; provided, however, that "Fair Market
Value" as to any shareholder who purchased any such shares subject to redemption
within 120 days of the Redemption Date need not (unless otherwise determined by
the Board) exceed the purchase price paid by him for any such shares of the
Company purchased within such 120 days.
(iii) "Closing Price" on any day means the reported closing sales price
or, in case no such sale takes place, the average of the reported closing bid
and asked prices on the Composite Tape for the New York Stock Exchange-Listed
Stocks, or, if such stock is not listed on such Exchange, on the principal
United States securities exchange registered under the Securities Exchange Act
of 1934 on which such shares are listed, or, if such shares are not listed on
any such exchange, the highest closing sales price or bid quotation for such
shares on the National Association of Securities Dealers, Inc. Automated
Quotations System or any system then in use, or if no such prices or quotations
are available, the fair market value on the day in question as determined by the
Board in good faith.
(iv) "Redemption Date" shall mean the date fixed by the Board for the
redemption of any shares of the Company pursuant to this Bye-law; provided,
however, with respect to any redemption pursuant to Bye-law 4B(A)(i), the
Redemption Date shall not be more than 90 days after the date the Board first
learned of the existence of a Disqualified Holder.
(v) "Subsidiary" shall mean any company (wherever incorporated),
association, partnership or other business entity more than 50% of whose
outstanding stock or other ownership interests entitled to vote generally in the
election of directors (or their equivalent in such form of entity and under the
laws of the jurisdiction of organisation of such entity) is owned by the
Company, by one or more Subsidiaries or by the Company and one or more
Subsidiaries.
(B) So long as a holder of Preference Shares is not a Disqualified Holder, such
Preference Shares shall be redeemed in accordance with the terms set forth
in the resolutions adopted by the Board."
Bye-Law 17
Bye-law 17 is amended by deleting the words "within three months" and inserting
the words "within three days".
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Bye-Law 49
Bye-law 49 is renumbered as "Bye-law 49(A)", and the following words are
inserted at the beginning of the second sentence thereof:
"Subject to Bye-law 49(B),".
A new Bye-law 49(B) is inserted as follows:
"Any Shareholder may irrevocably appoint a proxy, and in such case, such proxy
shall be irrevocable in accordance with the instrument of appointment and the
Shareholder may not vote at any meeting at which the proxy holder is present
either in person or pursuant to s. 75A of the Companies Acts."
Bye-Law 52
In Bye-law 52, insert the following words immediately after the words "provided
that":
", subject to Bye-law 49(B),".
Bye-Law 53
In Bye-law 53, insert the words "Bye-law 49(B) and" immediately before the words
"the Companies Acts".
Bye-Laws 54-56
Bye-laws 54, 55 and 56 are deleted in their entirety and are replaced with the
following:
"54(A) Until the HIIC Entities own less than 5% of the Voting Shares on a fully
diluted basis, the Board shall consist of 10 Directors who shall, subject to
Bye-law 54(B), be elected or appointed, except in the case of a casual vacancy
filled pursuant to Bye-law 55, at the annual general meeting or at any special
general meeting called for the purpose of electing or appointing Directors and
who shall hold office for such term as the Shareholders may determine or, in the
absence of such determination, until the next annual general meeting or until
their successors are elected or appointed or their office is otherwise vacated.
At such time as the HIIC Entities own less than 5% of the Voting Shares on a
fully diluted basis, the Board shall consist of such number not less than three
as the Company by Resolution may from time to time determine. At least two of
the Directors, other than the Directors appointed pursuant to Bye-law 54(B),
shall be individuals who are not otherwise officers or employees of the Company.
54(B) At any time at which the HIIC Entities own 10% or more of the Voting
Shares on a fully diluted basis, the HIIC Entities shall be entitled to appoint
a percentage of Directors which is the same percentage of the size of the entire
Board as the number of Voting Shares held by the HIIC Entities is of the total
number of Voting Shares on a fully diluted basis (such percentage of Voting
Shares owned by and such number of Directors appointed by the HIIC Entities
shall be determined as follows: the fractional portion of any percentage of
ownership shall be disregarded and whole numbers ending in 5 through 9 shall be
rounded up to the next highest multiple of 10 and whole numbers ending 1 through
4 shall be rounded down to the next lowest multiple of 10 (e.g., 24.9% shall be
rounded down to 20% and 25.1% shall be rounded up to 30%) (and the resulting
percentage shall be multiplied by 10). At any time at which the HIIC Entities
own 5% or more, but less than 10%, of the Voting Shares on a fully diluted
basis, the HIIC Entities shall be entitled to appoint one Director.
55. The Company in general meeting may authorise the Board to fill any vacancy
on the Board other than a vacancy in the office of a Director who was appointed
pursuant to Bye-law 54(B). Any vacancy in the office of a Director appointed
pursuant to Bye-law 54(B) may be filled by a written resolution deposited at the
Registered Office, signed by each of the HIIC Entities holding Voting Shares.
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56. The Company may in a Special General Meeting called for that purpose remove
a Director provided notice of any such meeting shall be served upon the Director
concerned not less than 14 days before the meeting and he shall be entitled to
be heard at that meeting and provided further that only the HIIC Entities shall
be entitled to vote on any resolution for the removal of an HIIC Director unless
the reason for removal is disqualification of such Director under Bye-law 58(f)
in which case such Director shall be subject to removal by the Company in
accordance with the foregoing provisions of this Bye-law 56. Any vacancy created
by the removal of a Director at a Special General Meeting may be filled at the
Meeting pursuant to Bye-law 54 by the election of another Director in his place
or, in the absence of such election, pursuant to Bye-law 55."
Bye-Law 58
Insert the words "and Officers" after the word "Director" in the heading.
Rename Bye-Law 58 as "Bye-law 58A"
In paragraph (e) of Bye-law 58, replace the words "a Special Resolution of the
Company"' with the words "Bye-law 56", and replace the period with a semi-colon.
Insert a new paragraph (f) as follows:
"(f) if he would be a Disqualified Holder if he were to own any shares of the
Company".
Insert a new Bye-law "58B" as follows:
The office of any officer shall be vacated upon the happening as to such officer
of the events set out in Bye-law 58A (except the events described in paragraph
(d) and (e)).
Bye-Law 59
In the first sentence of Bye-law 59, immediately after the words "of the
Directors" insert the words, ", other than the HIIC Directors,"; replace the
words "a Director may appoint" with the words "an HIIC Director may appoint" and
in the second sentence thereof replace the words "may be removed by Resolution
of the Company" with the words "may be removed in the same manner as the
Director in respect of whom he is appointed in the alternative".
Bye-Law 64
At the beginning of the third sentence of Bye-law 64, insert the words "Subject
to Bye-law 71,", and in the fourth sentence insert the words ", subject to Bye-
Law 71," immediately after the words "PROVIDED that".
Bye-Law 70
At the beginning of Bye-Law 70(A) and the beginning of the first sentence of
Bye-law 70(B) insert the words "Subject to Bye-law 71(B).".
Bye-law 70(B) is amended by the insertion of the following at the end thereof:
Notwithstanding the first sentence of this paragraph and Bye-law 70(C), for so
long as the HIIC Entities hold at least 5% but less than 10% of the Voting
Shares on a fully diluted basis, the HIIC Directors shall be entitled to elect
one member to each of the Board's executive committee, compensation committee
and audit committee (or any other committee with powers similar thereto); for
such time as the HIIC Entities hold 10% or more of the Voting Shares on a fully
diluted basis, the HIIC Directors shall be entitled to appoint a percentage of
members to each of the Board's executive committee, compensation committee and
audit committee (or any other committee with powers similar
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thereto) which is the same percentage of the total number of members of such
committee as the percentage of Voting Shares so held by the HIIC Entities is of
the total number of Voting Shares on a fully diluted basis (such number to be
determined follows: the fractional portion of any percentage of ownership shall
be disregarded and whole numbers ending in 5 through 9 shall be rounded up to
the next highest multiple of 10 and whole numbers ending 1 through 4 shall be
rounded down to the next lowest multiple of 10 (e.g., 24.9% shall be rounded
down to 20% and 25.1% shall be rounded up to 30%) and the fractional portion of
the number of members shall be rounded up to the nearest whole number (e.g., 30%
of a committee of 4 members would result in the right to appoint 2 members of
such committee)).
