<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
--------------
Commission file number 0-22622
INTERACTIVE ENTERTAINMENT LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA 98-0170199
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
845 CROSSOVER LANE, SUITE D-215
MEMPHIS, TN 38117
(Address of principal executive offices)
(901) 537-3800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1932 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
Yes X No
-------- -------
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
The registrant had 19,250,602 shares of common stock outstanding as of November
14, 1997.
Exhibit index is located on page 19
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INTERACTIVE ENTERTAINMENT LIMITED
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1997 and February 28, 1997 3
Consolidated Statements of Operations - Three Months and Seven Months 4
ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows - Seven Months ended 5
September 30, 1997 and 1996
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 15
and Results of Operations
PART II. OTHER INFORMATION
Item 6.(a) Exhibits 19
Item 6.(b) Reports on Form 8-K 20
</TABLE>
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Item 1. Consolidated Financial Statements
INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
------
September 30, 1997 February 28, 1997
------------------ -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 141,305 $ 626,074
Accounts receivable 50,387 119,768
Prepaid expenses 188,089 61,975
------------ ------------
Total current assets 379,781 807,817
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Land 434,000 800,000
Furniture, fixtures and equipment 495,826 643,492
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929,826 1,443,492
Less: accumulated depreciation (132,454) (294,189)
------------ ------------
Property and equipment, net 797,372 1,149,303
SOFTWARE UNDER DEVELOPMENT 2,166,248 1,357,869
OTHER ASSETS 530,723 209,587
EXCESS OF PURCHASE PRICE OVER NET
ASSETS ACQUIRED 14,444,933 --
------------ ------------
Total assets $ 18,319,057 $ 3,524,576
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,054,274 $ 979,948
------------ ------------
Total current liabilities 1,054,274 979,948
CONVERTIBLE DEBENTURES 1,000,000 2,600,000
MINORITY INTEREST -- 277,249
SHAREHOLDERS' EQUITY
Common shares, authorized- 50,000,000
shares; outstanding - 18,443,050 par
value US$.01 and 13,314,020 par
value C$.01 184,431 106,752
Class A preferred shares, $0.01 par
value, authorized - 3,000 shares,
outstanding - 2,737 shares 27 --
Additional paid-in-capital 60,354,430 16,027,379
Accumulated deficit (44,274,105) (16,466,752)
------------ ------------
16,264,783 (332,620)
------------ ------------
Total liabilities and
shareholders' equity $ 18,319,057 $ 3,524,576
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
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Interactive Entertainment Limited
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Seven Months Ended
September 30 September 30
------------------------------------------- ------------------------------------------
1997 1996 1997 1996
------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
OPERATING EXPENSES
General & Administrative $ 955,742 $ 236,865 $ 2,050,606 $ 516,644
Consulting & Contract
Labor 158,632 173,157 2,912,800 390,191
Marketing 112,849 119,755 217,841 245,873
Management Fees 41,184 52,500 114,351 115,750
Legal 185,581 13,932 530,699 74,359
Interest Expense 410,828 76,169 633,843 175,933
Depreciation and
Amortization 1,220,377 16,719 1,485,863 41,805
Amalgamation Expenses 100,000 - 18,065,734 -
Interest Income (1,321) (19,192) (9,189) (41,481)
----------- ---------- ----------- ----------
LOSS BEFORE MINORITY
INTEREST AND
EXTRAORDINARY ITEMS 3,183,872 669,905 26,002,548 1,519,074
Minority Interest - (76,869) (163,841) (182,925)
----------- ---------- ----------- ----------
LOSS BEFORE EXTRAORDINARY
ITEM 3,183,872 593,036 25,838,707 1,336,149
EXTRAORDINARY ITEM - - 1,824,222 -
----------- ---------- ----------- ----------
NET LOSS $ 3,183,872 $ 593,036 $27,662,929 $1,336,149
LOSS PER SHARE:
Before extraordinary item $ 0.18 $ 0.06 $ 1.85 $ 0.15
Extraordinary item - - 0.13 -
----------- ---------- ----------- ----------
Net loss $ 0.18 $ 0.06 $ 1.98 $ 0.15
AVERAGE COMMON SHARES
OUTSTANDING 18,403,497 9,181,385 14,026,354 8,878,615
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
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INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Seven Months Ended
September 30
---------------------------------
1997 1996
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CASH FLOWS USED IN OPERATING ACTIVITIES
<S> <C> <C>
Net cash used in operating activities $(1,685,306) $(1,963,924)
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CASH FLOW USED IN INVESTING ACTIVITIES
Additions to property and equipment (154,334) (42,383)
Software development costs (808,379) (608,255)
----------- -----------
Net cash used in investing activities (962,713) (650,638)
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CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from convertible debenture issuance 2,163,250 -
Proceeds from stock issuance - 2,405,530
----------- -----------
Net cash provided by financing activities 2,163,250 2,405,530
----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (484,769) (209,032)
CASH AND CASH EQUIVALENTS,
beginning of period 626,074 725,564
----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $ 141,305 $ 516,532
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
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INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements of Interactive Entertainment Limited and
Subsidiaries (the "Company") included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). In
management's opinion, these financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for the interim periods presented.
Pursuant to SEC rules and regulations, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
from these statements unless significant changes have taken place since the end
of the most recent fiscal year. For this reason, the consolidated financial
statements and notes thereto should be read in conjunction with the financial
statements and notes included in the Company's Form 20-F for the year ended
February 28, 1997, as amended.
The Company is a Bermuda exempted company which, in June 1997, changed its name
from Sky Games International, Ltd. ("SGI") to Interactive Entertainment Limited.
The Company's principal business objective is to develop, implement and manage
computerized, remote gaming software for use by passengers on international
airline flights.
The Company has entered into a contract to provide its gaming software to one
international airline, Singapore Airlines ("SIA"). SIA has selected the
Matsushita Avionics Systems Corporation ("MASC") hardware platform and operating
system for its interactive entertainment system. The Company has been in the
process of integrating its software with the MASC network and operating system,
and other third party provided software with which the Company's software is
also required to be integrated pursuant to its agreements with SIA. Following a
series of laboratory tests, the Company's software was certified by MASC on
August 25, 1997. The Company conducted a series of Application Test Programs
("ATP") with SIA and received certification from SIA on October 9, 1997.
Following additional testing on November 7, 1997, SIA has authorized the Company
to proceed with technical trials onboard an aircraft. Although the Company
believes the technical trials will be successful, there is no assurance of such
success, or if it does occur, when it will occur. Management continues to
believe the success of its software on Singapore Airlines will be critical to
its ability to secure additional airline contracts. The Company has yet to
receive any revenues under its agreement with Singapore Airlines and may never
receive any such anticipated revenues if its software is not successfully
implemented with Singapore Airlines.
On August 19, 1997, the Company entered into a non-binding letter of intent to
acquire all of the outstanding capital stock of Inflight Interactive Ltd. in
exchange for 500,000 shares of the Company's Common Stock. Inflight Interactive
is a U. K. developer and provider of amusement games to the airline industry.
Inflight's games are currently operating on a number of airlines including
Cathay Pacific, Egypt Air, Lauda Air, Malaysia Airlines, and Virgin Atlantic.
The agreement also provides for the Company to issue up to 250,000 additional
shares of Common Stock to the current owners of Inflight Interactive upon
achievement of certain milestones regarding implementation of the Company's
software with an international airline to be designated by the parties. The
Company believes that this acquisition will be completed by the end of 1997.
Until the Company receives sufficient cash flow from operations, additional
funding will be required to allow the Company to continue operations. Based on
discussions with potential investors, management believes the Company will be
successful in obtaining sufficient financing to enable the
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Company to continue its operations for the foreseeable future; however, such
funding may not be on terms that are as favorable to those available to more
stable companies and may be dilutive to current stockholders.
Subsequent to the end of the period, the Company completed agreements with two
investors for the private placement of 987,463 shares of Common Stock for an
aggregate purchase price of $3.2 million. $1.7 million was received upon
closing while the remaining $1.5 million is to be funded upon and is contingent
upon completion of the first flight with the Company's software available in all
seats of a Singapore Airlines aircraft. For each five shares of Common Stock
purchased and held for a minimum of six months, the investors will receive one
warrant for the purchase of additional shares. Warrants are to be exercisable
at a price of $3.80 per share for 18 months from their issue. The Company is
attempting to raise an additional amount of approximately $4.3 million on
similar terms and believes that its efforts will be successful.
Prior to June 17, 1997, the Company operated its principal business activities
through its indirectly 80%-owned subsidiary, Interactive Entertainment Limited
("Old IEL"). The remaining 20% of Old IEL was held by an affiliate of Harrah's
Entertainment, Inc. (which, together with its affiliates, is referred to herein
as "Harrah's"). Harrah's also managed the operations of Old IEL pursuant to a
management agreement effective December 30, 1994, (the "Management Agreement").
Effective June 17, 1997, pursuant to a Plan and Agreement of Merger and
Amalgamation dated May 13, 1997, Old IEL was merged into the Company (the
"Merger"). As part of the Merger, the Management Agreement with Harrah's was
terminated. Harrah's received a total of 5,879,040 shares of the Company's $.01
par value common stock (the "Common Stock") in exchange for its 20% ownership
interest in Old IEL and as consideration for the termination of the Management
Agreement. Of the total shares issued to Harrah's, 3,617,871 shares were
allocated to the acquisition of Harrah's 20% ownership interest in Old IEL and
2,261,169 shares were allocated to the termination of the Management Agreement.
This allocation was based on the Merger negotiation discussions held between the
Company and Harrah's.
The acquisition of the minority interest, previously held by Harrah's, has been
accounted for under the purchase method. The value of the purchase price was
based on the average quoted market price of the Company's Common Stock when the
Merger was announced, or $4.466 per share. The preliminary allocation of the
purchase price and estimates of fair value of the Company's assets has resulted
in an allocation which differs from the tentative valuations and allocations set
forth in the pro forma financial statements contained in the Company's proxy
statement dated May 13, 1997, and such allocations and valuations are subject to
further change as management refines its analysis. This transaction represents
a non-cash transaction for purposes of the Consolidated Statements of Cash
Flows.
The shares issued to terminate the Management Agreement were also valued at
$4.466 per share, and the $10,098,000 value of the shares is reflected as part
of the amalgamation expense for the seven months ended September 30, 1997.
Prior to termination, the Company paid Harrah's a monthly fee of $10,000 and was
obligated to pay Harrah's a percentage of future gross revenues.
Prior to the Merger, Harrah's had agreed, pursuant to a funding agreement, to
loan up to $1,000,000 (the "Harrah's Loan") to Old IEL. Upon closing of the
Merger, the outstanding principal and accrued interest of the Harrah's Loan
converted automatically into 1,007,875 shares of Common Stock at $1.00 per
share. Since the Harrah's Loan was convertible into Common Stock at less than
the current market, a beneficial conversion feature was included in the Harrah's
Loan. This beneficial conversion feature was valued at $3,466,000 and has been
included in amalgamation expense for the seven months ended September 30, 1997.
In addition, pursuant to the funding agreement, for 90 days following June 17,
1997, the Company had the right, under certain circumstances, to require
Harrah's to purchase up to 650,000 shares of Common Stock at a price of $1.00
per share to provide working
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capital for the Company. However, the Company did not exercise its rights with
respect to the 650,000 shares.
On April 23, 1997, the Board of Directors of the Company approved and adopted a
resolution changing the fiscal year end of the Company to December 31 of each
year from the last day of February of each year. Therefore, the Consolidated
Financial Statements include the three month and seven month periods ending
September 30, 1997. Pro forma information is presented for the seven month
periods ending September 30, 1997 and 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks and short-term investments
with maturities of three months or less as cash and cash equivalents.
Software Development
All software production costs (i.e., external and internal programmers, graphic
design and testing) are being capitalized until the software is available for
general release to customers, in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." Once
capitalization ceases, the software costs will be amortized using the straight-
line method over the remaining estimated economic life of the product, currently
estimated at three to five years.
Equipment
The Company's equipment is recorded at cost and depreciated over its estimated
economic life which is generally three to five years. Additions and
improvements that materially extend the useful lives are capitalized, while
repairs and maintenance costs are expensed as incurred.
Excess of Purchase Price over Net Assets Acquired
The excess of purchase price over net assets acquired, which arose from the
acquisition of the minority interest of Old IEL discussed in Note 1, is being
amortized on a straight-line basis over three years, which management estimates
is the related benefit period. Management regularly evaluates whether or not
the future undiscounted cash flows of the Company are sufficient to recover the
carrying amount of this asset. Additionally, management continually monitors
such factors as the status of new or proposed legislation, the competitive
environment and advances in the computer software and hardware industries. If
the estimated future undiscounted cash flows are not sufficient to recover the
carrying amount of this asset and, accordingly, an impairment has occurred,
management intends to write down the carrying amount to its estimated fair value
based on discounted cash flows. The amount of amortization expense recorded for
the period from the date of the acquisition (June 17, 1997) through September
30, 1997, totaled $1,430,000.