Bye-law 70(C) is amended by the substitution of the word "Affiliate" for the
word "affiliate".
Bye-Law 71
Bye-law 71 is renumbered "Bye-law 71(A)", and at the beginning of the second
sentence thereof, the following shall be inserted: "Save as otherwise provided
in these Bye-laws,".
Insert a new Bye-law "71(B)" as follows:
At any time that the HIIC Entities own 20% or more of the Voting Shares on a
fully diluted basis, any of the following actions by the Company would require
the approval by a Special Board Majority and a Resolution:
(i) the amalgamation, merger or consolidation of the Company; and
(ii) the amendment of these Bye-laws, including, without limitation, Bye-
laws 4B, 54, 55, 56, 58A, 58B, 71(B) or 71(C), in a manner that would
have a material adverse effect on the rights of the HIIC Entities
hereunder.
Insert a new Bye-law "71(C)" as follows:
At any time that the HIIC Entities own 20% or more of the Voting Shares of the
Company on a fully diluted basis, any of the following actions by the Company
would require the approval by a Special Shareholder Majority:
(i) the winding-up or dissolution of the Company; and
(ii) appointment of the Company's independent auditors.
Bye-Law 72
Bye-law 72 is amended by deleting the words "word of mouth" and substituting
therefor the word "verbally".
Bye-Law 73
Bye-Law 73 is amended by the deletion of the words "may be fixed by the Board
and, unless so fixed at any other number".
Bye-Law 95
In Bye-law 95 insert the words: "or to vote at" before the words "general
meetings".
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Bye-Law 107
Bye-law 107 is amended by the insertion of the words "Subject to Bye-law 71(B),"
at the beginning thereof and by the deletion of the words "by Special Resolution
at which time" and substituting therefor the words ", and upon such
confirmation".
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<PAGE>
IT WAS RESOLVED that: 1. the amendments to the Company's Bye-Laws set out in
Appendix B attached to the Proxy Statement be and they are hereby approved; 2.
the name of the Company be changed to "Interactive Entertainment Limited"; 3.
The par value of the Common Shares of the Company be changed from Cdn.$.01 to
US$.01 each; 4. the authorized share capital of the Company be increased from
US$500,000 to US$550,030 by the creation of 3,000 Non-Voting Convertible
Redeemable Preference Shares of par value US$.01 each and 5,000,000 Redeemable
Preference Shares of par value US$.01 each; and 5. the Directors of the Company
be and they are hereby authorized to issue the Non-Voting Convertible Redeemable
Preference Shares and the Redeemable Preference Shares on such terms as the
Board deems appropriate in accordance with the provisions of the Bye-Laws of the
Company.
<PAGE>
Appendix D
SKY GAMES ANALYSIS
as of April 22, 1997
Prepared By
[ART] Valuemetrics, Inc.
----------------------------
10 South Riverside Plaza
Suite 800
Chicago, Illinois 60606
(312) 382-0910
Issued April 25, 1997
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SKY GAMES ANALYSIS
Valuemetrics, Inc.
I. Engagement
Valuemetrics, Inc. ("VMI") has been retained by Sky Games International
Ltd. (the "Company") to provide certain valuation and other analytical services
(the "Analysis") to the Company in connection with the possible roll-up of the
Company's subsidiaries into the Company and the cancellation of certain
management arrangements. In connection with the Analysis, VMI did not assume any
responsibility for independently verifying any of the foregoing information, and
relied on all such information and assumed all such information was complete and
accurate in all material respects. Set forth below is a brief summary of VMI's
summary valuation analysis dated April 22, 1997, for which VMI was retained on
March 20, 1997.
II. Documents Reviewed
In connection with this Analysis, VMI has interviewed Messrs. Geller,
Stevenson, Burke and Sims. VMI has requested information regarding the Company's
business history, its current status, and its forecasted financial performance.
VMI has made a review of documents and other data as deemed necessary for the
Analysis. Specifically, VMI has reviewed the following documents supplied by the
Company:
. Sky Games International Ltd. annual financial statements from
February 28, 1994 through February 28, 1997;
. Interactive Entertainment Limited and Subsidiary consolidated
balance sheets as of December 31, 1996;
. the Shareholders Agreement between SGI Holding Corporation
Limited, Harrah's Interactive Investment Company and Interactive
Entertainment Limited dated December 30, 1994;
. the Management Agreement by and between Interactive Entertainment
Limited and Harrah's Interactive Entertainment Company dated
December, 1994;
. the Redemption Agreement dated February 25, 1997 by and among Sky
Games International, Inc (Nevada), Anthony Clements, Rex
Fortescue and Sky Games International Ltd. (Bermuda);
. the Share Analysis with initial shareholder percentages and the
dilution effect of each segment of the Amalgamation and
Transaction;
. the Current Structure and Post Merger/Investment Structure
diagram dated February 14, 1997;
. the Confidentiality Agreement between Interactive Entertainment
Limited (IEL) and Singapore Airlines Limited dated February 22,
1995;
. the Long Range forecast and Valuation Summary dated December 3,
1996 prepared by Geller & Co;
. the Software License and Software Services Agreement between IEL
and Singapore Airlines Limited dated November 7, 1995 and
Amendments dated November 21, 1996 and December 1, 1996;
. the Escrow Agreement between Montreal Trust Company of Canada,
Creator Capital Inc. and certain shareholders dated May 27, 1992;
. the draft Proxy Statement received April 11, 1997;
. presentation materials from the March 5, 1997 Board Meeting;
. the January 6, 1997 Private Placement Memorandum for InterGame;
. the April 1997 offer by London Select Enterprises, Ltd. to place
$3,500,000 of 8% two year convertible debentures;
. the Confidential Information Memorandum by Geller & Co. dated
September 12, 1996 for Sky Games International/Interactive
Entertainment Limited;
. the Financing Alternatives and analysis by investment banker
Montgomery Securities dated October 15, 1996;
. the IEL Compensation analysis dated March 18, 1997;
. the preliminary Management Incentive Plan (no date);
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. the draft dated March 17, 1997 Term Sheet for Merger of Sky Games
and Interactive Entertainment Limited;
. the draft dated March 20, 1997 Term Sheet for Conversion of the
Loan to Sky Games by BE Aerospace into Preferred Stock of Sky
Games;
. the draft dated March 14, 1997 Term Sheet for the Convertible
Loan to Interactive Entertainment Limited and Equity Investment
in Sky Games International by Harrah's Entertainment;
. the 1997 financial business plan provided by Geller & Co.;
. and, the draft of the proposed Non-Employee Director Stock
Ownership Plan.
Public and private information relied upon includes:
. the 1996 Boeing Current Market Outlook for the airline industry;
. the Department of Transportation overview and analysis of the
airline gaming industry dated March, 1996;
. information regarding Sky Games and Interactive Flight
Technologies from the electronic financial reporting system of
Bloomberg.
VMI has made no attempt to independently verify the above information.
Furthermore, statements made to VMI by management, employees and advisors to the
Company are considered to be accurate and materially complete in every respect.
III. Current State of Business
A. Description of Company
Sky Games International, Ltd. provides sophisticated remote-control gaming
entertainment systems software which offers airline passengers gaming
entertainment through the carrier's in-flight video entertainment systems.
B. Industry Economics & Competition
The U.S. market for betting and gambling has grown nearly 15 percent since
1994 to $48.5 billion in 1995. Total market value has grown by nearly 65 percent
in the five years to 1995. Casinos claimed the largest proportion of revenues
with 37 percent of total market value or $16.9 billion. This represents an
increase of nearly 69 percent since 1990. 1996 estimates of U.S. casino
winnings - or game revenues - are about $20 billion. The key characteristic of
the U.S. betting and gambling market in the coming few years is likely to be
increased consolidation. As the market continues to mature, major companies are
likely to expand into other betting sectors./1/
The U.S. Betting and Gambling market is forecast to grow by nearly 63
percent from 1995 to the year 2000 to reach a value of $74.4 billion. The
overall trend in the market over the next five years will be for the newer, more
convenient and less regulated sectors of the market to grow appreciably as more
traditional betting sectors grow slowly.
Current State of the In-Flight Gaming Market
Installation of video gambling essentially involves adding a software
program to an aircraft's installed entertainment system. The gambling games
themselves are similar to games played on personal computers or in video
arcades, with various "bells and whistles" to signal the state of play. Both
airlines and game developers emphasize that on-board gambling is designed to be
non-threatening, "fun" entertainment for whiling away the time on long flights.
Stakes will be low, pay-outs will be frequent, and
- - ----------------
/1/ "U.S. Betting and Gambling", Compiled by Euromonitor, Profound
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the amount that a passenger can lose on a single leg of a flight will be capped.
Gambling transactions, including the settlement of net winnings or losses, are
to be processed via credit card through the entertainment system's air-to ground
communications link once it is developed and prior to such time will be by
download of the information after each flight.
Estimated annual airline expenditure on in-flight entertainment ("IFE") and
communications increased more than 42 percent from $845 million in 1995 to
$1,203 million in 1996./2/
The combination of video gambling with air travel is the product of two
forces. One is the ongoing telecommunications technology revolution. Second, the
increased public acceptance of legalized gambling as a form of entertainment and
diversion of the consumer dollar.
The in-flight gaming industry is made up of a handful of development stage
companies designing, developing, marketing and test operating cashless video
gaming systems for use within in-seat interactive video platforms installed
aboard commercial aircraft. Virtually all major international airlines have
expressed an interest in video gambling, though most appear to be moving
deliberately due to uncertainties over the cost and reliability of entertainment
systems, as well as the acceptability and legal status of gambling.
Market Acceptance
The financial success of gambling aboard aircraft will depend on how warmly
the concept is accepted by international air travelers. Although airlines have
long offered feature films for cabin-wide viewing, the installation of
interactive systems for individual access is a relatively new development, for
which very little data is available regarding passenger acceptance and usage.
The Department of Transportation commissioned Yankelovich Partners Inc. to
ascertain air travelers' reactions to the concept of electronic entertainment
systems in general and video gambling in particular. Briefly stated, although
most international air travelers gamble irregularly and never have played video
gambling, they react favorable to the concept of gambling games with limits on
losses and winnings and payment by credit card. Most also perceive on-board
gambling as convenient, fun and enjoyable. On the other hand, the entertainment
system without gambling is generally viewed more favorably than the system with
the gambling feature, though in nearly all respects observed differences in
responses between the two groups are not statistically significant./3/
Full interactivity has proven complicated to implement, and some carriers
that took the plunge early have encountered difficulties with their systems.
Part of the problem stems from a lack of industry-wide standards for ensuring
technical compatibility between vendors entertainment systems and the
aircraft's. Another factor is the complexity of the software supporting
interactive systems.
If U.S. airlines were allowed to offer gambling on their international
flights, although potentially significant from the airlines point of view, the
revenue would be modest in relation to overall gambling activity, representing
less than 1 percent of the amount legally wagered by Americans today./4/
Nonetheless, at this time virtually any proposal to increase gambling's presence
is likely to encounter substantial opposition.
- - ----------------
/2/ "IFE Fact Sheet", World Airline Entertainment Association, (Sept 15, 1996).
/3/ "Report to Congress: Video Gambling in Foreign Air Transportation," U.S.
Department of Transportation (March 1996)
/4/ "Report to Congress: Video Gambling in Foreign Air Transportation," U.S.
Department of Transportation (March 1996)
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Government Regulation of In-Flight Gaming Industry
The regulatory and legal issues surrounding in-flight gaming are complex
and virtually without precedent. To date, there have been no requirements to
obtain any regulatory approval for the installation or operation of In-Flight
Gaming software programs. The International Airline Transportation Association
(the "IATA"), which represents a majority of international airlines, has
established that the interior of an aircraft is subject to the laws of the
aircraft's country of origin./5/ Because the installation of an electronic
entertainment system is considered a major modification to an aircraft, as is
the case with other electronic systems, the installation and operation of
entertainment networks are subject to FAA's issuance of a supplemental type
certificate for the particular aircraft type.
United States law, with certain exceptions, currently prohibits the knowing
transportation of gaming devices on aircraft operated in interstate air
transportation. Federal law also prohibits the installation of, transportation
or operation of gaming devices by any U.S. or foreign air carrier or for any
such carriers to permit their use on aircraft operated to or from the U.S. in
foreign air transportation. However, federal law does not restrict flights by
foreign air carriers between non-U.S. points, even if the aircraft routing
includes a segment to or from the U.S. Federal law also does not restrict the
transportation of gaming devices installed on aircraft operating into or out of
the U.S., provided that such devices are disabled./6/
The United States has a long history of legislation affecting gambling and
provides the basis for any policy decisions to be made. The Department of
Transportation is not at this time recommending any changes to the law
prohibiting gambling in foreign air transportation, rather they will "monitor
foreign airlines' implementation of gambling along with related developments
and, depending on those developments, recommend changes that they find
appropriate for assuring U.S. airlines remain competitive in providing
international passenger services. Insofar as other nations allow, foreign
airlines will continue to have the opportunity to offer video gambling on flight
other than those to or from the United States. ...... U.S. airlines, meanwhile,
can continue to install interactive entertainment systems on their aircraft
fleets, though they remain prohibited from offering gambling as an entertainment
feature."/7/
Competitors
The industry is characterized as an emerging market with a small number of
highly competitive development-stage companies. Although barriers to entry
exist, in the form of specialized technology and lengthy sales and marketing
cycles, initial success by one or several of the current industry participants
may prompt manufacturers of video gaming devices such as IGT, Bally Gaming and
others, to enter the market.
InterGame/8/
InterGame is in the process of completing and testing its proprietary
gaming system for use on the BE Aerospace MDDS interactive platform. The
proprietary system is also being modified for use on other systems. InterGame's
system includes three varieties of slots, four varieties of draw poker,
blackjack, keno, baccarat, paigow poker and roulette.
In February 1996, InterGame entered into an agreement with British Airways
under which InterGame anticipates providing and operating the video gaming
software for use on the in-flight entertainment system developed and installed
by B/E Aerospace aboard British Airways' fleet of wide-body aircraft. The
agreement with British Airways, subject to the success of the commercial trial
of InterGame's gaming system, has a five year term.
- - -------------------
/5/ InterGame Private Placement Memorandum
/6/ InterGame Private Placement Memorandum
/7/ Report to Congress: Video Gambling in Foreign Air Transportation, March 1996
/8/ InterGame Private Placement Memorandum
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Interactive Flight Technologies ("IFT")
IFT has developed an integrated hardware and software interactive system
for use in a total of 30 first and business class aircraft seats. IFT does not
offer a segregated video gaming software, only the entire IFT system, including
its hardware.