Impairment of Long-Lived Assets
In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," management continually
evaluates whether events or changes in circumstances indicate that the carrying
amount of long-lived assets may not be recoverable. Based on management's
evaluations, and except as discussed below, no significant impairments of long-
lived assets occurred through September 30, 1997.
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Through its wholly-owned subsidiary, Creator Island Equities, Inc. the Company
owns approximately 70 acres of land with a net book value of $800,000. The
subsidiary also owns other assets including irrigation equipment, greenhouses,
office equipment, nursery equipment, construction equipment, vehicles, and shop
equipment associated with this real estate. These other assets have a net book
value of approximately $83,000. None of these assets are used in the Company's
current principal business activity. The Company received an offer of
approximately $444,000 to purchase the real estate and the other assets. Based
on the opinion of real estate consultants that the offering price was fair and
indicative of similar property, and assuming selling costs of $10,000, the
Company recorded an asset valuation adjustment of approximately $449,000 in
September. The land and other assets were sold in November for approximately
$444,000. Any difference between the adjusted carrying value and the final
selling price will be reflected as a gain/loss on disposition of assets during
the period of the sale.
Loss Per Share
Loss per share was computed by dividing net loss (increased by dividends on
preferred shares) by the average common shares outstanding plus the dilutive
effect of common stock equivalents outstanding and convertible securities, using
the treasury stock method based on the average market price of the Company's
Common Stock. Fully diluted loss per share is not materially different from
primary loss per share.
Reclassifications
Certain reclassifications have been made to the historical financial statements
as of February 28, 1997 and for the three and seven months ended September 30,
1996, to conform to the presentation of the financial statements as of September
30, 1997 and for the three and seven months ended September 30, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Consolidated Subsidiaries
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries: Sky Games International Corp. (a Nevada
corporation), Creator Island Equities Inc., (a British Columbia corporation) and
IEL (Singapore) Pte. Ltd. (a Singapore corporation). For comparable periods
ending in 1996, the consolidated financial statements also include the accounts
of Sky Games International Holdings Ltd. and the Company's 80% ownership of Old
IEL. All material intercompany transactions have been eliminated in
consolidation.
Pro Forma Information
The table below shows pro forma information as if the purchase of the minority
interest had occurred at the beginning of each period:
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<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Pro Forma Loss Before
Extraordinary Item $27,488,000 $4,434,000
Pro Forma Net Loss $29,312,000 $4,434,000
Pro Forma Loss Per Share $ 1.86 $ 0.35
</TABLE>
3. CONVERTIBLE DEBENTURES
As of September 30, 1997, the Company had issued $2,163,250 of 8% convertible
debentures due in 1999, $1,163,250 of which had been converted to 581,632 shares
of Common Stock. The outstanding balance of convertible debentures as of
September 30, 1997, totaled $1,000,000.
Subscription dates range from July 7 through September 29, 1997. Half of the
debentures are convertible at any time 45 to 60 days after the subscription
date, and half are convertible 60 to 90 days after the subscription date at the
lower of 85% of the average of the closing bid prices of the Common Stock for
the five trading days immediately preceding the execution by the subscriber of
its individual subscription for debentures or 77.5% of the average of the
closing bid prices of the Common Stock for the five trading days immediately
preceding the date of conversion.
The debentures contain a feature that provides for conversion into Common Stock
at a price below the current market at the time of issue. The value of this
beneficial conversion feature, totaling $628,000, has been capitalized in other
assets with a corresponding increase to additional paid-in capital. Placement
fees of $149,000 incurred upon sale of the debentures are also capitalized. The
value of the conversion feature and the placement fees are amortized to interest
expense over the original life of the debenture. Any unamortized amount is
expensed upon conversion of the debenture. At September 30, 1997 the
unamortized deferred interest charge of $321,000 is included in other assets. A
total of $391,000 and $456,000 was expensed during the three month and seven
month periods ending September 30, 1997, respectively.
4. STOCK OPTION PLANS
On August 27, 1996, the Company established and the Company's shareholders
approved the 1996 Stock Program for the then upper management, directors and
major shareholders of the Company. The options issued under the 1996 Stock
Program were exercisable upon the grant date and expire during 2001 through
2006. As of September 30, 1997, options outstanding under the 1996 Stock
Program totaled options for 1,130,000 shares of Common Stock.
The Company adopted on December 6, 1996, a Directors Stock Ownership Plan
covering 500,000 shares of Common Stock pursuant to which all directors holding
office at December 10th of each year will automatically be granted options for
10,000 shares of Common Stock at the trading price on such day. On October 17,
1997, the Board of Directors of the Company approved an amendment changing the
grant date from December 10 to the date of the first meeting of the Board of
Directors following the Company's Annual General Meeting of shareholders. As of
September 30, 1997, options outstanding under the Directors Option Plan totaled
60,000 shares, which were exercisable immediately. Additional grants covering
90,000 shares were made on October 17, 1997.
Effective June 16, 1997, the Company established a Management Incentive Plan
(the "MIP") by authorizing the issuance of options for 4,070,105 shares of
Common Stock. The MIP was approved at the Company's Annual General Meeting on
October 17, 1997. The Compensation Committee of the Board of Directors (the
"Committee") has the authority to determine the allocation and vesting
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requirements for such options under the MIP. As of September 30, 1997, options
outstanding under the MIP totaled 2,159,550. A total of 1,200,000 options will
vest specifically on the earlier of sustaining certain stock price levels or ten
years from the date of the grant. The remaining 959,550 options vest partially
upon employees remaining with the Company for a specified period of time but
primarily upon the Company attaining revenue targets established by the
Compensation Committee of the Board of Directors. In any event, the options
vest ten years from the grant.
5. STOCK WARRANTS
As of September 30, 1997, the Company had outstanding stock warrants for 180,000
shares of its Common Stock as follows:
<TABLE>
<CAPTION>
Number of Warrants Exercise Price Expiration Date
------------------ -------------- ---------------
<S> <C> <C>
100,000 3.00 12-31-97
4,900 4.00 6-30-02
17,500 4.80 6-30-02
57,600 4.80 8-31-02
</TABLE>
6. PREFERENCE SHARES OF STOCK
In December 1994, the Company discontinued an engineering and marketing
arrangement with B/E Aerospace, Inc. ("BEA"). As part of the termination, the
Company issued to BEA a promissory note in the original principal amount of $2.5
million at 12% per annum. On February 28, 1997, an agreement was reached with
BEA to exchange the note, including accrued and unpaid interest, for Class A
Preference Shares at $1,000 per share. The exchange for 2,737 Class A
Preference Shares was completed in June, 1997.