IFT equipment, without gaming, has been installed on one Alitalia MD-11
aircraft with future installation planned for a total of five./9/ IFT also has a
contract with Swissair to provide them with an interactive entertainment system
that will include gaming on Swissair's fleet of MD-11's and 747-300
aircraft./10/ IFT announced April 14, 1997 that it has signed a memorandum of
understanding with Swissair regarding the purchase by Swissair of IFT's in-
flight entertainment network as part of IFT's recent change in the sales and
marketing system. IFT also announced that PrivatAir has signed a non-binding
letter of intent to purchase from IFT at least one in-flight entertainment test
contracts with two small regional airline charters, Debonair of the United
Kingdom, and Oasis Air of Spain./11/ IFT may also be soliciting a contract with
Quantas Airlines./12/
In-flight Interactive ("IFI")
IFI has indicated that it intends to develop gaming and skill games for in-
flight entertainment systems. IFI is a United Kingdom based joint venture
between In-Flight Productions (supplier of movies and entertainment for
airlines) and JPM International (manufacturer of gaming machines in the UK), a
division of Sega Enterprises, Ltd. IFI currently has no reported contracts to
supply gaming and skill games for in-flight entertainment systems to any
airline.
Basis of Competition
The design and engineering of an interactive in-flight gaming system
requires experience in a number of fields: PC-based network systems, computer
programming, gaming, and the software supporting interactive systems. Entry into
the in-flight gaming market requires a significant investment in terms of
dollars spent on research, software and games development and engineering to
develop an in-flight gaming system, as well as a lengthy sales and marketing
cycle.
Due to the limited number of airline company customers, the revenue sharing
percentages for in-flight gaming are likely to be highly competitive. If most
airlines are willing to enter into five-year contracts with IFE vendors, new
competitors who wish to enter the market may be required to wait until the
expiration of initial contracts to do so.
A number of airlines have communicated that they are awaiting the results
of the British Airways and Singapore Airlines interactive trials of gaming
systems and programs before making decisions whether or not to install a full-
cabin interactive entertainment system or a gaming program on any of their
aircraft.
Airline Industry
According to the Boeing outlook for the future of commercial aviation, the
airline industry continues its recovery as in the aggregate, the industry
returned to profitability. Load factors are up and profits are on the rise due
to restrained capacity growth and aggressive cost reduction. Projected traffic
increase will be 5.1 percent per year. More and more countries will benefit from
economic development and integration into the global economy. As a result, the
strongest traffic growth will occur in the Asia-Pacific region and will
- - -----------------------
/9/ InterGame Private Placement Memorandum
/10/ USA Today Business Travel, Swissair places bet on gambling
/11/ Bloomberg News
/12/ InterGame Private Placement Memorandum
D-6
<PAGE>
average 7.1 percent per year; China will average 11.5 percent. The result will
be that Asia traffic will equal that of North America by 2015.
Long term profitability will depend on the successful development of cost
reduction strategies. These strategies, influenced by differences in traffic
growth rates among major markets, will produce marked changes in the composition
of the world airline fleet. In particular, intermediate size airplanes will
account for over 21 percent of the world fleet by 2015, up from 17 percent on
1995. A total of 1,460 deliveries are projected over the next ten years.
Intermediate size aircraft are those twin aisle, 241-400 seat aircraft,
including the 767, 777-200/-300, A340 and MD-11 targeted by Sky Games for
installation of their system.
The large airplane category includes all 747 models and any future airplane
with more than 400 seats. Currently this fleet represents only 8.5 percent of
the world fleet, but provides 22 percent of all airline capacity. The projected
need for large airplane deliveries over the next ten years is 700 units. Large
airplanes currently provide over three-quarters of the capacity in the fast
growing Trans-Pacific market. Between Asia and Europe, they account for almost
as large a share.
In total, 15,900 airplanes worth $1.1 trillion dollars will be delivered
over the next twenty years. The mix of new airplanes added through 2015 will be:
68 percent single-aisle, 22 percent intermediate-size, and 10 percent large
planes. The fastest growing segment of the market will be intermediate-size
planes. The forecast growth in intermediate-size (767,777,A340 and MD-11) and
large (747,777) wide-body, long haul aircraft represent a substantial market for
IFE systems in general, and in-flight gaming.
Revenue Impact on Airlines
The Department of Transportation has made two estimates of potential
gambling revenues to foreign airlines. The first applies to their long-haul
service between foreign cities, which is not affected by the current U.S.
gambling ban. The second estimate applies to foreign carrier flights to or from
the U.S., assuming the laws were changed to permit gambling on those flights.
Both estimates rely on the consensus estimate that video gambling would
generate, on average, revenue of $1 million per aircraft per year.
Flights between foreign cities account for about 82 percent of the long-
haul service operated by foreign airlines. These flights involve some 480
aircraft. Thus at $1 million per aircraft, the potential gambling revenue from
foreign airlines' long-haul service between foreign cities amounts to
approximately $480 million per year. For flights to and from the U.S., an
additional 112 aircraft come into play. While it is unlikely that all foreign
airlines would install entertainment systems on all of their aircraft, the
foreign carrier fleet is comprised of more than 6,000 jet aircraft./13/
While U.S. airlines will have to install entertainment systems for
competitive reasons, their ability to cover the costs of those systems if not
permitted to offer gambling is uncertain. If U.S. airlines were allowed to offer
video gambling on their international flights, the Department of Transportation
estimates they could earn $300 million per year in gambling revenue from their
international service in the Atlantic and Pacific regions combined. Net of
direct operating expenses estimated at approximately $75 million per year, video
gambling could yield net revenues of approximately $225 million annually for
U.S. carriers./14/
Target Market
Sky Games has targeted several major international air carriers as strong
candidates for obtaining contracts based on their fleet composition, demographic
profile of their customer base, number of
- - -----------------
/13/ United States Department of Transportation, Report to Congress, Video
Gambling in Foreign Air Transportation.
/14/ United States Department of Transportation, Report to Congress, Video
Gambling in Foreign Air Transportation.
D-7
<PAGE>
international flights, and receptiveness to gaming as part of their IFE systems.
These airlines include Tier I: Quantas, Cathay Pacific, KLM, Air France; Tier
II: Malaysian, Lufthansa, Thai, Iberia, Aerolineas and Varig; and Tier III:
Korean, Asiana, Eva, Emirates, and several others./15/ Among the world's
passenger airlines, Virgin Atlantic Airways offers the "Best Overall" in-flight
entertainment, according to a 12-member international media panel that evaluated
nearly 50 leading carriers. KLM Royal Dutch Airlines earned the number two spot
in this annual competition, Quantas Airways took third./16/
Sky Games secondary targets are U.S. carriers, as they are currently
prohibited from offering in-flight gaming to their customers. The U.S. airlines
demonstrating a strong interest in working with Sky Games "Pay for Play"
opportunities are American Airlines and Delta. Providing non-gaming options for
these U.S. carriers would at best be a break-even option for Sky Games, but
would position them very strongly if and when the U.S. legislation is
repealed./17/
Strategic Relationships
Sky Games operations are managed by Harrah's Interactive Entertainment
Company, a subsidiary of Harrah's Entertainment. Harrah's provides Sky Games
with expertise and management experience in the areas of implementation and
testing, financial transactions processing, database management for customer
satisfaction and marketing, training and brand marketing.
Harrah's interest in the partnership stems from its desire to invest in
growing markets where they have an opportunity to increase market share and
further strengthen the Harrah's brand name./18/ Harrah's prides itself on being
the premier name in the casino entertainment industry and the most
geographically diversified casino company in North America.
C. Critical Factors of Sky Games/IEL as a Development Stage Company:
Revenue Generation
The Company has yet to produce any revenues and is considered a development
stage company. Once the product is developed, the growth of revenues and profit
may increase both quickly and substantially. This is dependent upon whether the
product is accepted by both the flying public and the airline industry. Without
revenue generation and a completely developed product, the Company is still
considered a speculative investment at this time.
Projections completed by Geller & Co. in September of 1996 show the
following revenues and net income for the Company based on their pro-forma
estimate of anticipated usage, market penetration of airline passengers and
certain assumptions of growth of airlines using the Company's systems (figures
in millions of dollars). These figures are highly speculative in nature and are
based on many unknown factors related to both revenues and costs, which can not
be known with reasonable certainty at this time. Actual results may vary widely
from the Geller & Co. projections based upon operating expenses and costs.
- - ------------------------
/15/ "Confidential Information Memorandum", Sky Games International/Interactive
Entertainment Limited (Sept 12, 1996)
/16/ "Virgin Atlantic Airline Named Top Airline for In-flight Entertainment,"
The Seattle Times (September 20, 1996)
/17/ "Confidential Information Memorandum", Sky Games International/Interactive
Entertainment Limited (Sept 12, 1996)
/18/ 1995 Annual Report, Harrah's Entertainment, Inc.
D-8
<PAGE>
<TABLE>
<CAPTION>
Years After Development Completed
One Two Three Four
<S> <C> <C> <C> <C>
Revenues $ 2.7 $14.4 $47.9 $60.8
Pre Tax Net Income (2.3) $ 5.0 $31.3 $40.6
</TABLE>
Technology and Operations Status
The Company's management believes it is 90 to 95 percent complete with the
development of the product. Hardware problems with Matsushita do exist, and
the hardware platforms have changed during the time of Sky Games development
of its product. Recent steps, such as the negotiations to receive a platform
tester at Harrah's Memphis headquarters, have been taken to expedite
development in the future.
Risks and Challenges for Rapid Growth
Once the Company has a fully operational system, other factors considered
for success include the integration of the system with the airline's day-to-
day operations and also the amount of passenger usage of the system. Other
airlines may choose to do business with a competitor or simply not install a
system. The airline seat configuration, their system routing or desire not to
train their flight crew may have a strong negative effect on meeting revenue
goals. Passenger utilization may be significantly lower than projections,
with the amount wagered or the time spent playing the games varying
considerably from expectations. For example, Geller & Co. anticipates the
average passenger duration of play to be 2.2 hours, and 15 percent of the
aircraft capacity load factor to be playing for this amount of time. Based on
statistical models, this should produce $35.38 in revenues per playing
passenger.
Other risks to consider include the regulatory environment. Currently,
most of the gaming will take place on flights to and from the Asian-Pacific
area. Should any Asian Pacific countries outlaw gambling on flights in a
fashion similar to the U.S., then it would negatively effect the opportunity
for revenue growth.
Other challenges for the Company include building the management team,
marketing the concept, establishing a reliable system of payment of winnings
and collection of customer losses. This is the major reason Harrah's was
brought into the Company. Harrah's expertise and considerable industry
knowledge is a major reason Sky Games business could become a financial
success.
The "back office" requirements of efficiently running the day-to-day
operations will have a major impact on the success of this venture. Customer
satisfaction, processing of wins and losses, statistical information on wins
and losses and other factors are extremely important. Customer identification
with the Harrah's name will also be important.
Furthermore, Harrah's involvement also brings credibility to the multi-
billion dollar airline industry. It is doubtful the airlines would consider
the Sky Games in-flight gaming systems if Sky Games was a stand-alone company
with no affiliation with Harrah's.
Financing Needs, Alternatives and Results
The Company has spent considerably more capital than originally
anticipated. In an attempt to raise additional capital, the Company
unsuccessfully tried to partner with other companies, as listed in the Proxy.
The Company has also solicited capital raising suggestions from four
investment banks, and all suggested simplifying the Company's corporate
structure.
The Company was almost delisted from NASDAQ trading due to its worsening
financial condition. The losses have continued over a protracted time period
without any revenue to offset the expenditures. Because of the need to
immediately raise additional capital, the Amalgamation and Transactions need
to occur.
D-9
<PAGE>
Short Term Financial Status
By entering into a $1,000,000 line of credit from Harrah's in the near
future, as well as having an additional $650,000 available, if needed, from
Harrah's after the Amalgamations, IEL and the Company should have sufficient
funds to cover anticipated expenditures for at least six months of operations.
This is expected, by the Company's estimates, to give it enough time to both
prove their product in the marketplace and thereafter raise additional funds
from other sources.
Another consideration regarding the Amalgamation and Transactions is the
relinquishing of fees paid to Harrah's under the Management Agreement.
Currently, Harrah's is paid a $10,000 per month fee, and the fee paid increases
as a percentage of revenue when revenues exceed $2,000,000. The top payment is
for 7.5 percent of revenue when revenues exceed $10,000,000. By converting this
contract to equity, the Company saves these fees going forward.
Also, the Company will grant options to their Board of Directors and
Management under the Amalgamation. Although this dilutes the current
shareholders, this also saves money for the Company at this critical financial
juncture. By paying experienced management below-market salaries, the Company's
performance based incentive program saves cash and also brings to the Company
the types of entrepreneurial individuals who would not otherwise join such an
undercapitalized company. The Directors options also reduce expenses while
attracting board members with contacts in the industry who also would not
otherwise join such an undercapitalized company.
IV. Immediate & Substantial Dilution Impact Following Transactions on Sky
Games' Stock.
A. Conversion of IEL stock for Sky Games
Pursuant to the Amalgamation Agreement, whereby IEL would amalgamate with
and into SGHIC, HIIC's 20 percent holding of a minority interest of IEL would be
converted into 3,617,871 shares of common stock of Sky Games, and would be
further diluted by issuances related to the Management Incentive Plan and
Harrah's Management Contract. The holding of Sky Games stock by HIIC represents
20 percent of the total number of shares outstanding after a 30 percent dilution
to account for both the merger between IEL and SGHIC and Harrah's management
contract.
B. Issuance of Management & Director Stock Options
Pursuant to the Management Incentive Plan previously adopted, the Sky Games
Board can allocate options with 4,070,105 shares of underlying Common Stock, or
20 percent of the total number of outstanding shares, on a fully diluted basis,
after issuances with respect to Harrah's merger but before issuances with
respect to the management contract. IEL's compensation plan was reviewed by
another advisor and the 20 percent figure was considered to be reasonable and
acceptable given the development stage of the Company. The management options'
vesting schedule is documented in the Sky Games Management Incentive Plan. The
options have an exercise price equal to the fair market value of the shares at
the date of grant and would expire ten years after the date of grant. Such
options were granted but not allocated on December 6, 1997.
Sky Games will also enter into a Non-Employee Director Stock Ownership Plan
for directors of the Company, where 500,000 options may be issued over time.
Beginning December 10, 1996, and continuing annually each December 10, each
director in office will automatically be awarded a stock option to purchase
10,000 shares of Common Stock. The exercise price of the options is the fair
market value at the date of grant. The options have a ten year term from the
date of award, and are not exercisable during the first six months of the term,
except in the case of death, disability, or termination.
Since the management and director options will be funded through the
issuance of common stock, the Management Incentive Plan and Director Plan could
have a significant dilutive impact to existing shareholders. The management
options, which are issued as performance based options, are issued at the market
value at the date of grant, are long lived, vest over time, and have a highly
volatile underlying
D-10
<PAGE>
security. If all the options vest, the options could represent a material
financial reward for management, and a material value dilution for the
remaining shareholders.
C. Conversion of Harrah's Management Contract
Harrah's Management Contract currently provides that they will receive from
IEL a total of at least $10,000 per month. When revenues exceed $2,000,000,
Harrah's receives an escalating management fee. For example, the top tier is
7.5 percent of revenues when revenues exceed $10,000,000. For this
Amalgamation, Harrah's negotiated a 10 percent ownership basis after the
conversion of Harrah's ownership interest in IEL, and after the issuance of
shares for the Management Incentive Plan. In total, Harrah's previous
ownership stake in IEL and their Management Contract are converted into a 26
percent ownership stake on a fully diluted basis.