The Class A Preference Shares are convertible at any time into a number of
shares of Common Stock, determined by dividing $1,000 per share of Class A
Preference Shares, plus any accrued and unpaid dividends thereon by: (i) prior
to February 28, 1999, a conversion price equal to 70% of the average mean of the
closing bid and ask prices of the Common Stock for the 20 trading days prior to
the conversion (the "Market Price"); (ii) after February 28, 1999 and prior to
August 31, 1999, a conversion price equal to 65% of the Market Price; and (iii)
after August 31, 1999, a conversion price equal to 60% of the Market Price.
Dividends on the Class A Preference Shares are cumulative and payable quarterly
at an annual dividend rate of 9%. The Company, at its option, may redeem the
Class A Preference Shares, in whole or in part, at any time and from time to
time, at a redemption price of $1,000 per share plus any accrued and unpaid
dividends thereon. The Company is not required to redeem the Class A Preference
Shares. 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 do not have any voting rights.
Since the Preference Shares were convertible into Common Stock at less than the
market value at the time of issue, a beneficial conversion feature existed
requiring that the Preference Shares be valued at the market value of the
underlying Common Stock. Since the resulting valuation of the Preference Shares
exceeded the balance of the note, an extraordinary expense of $1,824,000 was
incurred for early extinguishment of the note.
As part of the Merger, Harrah's entered into the "Registration and Preemptive
Rights Agreement" under which, among other things, Harrah's has the right to
receive additional shares of Company Stock at $.01 per share in order to
maintain their ownership percentage in the Company in the event that the Class A
Preference Shares held by BEA are converted into Common Stock. The market value
of the Common Stock issuable to Harrah's in the event that BEA elects to convert
the Class A
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Preference Shares, was determined to be $2,561,000, and this amount
has been included in amalgamation expense for the seven months ended September
30, 1997.
7. INCOME TAXES
As a Bermuda exempted company, IEL is not currently subject to income tax filing
requirements in Bermuda. Accordingly, with the exception of U.S. earned
interest income, which is subject to U.S. taxation, there are no income tax
provisions, benefits, liabilities or assets reflected in the accompanying
financial statements. U.S. tax expense related to interest income was
approximately $400 and $1,900 for the three and seven month periods ended
September 30, 1997, respectively, and $2,400 and $4,300 for the three and seven
month periods ended September, 1996.
8. RELATED PARTY TRANSACTIONS
Pursuant to the Management Agreement, Harrah's managed Old IEL. The Management
Agreement provided for Harrah's to receive a management fee equal to the greater
of $10,000 per whole fiscal month, as defined, or a percentage of gross
revenues, as defined. The Management Agreement was terminated June 17, 1997, in
conjunction with the Merger. Management fees totaled $30,000 for the three
month period ending September 30, 1996 and zero for the same period in the
current year. Management fees totaled approximately $36,000 and $70,000 and for
the seven month periods ending September 30, 1997 and 1996, respectively.
Under the terms of the Management Agreement, the Company transferred cash to
Harrah's for payments made on the Company's behalf to support its operations,
including accounts payable, payroll and capital expenditures. The net transfers
for the three month periods ending September 30, 1997 and September 30, 1996
totaled zero and approximately $89,000, respectively. The net transfers for the
seven month periods ending September 30, 1997 and 1996 totaled approximately
$143,000 and $863,000, respectively.
The Company was charged a fee by Harrah's for administrative services (including
legal, accounting, information technology and office occupancy). The Company
was charged approximately $115,000 for the three month period ending September
30, 1996. This arrangement ended with termination of the Management Agreement,
and there were no similar charges during the 1997 period. The Company was
charged approximately $160,000 and $279,000 for the seven month periods ending
September 30, 1997 and 1996, respectively.
On June 17, 1997, the Company entered into a Continuing Services Agreement with
Harrah's under which Harrah's provides certain telecommunications, computer
systems support and consulting services to the Company. The Company incurred a
cost of approximately $56,000 during the three month period ending September 30,
1997 and $66,000 during the seven month period ending September 30, 1997.
Effective June 5, 1997, the Company entered into a lease (the "Sublease
Agreement") with Harrah's for the office space occupied by the Company. The
Sublease Agreement is for a period of 23 months at a monthly cost of
approximately $11,000. In conjunction with the Sublease Agreement and with the
Merger, the Company purchased certain leasehold improvements, computer hardware,
computer software and office equipment from Harrah's. The total purchase price
was approximately $42,000.
During 1996, the Company entered into a sublicense agreement with Harrah's,
which provides the Company with rights to use an immediate authorization
credit/debit system that Harrah's is developing. The Company reimburses
Harrah's for a portion of the development costs which totaled $30,000 and
$70,000 for the three month and seven month periods ending September 30, 1997,
respectively.
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On June 17, 1997, in conjunction with the Merger, the Company entered into a
Software License Agreement with Harrah's (the "License Agreement"). The License
Agreement is a fully-paid, perpetual, world-wide license to Harrah's and its
affiliates to use the Company's gaming technology in non-competitive uses in
traditional casino venues owned, operated or managed by Harrah's affiliates.
The License Agreement includes source codes for all software, but neither party
to the License Agreement has any obligations to share or provide any
improvements or modifications with the other party.
The Company paid approximately $75,000 and $117,000 during the three month
periods ending September 30, 1997 and 1996, respectively, to directors and
companies with common directors for management and consulting services and for
reimbursement of expenses. The company paid approximately $157,000 and $203,000
during the seven month periods ending September 30, 1997 and 1996, respectively.
On April 30, 1997, the Company entered into a Consulting Agreement with James P.
Grymyr, then a director of the Company, whereby Mr. Grymyr would provide
consulting services to the Company as requested by the Company from time to
time. Under the terms of the Consulting Agreement, the Company has issued to
Mr. Grymyr 586,077 shares of Common Stock as consideration for all such
consulting services both past and future. The Company expects any future
consulting services to be minimal. The value of the stock (approximately $2.4
million) is included in the Statements of Operations for the seven month period
ending September 30, 1997, as consulting and contract labor.
Geller & Co., of which Laurence Geller is Chairman and CEO, performed consulting
services for the Company pursuant to a retainer agreement that commenced in
February, 1996 and terminated August 14, 1997. Geller & Co. was paid a monthly
retainer of $5,000. Pursuant to Geller & Co.'s retainer, a grant of options for
200,000 shares of Common Stock with an exercise price of $3.00 and a term of ten
years was also made to Geller & Co. In addition, Geller & Co. received 200,000
shares of Common Stock that vest upon the closing of a major financing. The
Board has determined that the Merger which occurred June 17, 1997 constituted a
major financing, and, consequently, the 200,000 share success fee has vested and
an expense of $650,000 was recognized. Mr. Geller has been Chairman of the
Board of Directors of the Company since September 30, 1996.