As of April 21, 1997, the investment in IEL is the primary asset of value
to the Sky Games shareholders. As a function of the rights granted to it, in
both the management contract and the shareholders agreement, Harrah's
Interactive has economic claims that are superior to the Sky Games
shareholders, and in certain situations (financial distress; default in the
management agreement), Harrah's has the option to purchase the Sky Games
interest at a substantial discount.
Given the need for cash to invest in the venture and Sky Games' obligation
to provide the cash and its likely inability to meet the obligations, it is
possible that the shareholders would lose this asset if Harrah's pursued its
rights. Accordingly, the economic benefits would be lost, even if the venture
were successful.
The exchange of shares for Harrah's rights under the agreements puts
Harrah's at the same level as all of the shareholders and does not give
Harrah's superior economic benefits. Given the monetary value of Harrah's
rights under the management contract and the superiority of the current
Harrah's economic interest, the substitution of shares for the contracts'
rights is reasonable.
D. Conversion of Harrah's $1,000,000 for 1,000,000 shares; $650,000 for
650,000 shares
In the current Shareholders Agreement, if either Sky Games or Harrah's is
unable to make the contractual capital contributions, then the other party may
purchase shares at $1.00 per share. At this time Sky Games will be unable to
contribute their contractual capital contributions in the short term. In this
roll-up Amalgamation and Transactions, the negotiations have resolved that
Harrah's will contribute $1,000,000 as a loan, which will convert to one
million shares. It is anticipated by the Company that this will be sufficient
to fund the Company's expenditures for the next several months. Only if there
is a need to do so, the Company may request to receive an additional $650,000
as a loan which will convert to 650,000 shares.
The conversion price of the notes, the share price of the warrants, and the
commitment are costly to the shareholders given the current share value.
Today Harrah's is the only source of financing and the financing is required
for Sky Games' survival. Given Harrah's willingness to provide the funds and
no other alternatives for financing, the Harrah's financing, while costly,
provides the required funds to provide an opportunity for the existing
shareholders to preserve value by providing the required investment dollars to
introduce the "Sky Games". While costly, this investment is reasonable in
consideration of the alternatives.
V. Board Representation Rights
Today, Harrah's (as minority shareholder) through its shareholders
agreements has significant blocking rights at the Board level over the
activities of IEL, which is the primary asset of value to the Sky Games
shareholders. The current agreements indicate that the new shares to be
issued to Harrah's in exchange for their old shares and their contracts, will
have similar rights through the Board agreement.
While these rights are somewhat unusual, they are not unusual for a
minority investor who is willing to invest new money. In addition, Harrah's
will be in an equivalent position to all other shareholders. Consequently,
they should be motivated to make decisions that are in the best interests of
all shareholders.
D-11
<PAGE>
Because of the prior rights they relinquished, the new money, and the fact
that all shareholders will be at the same level, these rights are not
unreasonable.
VI. Market Efficiency Test
The question to address is whether the current market price for Sky Games
stock reflects the fair market value of Company shares on a marketable
minority basis. To test this, a series of different research methods were
undertaken. First, we researched the individual characteristics of the Sky
Games stock. Specifically, factors such as analyst coverage, daily trading
volume and exchange listing were examined in order to determine overall
investor interest and trading activity in the stock. An active trading
history and investor interest are the initial signs of an efficiently priced
security.
The second method involves testing independence of historical and future
rates of return. In an efficient market, historical stock price data should
have no relationship with future rates of return. Therefore, investors in Sky
Games should gain very little from any "trading rule" that decides to buy or
sell the stock based upon its historical rates of return.
SECURITY ANALYSIS
The first element of the market efficiency study requires that we analyze
the individual characteristics of the security. In the case of Sky Games, we
examined the following characteristics: Analyst Coverage, Exchange Listing,
Historical Trading Activity/Volume, and Access to Public Information. These
factors provide the initial evidence indicating an efficient or inefficient
market for the security. The section below summarizes the information
gathered from our research.
Analyst Coverage: There are currently no equity analysts that follow and
report on Sky Games. One analyst. Mr. Ashish Thadhani of Thalmann, Ladenburg
issued a report on the Company, but that was over a year ago. The reports and
recommendations that equity analysts issue are valuable to investors in the
marketplace because they contain an in-depth analysis of the security. The
information in these reports allow investors to make better informed decisions
regarding a Buy/Hold/Sell strategy in the stock. Without these analysts,
investors have to examine the security themselves.
Exchange Listing: Since March 1, 1994, Sky Games' common shares have been
traded in the over-the-counter market (Nasdaq Small Cap Market) under the
symbol "SKYGF." A listing on a major exchange (NYSE, AMEX or NASDAQ National
Market System) exchange is expected to increase the market liquidity of the
stock and its exposure to investors. These factors improve efficiency because
it allows investors to effectively market the security given new information.
Historical Trading Activity & Volume: At July 17, 1996, there were 196
holders of record of the Company's common shares. Of these holders, 159 had
registered addresses in the U.S. and held a total of 7,981,232 common shares
or approximately 62.81 percent of the total 12,706,309 common shares
outstanding. As of February 12, 1997, a total of 12,886,385 outstanding
shares were shown on the books of the Company's transfer agent. An
examination of historical trading activity indicates that Sky Games is very
thinly traded. The daily and monthly trading activity are relatively small
compared to the total shares outstanding. For example, the average daily
trade volume for last twelve months ranged between zero and 214,000 shares,
with an average daily volume of just 23,491 shares. The average daily trading
volume of 23,491 shares is very small (less than 0.2 percent) compared to the
12,886,385 shares outstanding. During the twelve month period April 1996 to
March 1997, total monthly trading volume ranged between 229,800 and 1,180,500
shares, with an average monthly volume of just 533,870 shares. These monthly
blocks are very small (just over 4.0 percent) compared to the 12,886,385
shares outstanding as of February 12, 1997.
Access to Public Information: Sky Games is a publicly-traded over-the-
counter stock and thus is required to file financial documents and to register
its stock with the Securities and Exchange Commission. As a result, annual
financial information and news is readily available in the public market
place. As a
D-12
<PAGE>
result, investors are able to make informed investing decisions given the
availability of information on Sky Games.
Summary of Security Analysis
The characteristics highlighted above provide some initial evidence toward
an inefficient market for Sky Games stock. The primary factors indicating
inefficiency are the relatively thin market for the stock and lack of coverage
by equity analysts. The low daily trading activity and lack of equity
specialists that follow the stock on an ongoing basis indicates that there is
not a well established market that continuously trades Sky Games' shares. The
low volume may also cause the quoted price be to unreliable in valuing a sizable
block of Sky Games.
STATISTICAL MARKET EFFICIENCY TESTS
In an efficient market, the stock prices represent a reasonable market
consensus of the true value of the firm and the stock prices are independent,
that is, past prices have no predictive power for future prices. If a price is
to represent a market consensus, changes in this value should show little
evidence of a temporal pattern. In other words, the sequence of past price
changes should contain no information about future changes. For if this were not
the case, arbitrage opportunities would exist, and the smart investor would use
this pattern as the basis for a profitable trading strategy, refuting the claim
that the market is efficient.
In an efficient market, the trading prices randomly wander around the true
value of the firm. When the prices become too high for the market consensus of
firm value they will tend, on average, to revert to the true value. Likewise,
when the prices become too low they will tend to revert to the market consensus
of true value. For example, consider two types of simple market inefficiencies;
1) the stock prices "over-react" to news, and 2) the stock prices "under-react"
to news. In the first case, we would expect to see a pattern of negative
correlation in returns as a positive overreaction leads to subsequent negative
correction. In the second case, we would expect to see a pattern of positive
correlation as the prices sequentially "catch up" to the true price.
Theoretically, it is most appropriate to look for a time series pattern in
continuously compounded returns: i.e., differences in the mathematical logarithm
of price. This is due to the fact that the best way to look for time series
patterns is to examine correlations, which are a measure of linear dependence.