9. AGREEMENT REGARDING REDEMPTION OF PERFORMANCE SHARES
When the Company acquired the rights to the inflight gaming software from Sky
Games International, Inc. ("SGII") on November 7, 1991, a portion of the
consideration was 3,000,000 shares of Common Stock which, according to then
applicable requirements, were placed in escrow, to be released on the basis of
one share for each U.S. $1.78 of net cash flow generated from the assets over a
ten-year period (the "Performance Shares"). The Performance Shares were issued
at a deemed price of $.1155 per share with 2,000,000 shares issued to SGII (87 %
of the outstanding stock of which is owned by James P. Grymyr, formerly a
director of the Company, and his wife) and 1,000,000 shares were issued to
Anthony Clements, a director of the Company. An additional 525,000 shares,
which were issued to Dr. Rex E. Fortescue, formerly a director of the Company,
are held in the escrow on the same terms and are also included as Performance
Shares. Each of Messrs. Clements and Fortescue, as of April 30, 1997, have
agreed to allow the Company to redeem and cancel the Performance Shares when and
if they are released from escrow for any reason whatsoever (the "Redemption
Agreement"). As consideration for such agreement to tender the Performance
Shares for cancellation by the Company in the event they are ever released from
the escrow, the Company has issued to Messrs. Clements and Fortescue, 333,333
and 175,000 shares of Common Stock, respectively. SGII, as of April 30, 1997,
has also agreed that it will tender the 2,000,000 Performance Shares which it
holds for cancellation by the Company when and if such Performance Shares are
released from escrow for any reason whatsoever. As consideration of such
agreement, in February, 1997, the Company expensed the outstanding balance of a
note made by SGII to the Company in the approximate amount of $550,000 and has
issued to SGII 80,590 shares of Common Stock (the
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"Redemption and Cancellation Agreement"). In the event the Performance Shares
are not released prior to six months after the end of the Company's financial
year ending in the year 2002, the Performance Shares will automatically be
canceled in accordance with the terms of the escrow agreement. The value of the
588,923 shares of Common Stock issued as consideration for the agreement was
determined to be $1,840,000. This amount is included on the Consolidated
Statement of Operations as amalgamation expense.
Each of Messrs. Clements and Fortescue and SGII have the right to include the
588,923 shares of Common Stock issued in connection with the Redemption
Agreement and the Redemption and Cancellation Agreement in certain registered
offerings conducted by the Company 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 issued an irrevocable proxy to First
Tennessee Bank which has agreed not to vote the Performance Shares at any
General Meeting of Shareholders or otherwise. The irrevocable proxy and the
agreement not to vote the Performance Shares will terminate upon the
cancellation of the Performance Shares.
The escrow agent is prohibited from canceling the Performance Shares under the
escrow agreement; however, it is management's opinion that the Performance
Shares should be treated as canceled and have no rights and should be excluded
from all per share calculations.
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Item 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Interactive Entertainment Limited ("IEL" or the "Company"), formerly known as
Sky Games International Ltd. ("SGI"), is a Bermuda exempted company which was
incorporated on February 28, 1981. The Company's activities are focused on
providing inflight gaming software and services by developing, implementing and
operating a computer-based interactive video entertainment system of gaming and
other entertainment activities on, but not limited to, the aircraft of
international commercial air carriers.
On December 30, 1994, the Company entered into a Shareholders Agreement with SGI
Holding Corporation Limited ("SGIH"), a wholly-owned subsidiary of SGI, and
Harrah's Interactive Investment Company ("HIIC"), an indirect wholly-owned
subsidiary of Harrah's Entertainment, Inc., the result of which was that Old IEL
became owned 80% by SGIH and 20% by HIIC. Pursuant to the Management Agreement,
Old IEL was managed by Harrah's Interactive Entertainment Company ("HIEC"), an
affiliate of Harrah's.
At a Special General Meeting of shareholders held on June 16, 1997, pursuant to
a Plan and Agreement of Merger and Amalgamation dated May 13, 1997, Old IEL was
merged into SGIH (the "Subsidiary Merger") and then into SGI (the "Parent
Merger"). Prior to the Merger, Harrah's owned 20% of the capital stock of Old
IEL and did not own any capital stock or other securities of SGI and had no
representatives on the Board. As a result of the amalgamation of Old IEL and
SGIH and the termination of the Management Agreement, the outstanding shares of
Old IEL common stock held by Harrah's were converted into 5,879,040 shares of
Common Stock of the Company, therefore making Harrah's the largest shareholder
of the Company holding approximately 38.6% of the outstanding shares at the time
of the amalgamation.
Pursuant to the Amalgamation Agreement, Harrah's was provided with the right to
appoint persons to the Board and to specified committees in a number generally
proportionate to their share holdings. Additionally, Harrah's was provided with
the right to approve specified significant corporate actions by the Company for
as long as the ownership of Common Stock by Harrah's is in excess of 20% (10% in
some cases) of the outstanding voting shares computed on a fully-diluted basis.
Upon consummation of the Parent Merger, SGI changed its name to Interactive
Entertainment Limited and installed Gordon Stevenson as President and Chief
Executive Officer. The Company has consolidated certain operations formerly
performed at its Vancouver, British Columbia office into its Memphis, Tennessee
headquarters. A charge of $100,000 was recorded in September, 1997 in
connection with the closure of the Vancouver office.
The Company has yet to generate any operating revenues and has no assurance of
future revenues. Its principal activities through September 30, 1997, consisted
of developing, testing and marketing the inflight gaming software. As of
September 30, 1997, IEL had a contract to provide its gaming software to
Singapore Airlines, which has various termination provisions. The contract
provides for a six-month minimum trial period for the parties to assess the
operation of the inflight gaming system and public acceptance of the inflight
gaming business. The Company and Singapore Airlines are not yet in the six-
month trial period. During this trial period, the airline has no affirmative
obligation to install the system on any or all of its aircraft; although, if 12
aircraft are not installed with the system within 18 months from the date
inflight gaming begins, IEL may terminate the contract. The contract with
Singapore Airlines is the Company's only contract to provide its gaming software
to an airline. The Company is pursuing additional contracts. However, gaming
is prohibited on the aircraft of U.S. commercial air carriers and on all flights
to and from the United States. Other countries may introduce
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similar prohibitions, which could limit the prospects for additional contracts
and result in termination of the contract with Singapore Airlines or any future
contracts with other airlines.
Prior to the end of 1997, the Company expects to begin a trial of its
interactive gaming application in a limited number of cabins on one cruise ship
operated by an international cruise line. This trial will be performed in
conjunction with Transdigital Communications Corporation. There is no assurance
that the trial will be successful, and if it is successful, that it will be
extended to other cabins or to other cruise ships operated by the owner or
result in any agreement with the owner.
On August 19, 1997, the Company entered into a letter of intent to acquire all
of the outstanding stock of Inflight Interactive Ltd. in exchange for 500,000
shares of the Company's Common Stock. Inflight Interactive is a U. K. developer
and provider of amusement games to the airline industry. Inflight's games are
currently operating on a number of airlines including Cathay Pacific, Egypt Air,
Lauda Air, Malaysia Airlines, and Virgin Atlantic. The agreement also provides
for the Company to issue up to 250,000 additional shares of Common Stock to the
current owners of Inflight Interactive upon achievement of certain milestones
regarding implementation of the Company's software with an international airline
to be designated by the parties. The Company believes that this acquisition
will be completed by the end of 1997.
Results of Operations
Three Months Ended September 30, 1997 and September 30, 1996
Total expenses for the quarter ended September 30, 1997 were approximately $3.2
million compared to approximately $.6 million during the same period of 1996.
The increase in expenses relates to increased staffing levels, the Merger,
financing activities and increased regulatory requirements as a public company
reporting in the U.S.
General and administrative expense increased by approximately $719,000. This
includes an increase in payroll and related costs of $153,000 due to increased
staffing during 1997. Also included in general and administrative expense is a
$449,000 write-down in the value of real estate and other assets owned by the
Company's wholly-owned subsidiary, Creator Island Equities, Inc.
Legal expenses for the current quarter were $186,000 as compared to $14,000 in
the prior year. The increase is due to Merger, financing and reporting
activities of the Company.
Interest expense, including amortization of finance fees on Company debt,
totaled $411,000 for the 1997 quarter and $76,000 for the 1996 quarter. The 1997
expense is composed of interest on convertible debentures and amortization of
finance fees related to the debentures, while the 1996 expense is related to
interest on the convertible note due to B/E Aerospace.
Depreciation and amortization expenses increased by $1.2 million due to
amortization of the excess of the purchase price over assets acquired when the
Company purchased the minority interest in Old IEL previously owned by Harrah's.
There were no comparable expenses in the 1996 quarter.
Amalgamation expenses for the 1997 quarter were $100,000 for closure of the
Vancouver office.
Seven Months Ended September 30, 1997 and September 30, 1996
Total expenses for the seven months ended September 30, 1997 were approximately
$27.7 million vs. $1.3 million during the same period in 1996.
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General and administrative expenses increased by approximately $1.5 million.
Payroll and related costs increased by $166,000 due to increased staffing
levels. The vesting of the of 200,000 shares of restricted stock issued to
Geller & Co. upon closing of the Merger resulting in an expense of $650,000.
Recruiting and relocation expenses increased to $70,000 in 1997 from $6,000 in
1996 as a result of the Company building a permanent staff and reducing reliance
on contractors. Rent expense increased to $75,000 in 1997 from $15,000 in 1996
as a result of relocating operations from Harrah's corporate headquarters to
dedicated leased space for the Company. Also included in general and
administrative expense is a $449,000 write-down in the value of real estate
and other assets owned by the Company's wholly-owned subsidiary, Creator Island
Equities, Inc.
Consulting expenses for the 1997 period were $2.9 million compared to $390,000
in 1996. The increase is primarily due to the $2.4 million expensed for the
Grymyr consulting agreement.
Legal expenses were $531,000 and $74,000 for the 1997 and 1996 periods
respectively. The increase in legal expenses is due to costs of the Merger,
financing activities and U.S. reporting requirements.
Interest expense, including amortization of finance fees on Company debt,
totaled $634,000 for the 1997 quarter and $176,000 for the 1996 quarter. The
1997 expense is composed of interest on convertible debentures and amortization
of finance fees related to the debentures, while the 1996 expense is related to
interest on the convertible note due to B/E Aerospace.
Depreciation and amortization for the 1997 period includes approximately
$1,430,000 for amortization of the excess purchase price over assets acquired
when the Company purchased the minority interest in Old IEL from Harrah's.
Other than $100,000 incurred in connection with the closing of the Company's
offices in Vancouver, British Columbia, amalgamation expenses for the 1997
period are non-cash expenses which include: $10,098,000 for the expense of the
Common Stock issued to Harrah's upon termination of the Management Agreement;
$3,466,000 upon expensing the value of Common Stock issued to Harrah's relating
to conversion of the Harrah's Loan; $2,561,000 upon expensing the value of the
Common Stock that may be issuable to Harrah's under the Registration and
Preemptive Rights Agreement in the event that BEA converts its Class A
Preference Shares to Common Stock; and an expense of $1,840,000 for the value of
the Common Stock issued to SGII, Anthony Clements and Dr. Rex Fortescue upon
their agreement to surrender the Performance Shares for cancellation upon their
release from escrow.
An extraordinary expense of $1,824,000 was recorded in the period for early
extinguishment of the note due to BEA when it was exchanged for the Class A
Preference Shares. There were no comparable expenses in the 1996 period.
Liquidity and Capital Resources
At September 30, 1997 the Company had a working capital deficit of $674,493.
The Company's primary source of funding has been through sales of its equity and
securities convertible into equity.
Subsequent to the end of the period, the Company completed agreements with two
investors for the private placement of 987,463 shares of Common Stock for an
aggregate purchase price of $3.2 million. $1.7 million was received upon
closing with the remaining $1.5 million to be funded upon and is contingent upon
completion of the first flight with the Company's software available in all
seats of a Singapore Airlines aircraft. For each five shares of Common Stock
purchased and held for a minimum of six months, the investors will receive one
warrant for the purchase of additional shares. Warrants are to be exercisable
at a price of $3.80 per share for 18 months from their issue. The Company is
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attempting to raise an additional amount of approximately $4.3 million on
similar terms and believes that its efforts will be successful.
The Company has not yet generated any operating revenue under its agreements
with Singapore Airlines. Until the Company receives sufficient cash flow from
operations, additional funding will be required to allow the Company to continue
operations during 1998. Absent sufficient cash flow from operations, the short-
term viability of the Company and the Company's ability to continue its
operations is directly dependent upon the completion of significant additional
financing.