In addition, the dollar value of deviations from efficient prices should be
roughly proportional to the price level. Thus by taking the difference in the
logarithms of prices, the inefficiency (or deviation from a market consensus
value) shows up as an additive error, and correlations should adequately detect
the time series pattern that the errors induce.
We test for efficiency in two ways: First, we look at simple serial
correlations in continuously compounded daily returns at intervals between one
day prior and twenty days prior. Second, we use multiple linear regression to
test for more complicated time series patterns. In each case, we use standard
statistical tests to indicate whether estimated correlations are due merely to
random chance. In an efficient market, there is no useful information in the
sequence of past stock prices.
We collected daily stock trading data for Sky Games, Inc. from April 16,
1996 through April 16, 1997. The result was 251 observations of daily trades.
Testing the Data for Evidence of Serial Correlation
First we tested for evidence of serial correlation in Sky Games' daily
stock returns. The term "correlation" refers to the strength of the relationship
between the returns in prior periods and the returns today. In an efficient
market we expect to observe very little serial correlation in the daily return
data. We expect the price of the stock to fluctuate around a specific "accurate"
price in an efficient market. Although
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<PAGE>
deviations in this price will occur, these deviations are expected to be
temporary, with the price reverting back to its accurate level in an efficient
market.
We tested serial correlations in continuously compounded daily returns over
the period from April 16, 1996 to April 16, 1997. For each day we examined
twenty different returns for evidence of correlation and applied standard
statistical tests to indicate whether estimated correlations were due merely to
random chance. This technique effectively tests whether today's stock return is
correlated to the returns one period back, two periods back, and so on, up to
twenty periods back. The following results were obtained.
Serial Correlation of Sky Games' Daily Stock Returns:
Sky Games
Table of Correlations
<TABLE>
<CAPTION>
<S> <C> <C> <C>
95%
Lag Period Correlation T-Ratio Significant?
2 0.0471 0.742 No
3 (0.0577) (0.907) No
4 0.0466 0.731 No
5 (0.0153) (0.240) No
6 0.0398 0.622 No
7 (0.0454) (0.707) No
8 0.0849 1.320 No
9 (0.1226) (1.903) No
10 0.0620 0.961 No
11 0.0234 0.362 No
14 0.0410 0.629 No
15 (0.0369) (0.565) No
16 (0.0185) (0.283) No
17 0.0548 0.837 No
18 0.0271 0.413 No
19 0.0123 0.188 No
20 (0.0834) (1.264) No
</TABLE>
Of the 20 separate tests performed, 3 cases of statistically significant
correlations were found. Therefore, the market for Sky Games' stock is judged
to be inefficient in this manner.
Multiple Linear Regression Analysis
Realizing that testing for separate serial correlations may overlook more
complicated serial patterns, we also tested for more complicated patterns using
multivariate regression. A multiple linear regression calculates the equation
for the straight line that best fits the data on the daily returns and also
tells us the significance of any relationships which exist among the data. This
technique seeks to define the best predictor of future returns based on
historical returns. If the regression equation were to any significant
predictive power, we would conclude that there are possible significant
inefficiencies in the market for Sky Games' stock.
Looking at continuously compounded daily return from April 16, 1996 to
April 16, 1997, a regression was performed using each day's current period
return as the dependent variable. The stock returns from one, two, three, four
and five days prior were used as the five independent variables. Standard
statistical tests were performed to determine whether any significant
relationship exists and whether the regression equation has any significant
predictive power.
D-14
<PAGE>
The resulting regression coefficients, T-Ratios, and significance at the 95
percent and the 90 percent levels were:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------
Multiple Regression Output Table
<S> <C> <C> <C> <C>
Regression 95% 90%
Coefficient T-Ratio Significant? Significant?
Lag Period 1 0.00036 (0.03648) No No
Lag Period 2 (0.00257) (1.57189) No No
Lag Period 5 (0.44105) 0.00000 No No
- - --------------------------------------------------------------------
</TABLE>
Our tests find two instances of significant predictive power. Two
regression coefficients, Lag Period 3 and Lag Period 4, were significant at the
95 percent confidence level, and one regression coefficient, Lag Period 4 was
significant at the 90 percent confidence level. Therefore, the market for Sky
Games' stock is judged to be inefficient in this respect.
Conclusion on Market Efficiency
Given the results of the statistical analysis and the specific
characteristics Sky Games stock, it is concluded that the market for the shares
of Sky Games is inefficient relative to the pricing of the Company. Therefore,
the pricing of Sky Games stock from the public market is not necessarily
representative of fair market value (on a marketable, minority interest basis).
VII. Dilution Analysis
In order to assess the impact of the proposed transactions on the value of
the common shares that are owned by the public shareholders of Sky Games, VMI
estimated the probable change in aggregate and per share value caused by the
steps of the transaction outlined above. VMI examined four cases to assess
the accretive and dilutive impacts of the transactions. Three valuation cases
incorporate the market capital values determined by Montgomery Securities in
their Management, Downside 1 and Downside 2 Cases. Additionally, VMI examined
the impact of the transactions based on the total market capital value implied
by the NASDAQ quoted stock price as of approximately 10:00 am on April 22,
1997. VMI valued all management and directors stock options and outstanding
warrants using the Black-Scholes Option Pricing formula. VMI assumed a stock
price volatility of 70 percent, based on the observed volatility of the stock
price over the past two years. VMI assumed that all options and warrants
would be held to maturity. Additionally, VMI assumed that only 70 percent of
the new management incentive options would vest prior to their expiration.
VMI was not requested to analyze the dilutive impact of the placement of
convertible debentures by London Select Enterprises, Ltd.
VMI analysis indicates that the adjustment of the escrowed shares is
accretive to the current public shareholders of Sky Games, while the subsequent
steps of the amalgamation transaction are dilutive. The cancellation of
2,350,000 escrowed common shares causes the value of the common shares to
increase by approximately 19 percent. The merger of Harrah's interest into Sky
Games dilutes the value of the common shares by approximately four percent
because the merger consideration has been adjusted to offset the expected
dilutive impact of the new management incentive option plan. When the Company's
management is issued 4,070,105 options to purchase common shares of the new
Company at the fair market value at the time of grant, VMI estimates that the
value per common share declines by approximately eight percent. The issuance of
2,261,169 common shares to Harrah's to release Sky Games and IEL from the
Management Contract decreases the value of the shares by an estimated 12
percent. However, the dilutive impact is overstated because VMI conservatively
assumes that releasing the Company from the Management Contract does not
materially increase the Company's value. Finally, Harrah's additional $1,000,000
investment in the new Company for the equivalent of 1,000,000 shares causes
dilution of approximately four percent.
D-15
<PAGE>
Overall, the accretive effect of the escrow share adjustment is more than
offset by the dilutive effects of the subsequent steps of the transaction. The
net impact of the amalgamation transaction to the current public shareholders of
Sky Games is an 11 percent decrease in per share value. Although the
amalgamation transaction decreases the value of the shares currently held by the
public shareholders of Sky Games, the dilution does not seem unreasonable based
on the facts and circumstances surrounding the amalgamation transaction. While
it is clear that the current public shareholders are giving up a portion of the
value of their shares, they are also preserving the majority of their value.
In our analysis, VMI has reviewed a range of values established by other
advisors to management. The analysis provided by other advisors indicates a very
wide range of value for Sky Games, and is based on certain assumptions including
discount rates, growth rates and projected cash flows that are difficult to
ascertain with any reasonable certainty. This is due to the speculative state of
the industry and the current uncertainty of obtaining the projected cash flows.
In addition, the most recent projections supplied by management and used in our
analysis were dated in August, 1996.
Thus, the share values arrived at in our analysis and the equity value
arrived at by management's other advisors cannot be understood properly without
a complete understanding of the assumptions upon which they rely.