New Financial Accounting Standards
- ----------------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". This statement, effective
for fiscal years ending after December 15, 1997, simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15, "Earnings
per Share," and makes them comparable to international EPS standards. Early
adoption of this standard is not permitted, and the Company has not determined
the future financial statement impact of adopting this statement.
Forward-Looking Information
- ---------------------------
Except for historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q are forward-looking statements (within the
meaning of Section 27A of the Securities Act of 1993, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended) that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those set forth in such forward-looking statement. Such risks and
uncertainties include the inability to complete integration and testing of the
Company's software with the Matsushita system and the implementation of the
software by Singapore Airlines.
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PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibits
- ------- ----------------------------------------------
1.1+ Articles of Incorporation and Bylaws of the Company (Yukon
Territory).
1.2++ Articles of Continuance and Bye Laws (Bermuda)
3.1+ Asset Purchase Agreement, as amended, dated November 7, 1991, among
Sky Games International, Inc. ("SGII"), the Company and Sky Games
International, Corp. (formerly Forty-Four Inc.) ("SGIC") and
amendments thereto.
3.2+ Escrow Agreement dated May 27, 1992, as amended, among Montreal
Trust Company of Canada, the Company and certain shareholders.
3.4+ Indemnification Agreement dated February 19, 1993, between SGII and
SGIC.
3.5+ Cooperation Agreement dated May 20, 1993, by and among BE Aerospace,
Inc. ("BEA"), the Company and SGII.
3.6+ Lease dated November 3, 1992, between Leifer Trust and the Company.
3.7+ Lease dated March 17, 1992, between Murray & Company Limited and the
Company.
3.8# Termination Agreement and Mutual Release, dated as of December 30,
1994, among the Company, BEA and SGIC.
3.9++* Services Agreement, Dated as of November 7, 1995, between IEL and
Singapore Airlines Limited.
3.10++* Software License and Software Services Agreement, dated as of
November 7, 1995, between IEL and Singapore Airlines Limited.
3.11+++ Sublease Agreement dated as of June 5, 1997, between IEL and
Harrah's Operating Company, Inc.
3.12+++ Redemption Agreement, dated as of February 25, 1997, between the
Company and Anthony Clements and Rex Fortescue.
3.13+++ Redemption and Cancellation Agreement, dated as of April 30, 1997,
between the Company and Sky Games International, Inc.
3.14+++ Consulting Agreement, dated as of April 30, 1997, between the
Company and James P. Grymyr.
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3.15+++ Shareholder Rights Agreement, dated June 17, 1997, between the
Company and Harrah's Interactive Investment Company.
3.16+++* Software License Agreement, dated June 17, 1997, between the Company
and Harrah's Interactive Investment Company. (20 pages omitted.)
3.17+++ Continuing Services Agreement, dated June 17, 1997, between the
Company and Harrah's Interactive Entertainment Company.
3.18@ Plan and Agreement of Merger and Amalgamation, dated as of May 13,
1997, among the Company, SGI Holding Corporation Limited, IEL and
Harrah's Interactive Investment Company.
3.19@ Registration and Preemptive Rights Agreement, Dated June 17, 1997,
between the Company and Harrah's Interactive Investment Company.
3.20@ Registration Rights Agreement, dated June 17, 1997, between the
Company and B/E Aerospace, Inc.
3.21+++ Termination Agreement and Release, dated as of June 17, 1997, among
the Company, SGI Holding Corporation Limited, IEL, Harrah's
Interactive Investment Company, and Harrah's Interactive
Entertainment Company.
3.22 Subscription Agreement, dated as of October 22, 1997, between the
Company and Henderson International Investments Limited.
3.23 Subscription Agreement, dated as of October 22, 1997, between the
Company and Michael A. Irwin.
27 Financial Data Schedule
+Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form 20-F (File No. 0-22622) as filed with the
Securities and Exchange Commission on October 12, 1993.
++Incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 20-F (File No. 0-22622) as filed with the Securities and
Exchange Commission on October 30, 1995.
+++Incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 20-F (File No. 0-22622) as filed with the Securities and
Exchange Commission on September 12, 1997
#Incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 20-F (File No. 0-22622) as filed with the Securities and
Exchange Commission on September 16, 1996.
@Incorporated by reference to the exhibits to the Company's Form 8-K as filed
with the Securities and Exchange Commission on June 26, 1997.
*Confidential treatment has been requested.
(b) Reports on Form 8-K
8-K filed September 15, 1997 for capital raising events occurring on
September 15, 1997
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Signature
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERACTIVE ENTERTAINMENT LIMITED
November 19, 1997 BY: /s/ David B. Lamm
--------------------------------------
Chief Financial Officer
November 19, 1997 BY: /s/ Michael A. Irwin
--------------------------------------
Director of Finance and Administration
(Chief Accounting Officer)
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Exhibit 3.22
------------
INTERACTIVE ENTERTAINMENT LIMITED
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT ("Subscription Agreement") is made as of
October 22, 1997, between Henderson International Investments Limited, (the
"Subscriber") and Interactive Entertainment Limited, a Bermuda exempted company
(the "Company").
R E C I T A L S:
---------------
A. The Subscriber desires to subscribe for and purchase shares of common
stock, par value $.01 per share ("Common Stock"), of the Company, and a warrant
to purchase shares of Common Stock, and the Company desires to issue and sell
such Common Stock and warrant to the Subscriber, on the terms and subject to the
conditions herein contained.
B. In connection with the issuance of such shares of Common Stock and
warrant to the Subscriber, the parties have agreed that Subscriber's shares of
Common Stock shall be subject to the restrictions provided herein.