VIII. Conclusions
VMI concludes that given the current financial standing, product
development stage and form of corporate organization of the Company, the
proposed Amalgamation and Transactions in their entirety is reasonable given the
current circumstances of the Company. These reasons include, but are not limited
to:
. that in-flight gaming appears to be a viable concept, that the in-
flight gaming concept is still in a development stage,
. that further capital is needed to bring the concept to market, that
capital is currently limited,
. that the Company has been unable to raise capital in its current
corporate structure,
. the corporate structure of the Company and its subsidiaries is
complicated,
. that there are no alternatives for raising capital at this time in
its current corporate structure,
. despite dilution, all shareholders will benefit as the viability of
the Company is enhanced,
. and, that by executing the Amalgamation and Transactions the Company
will be better able to raise capital.
VMI has further ascertained that the public market for Sky Games
International stock is currently traded in an inefficient marketplace due to low
trading volume and the lack of correlated trading prices. This produces a wide
range of values due to the inherent riskiness and uncertainty of the Sky Games
business.
The restructuring of the IEL subsidiary and conversion of Harrah's minority
interest is necessary to simplify the operating structure. This should induce
outside equity to invest needed capital. Without this restructuring step, the
Company could be in jeopardy of failing and going into bankruptcy.
The issuance of performance based stock options under the Management
Incentive Plan is necessary to attract and retain the management necessary to
become involved with such a risky venture. Similarly, the Directors options
induce those individuals with qualifying experience and judgment to become
involved with the Company, while reducing cash outlays of the Company for
directors fees.
The conversion of Harrah's Management Contract to equity is necessary to
reduce the monthly cost of doing business. This reduces monthly expenditures,
while also simplifying the corporate structure which should make an investment
in Sky Games more attractive.
D-16
<PAGE>
Finally, the Company needs capital in the short term. Because Harrah's
already has the right to buy equity at $1.00 per share per the Shareholders
Agreement when IEL can not make their capital contributions, the negotiations
to limit it at this time to a maximum of $1,650,000 is reasonable. This gives
the Company current liquidity, time to restructure, continue development and
testing, and prepare to raise equity in the near future.
D-17
<PAGE>
EXHIBIT 99
NEWS RE:
BULLETIN Sky Games International Ltd.
10 S. Wacker Drive Suite 3500
Chicago, IL 60606
FROM:
FRB TRADED: Nasdaq: SKYGF
- - --------------------------------------------------------------------------------
The Financial Relations Board Inc.
FOR FURTHER INFORMATION:
<TABLE>
<CAPTION>
AT THE COMPANY: AT FRB CHICAGO: AT HARRAH'S:
<S> <C> <C> <C> <C>
Laurence Geller Tad Gage Bill Schmidle Laura Kuhlmann Ralph Berry
Chairman, CEO General Info Analyst Contact Media Contact V.P. Communications
(312)715-4214 (312)640-6745 (312)640-6753 (312)640-6727 and Public Affairs
[email protected] [email protected] [email protected] (901)762-8629
</TABLE>
FOR IMMEDIATE RELEASE
Tuesday, June 17, 1997
SKY GAMES SHAREHOLDERS APPROVE MERGER WITH AIRLINE
GAMING SOFTWARE DEVELOPER INTERACTIVE ENTERTAINMENT LIMITED
Harrah's Entertainment Inc. Takes 30% Equity Stake in IEL
---------------------------------------------------------
Hamilton, Bermuda, June 17, 1997 -- Sky Games International Ltd. (Nasdaq:SKYGF),
a developer of sophisticated remote control gaming entertainment software for
use in the international long-haul airline industry, announced that its
shareholders on June 16, 1997 approved a merger with Interactive Entertainment
Limited (IEL), which was previously owned 80 percent by a subsidiary of Sky
Games International Limited and 20 percent by a subsidiary of Harrah's
Entertainment, Inc. Sky Games will be renamed Interactive Entertainment Limited
shortly.
"We are gratified that a majority of voting shareholders recognized that this is
a critical step in our company's development," said Laurence Geller, chairman.
"We also appreciate the confidence shown in our management and our concept by a
premier gaming and entertainment company like Harrah's. We now have the
corporate structure needed to effectively manage our business, product
development, and industry opportunities."
One of the key features of the transaction is that Harrah's has taken an equity
stake of 5.879 million shares in the merged company, becoming its largest single
shareholder with approximately 30 percent of the outstanding common stock on a
fully diluted basis. Harrah's is entitled to representation on the board of
directors of the company, proportional to Harrah's stockholdings, for as long as
Harrah's owns more than 10 percent of the company's outstanding stock. Ownership
of between 5 percent and 10 percent would permit Harrah's to name one
representative to the board of directors. As long as Harrah's owns 20 percent or
more of the company, it will have approval rights over major decisions such as
mergers, acquisitions, incurring of debt or issuing of equity, and other
significant corporate actions.
"We are excited about the creation of this easily understood and highly focused
corporate structure, joining two excellent organizations with the same ultimate
goal," stated John Boushy, senior vice president of information technology and
marketing services for Harrah's. "We look forward to our
...MORE
FINANCIAL RELATIONS BOARD, INC. SERVED AS FINANCIAL RELATIONS COUNSEL TO THIS
COMPANY, IS ACTING ON THE COMPANY'S BEHALF IN ISSUING THE BULLETIN AND
RECEIVING COMPENSATION THEREFOR. THE INFORMATION CONTAINED HEREIN IS
FURNISHED FOR INFORMATION PURPOSES ONLY AND IS NOT TO BE CONSTRUED AS AN
OFFER TO BUY OR SELL SECURITIES.
<PAGE>
SKY GAMES
ADD ONE
ongoing participation and ownership interest in what we believe will be the
premier name in inflight gaming entertainment."
As part of the merger agreement, Sky Games shareholders approved Gordon
Stevenson, president of IEL since 1995, to become president and CEO of the
merged company. Geller will remain chairman of the merged company.
Stevenson noted: "For investors, this new corporate structure is significantly
easier to follow and understand, which we anticipate will help make future
capital raising substantially easier, and will facilitate analyzing and
investing in IEL. We also believe that this restructuring transaction will make
it easier for our customers, the airlines, to understand how we operate, and to
do business with us."
To establish performance-based incentives, Sky Games shareholders approved an
incentive-based stock option plan for employees of the merged company. The plan
covers approximately 4 million shares or 16 percent of the company's outstanding
shares after Harrah's additional shares are issued as part of the merger/capital
infusion transaction. As a result of the merger, Harrah's capital infusion, and
shares reserved under the new management incentive plan, approximately 24
million shares of Sky Games are outstanding.
IEL has pioneered development of sophisticated remote control gaming
entertainment software for use in the international long-haul airline industry.
IEL has a multi-year contract with Singapore Airlines for planned use of the
software and is pursuing a number of other opportunities with international
carriers to provide inflight gaming entertainment. The company notes that
testing of its interactive software, including inflight trials, is continuing
with a target for launch later in the year.
"We remain optimistic that the challenges related to developing these systems
can be overcome, and we continue to be very excited about the revenue and
marketing potential presented by inflight gaming," explained Geller. "It has
been somewhat frustrating because many of the factors impeding the progress of
interactive IFE have been out of our control. Our product is developed, and we
have been cooperating with IFE hardware and software providers toward creating
an integrated, functional interactive inflight offering."
This press release contains forward-looking statements, which are subject to
risks and uncertainties that could cause actual results to vary materially from
those anticipated. These include the company's dependence on airlines'
implementation of interactive entertainment systems, the regulatory environment,
overall conditions in the airline industry, and the company's ability to raise
the necessary capital to fund its operations. Please refer to the company's
documents, on file with the Securities and Exchange Commission, for a complete
discussion of risks and trends.
FOR MORE INFORMATION ON SKY GAMES,
SIMPLY DIAL 1-800-PRO-INFO AND ENTER THE COMPANY TICKER "SKYGF"