A G R E E M E N T S:
-------------------
NOW, THEREFORE, the parties agree as follows:
1. Subscription for Shares. The Subscriber hereby subscribes for and
agrees to purchase from the Company and the Company hereby agrees to sell to the
Subscriber 925,747 shares of Common Stock and, subject to the provisions of this
paragraph, a warrant to purchase 185,150 shares of Common Stock (the "Warrant"),
which Warrant will be in the form attached hereto as Exhibit A, for an aggregate
purchase price of US$3,000,000 (which it is agreed represents the product of (x)
the number of shares of Common Stock subscribed for hereunder and (y) 85% of the
average of the closing prices for shares of Common Stock on the Nasdaq SmallCap
Market during the five trading days immediately preceding the date hereof) (the
"Subscription Price"). The Subscription Price shall be payable by the Subscriber
by wire transfer to the Company's account identified on Exhibit B attached
hereto in accordance with the following: (i) a tranche of one million five
hundred thousand dollars ($1,500,000) ("Tranche A") shall be sold by the Company
and purchased by the Subscriber immediately upon the execution of this
Agreement; and (ii) a second tranche ("Tranche B") may be sold by the Company
and purchased by the Subscriber upon written notice from the Company electing
that Tranche B be closed within forty-eight (48) hours of receipt of such notice
by the Subscriber. In the event that the Subscriber receives such written notice
electing that the Tranche B transaction be consummated, the Subscriber shall be
obligated to purchase such securities within the forty-eight (48) hour period
designated in the written notice. The Company's option with respect to Tranche B
shall not be exercisable until the Company's gaming software has been installed
and is available to paying passengers in the entire cabin of one Singapore
Airlines B747, B777, or A340 aircraft and shall expire if not exercised within
six (6) months of the date hereof. The Company is obligated to exercise its
option with respect to Tranche B within 30 days of completion of the
aforementioned flight. Upon delivery to the Company of the Subscription Price,
the proper officers of the Company shall execute and deliver to the Subscriber
certificates representing said shares of Common Stock. If (and only if) , the
Subscriber still holds all of the Shares of Common Stock purchased hereunder six
months from the respective dates of consummation of Tranche A and Tranche B, the
proper officers of the Company on that date shall execute and deliver to the
Subscriber the Warrant. The subscriber acknowledges that, by signing this
Agreement, he is making
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an irrevocable offer to purchase shares of Common Stock and the Warrant. The
Subscriber understands and agrees that this subscription is subject to
acceptance by the Company, and that the Company reserves the right to accept or
reject this subscription. If this subscription is rejected, the Company will
return the Subscriber's payment for the Subscription Price.
2. Subscriber's Representations and Warranties. In connection with the
subscription for and purchase of shares of Common Stock and the Warrant pursuant
to this Subscription Agreement, the Subscriber represents and warrants to the
Company and agrees and acknowledges, that:
(a) all shares of Common Stock and the Warrant acquired by or for the
Subscriber pursuant to this Subscription 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 Common
Stock or the Warrant, and that, irrespective of any other provisions of
this Subscription Agreement, any Transfer (as herein defined) of such
Common Stock or the Warrant by the Subscriber will be made only in
compliance with all applicable federal, state and foreign securities laws,
including, without limitation, the Securities Act of 1933, as amended (the
"Act");
(b) neither the shares of Common Stock nor the Warrant acquired by or
for the Subscriber will be registered under the Act or under any other
applicable securities laws and must be held by the Subscriber until such
shares of Common Stock are registered under the Act and under applicable
securities laws or an exemption from such registration is available; the
Company will have no obligation to take any actions that may be necessary
to make available any exemption from registration under the Act or under
applicable state securities laws; and the Company shall place "stop
transfer" restrictions on the party responsible for recording Transfers of
shares of Common Stock in violation of the foregoing provisions of this
clause (b);
(c) the Subscriber 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 Common Stock, which are acquired from
the issuer of such securities in a transaction not involving any public
offering); the Subscriber is aware that reliance on Rule 144 to Transfer
securities is subject to other restrictions and limitations, as set forth
in such Rule;
(d) in connection with a Transfer of the Common Stock pursuant to an
exemption from registration under the Act, or if available, under Rule 144
or pursuant to some other exemption, such Subscriber may be required by the
Company to deliver to the Company an opinion from counsel for such
Subscriber, and/or receive an opinion from counsel for the Company, to the
effect that all applicable federal and state securities law requirements
have been met;
(e) The Subscriber is an "accredited investor" as that term is
defined in Rule 501(a) of Regulation D under the Securities Act because:
(i) the Subscriber is a natural person whose individual net
worth or joint net worth with the Subscriber's spouse, as of the
date hereof, exceeds $1,000,000;
(ii) the Subscriber is a natural person who had individual income
in excess of $200,000 (or joint income with the Subscriber's
spouse in excess of $300,000) in each of the past two calendar
years and reasonably expects to reach the same income level in
the current calendar year;
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(iii) the Subscriber is (1) a bank as defined in Section 3(a)(2)
of the Securities Act, or a savings and loan association or other
institution as defined in Section 3(a)(5)(A) of the Securities
Act, whether acting in its individual or fiduciary capacity; (2)
a broker dealer registered pursuant to Section 15 of the Exchange
Act; (3) an insurance company as defined in Section 2(13) of the
Securities Act; (4) an investment company registered under the
Investment Company Act or a business development company defined
in Section 2(a)(48) of the Investment Company Act; (5) a Small
Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or 301(d) of the Small
Business Investment Act of 1958 ("SBIA"); (6) a plan established
and maintained by a state, its political subdivisions, or any
agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, which has total
assets in excess of $5 million; or (7) an employee benefit plan
within the meaning of Title I of ERISA, if the investment
decision is made by a plan fiduciary, as defined in Section 3(21)
of ERISA, which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or if the
employee benefit plan has total assets in excess of $5 million
or, if a self-directed plan, with investment decisions made
solely by persons that are accredited investors;
(iv) the Subscriber is a private business development company
as defined in Section 202(a)(22) of the Investment Advisers Act
of 1940, as amended;
(v) the Subscriber is an organization described in Section
501(c)(3) of the Code, a corporation, a business trust, or a
partnership, in each case not formed for the specific purpose of
acquiring Common Stock, with total assets in excess of $5
million;
(vi) the Subscriber is a trust, with total assets in excess of
$5 million, not formed for the specific purpose of acquiring
shares of Common Stock, whose purchase is directed by a
sophisticated person with such knowledge and experience in
financial and business matters that such person is capable of
evaluating the merits and risks of the prospective investment; or
(vii) the Subscriber is an entity in which all of the equity
owners are "accredited investors" of the types described in one
or more of the foregoing clauses (i) through (vi).
(f) the execution, delivery and performance of this Agreement by the
Subscriber have been duly authorized and this Agreement constitutes the
valid, legal and binding obligation of the Subscriber enforceable against
the Subscriber in accordance with its terms. If the Subscriber is an
entity, the Subscriber's governing instruments permit it to purchase, and
it is duly qualified to purchase, the shares of Common Stock and the
Warrant subscribed for hereunder;
(g) if the Subscriber is an individual, the Subscriber is at least 21
years of age, a citizen or permanent resident of the United States and the
state set forth under Subscriber's signature on the signature page hereto;
is of sufficient legal capacity to execute this Subscription Agreement, to
the extent applicable;
(h) the Subscriber has the power and authority to execute and perform
the terms of this Subscription Agreement and this Subscription Agreement
constitutes a valid and
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binding obligation of the Subscriber, enforceable against the Subscriber in
accordance with its terms, except that (i) such enforcement may be limited
by or subject to any bankruptcy, insolvency, fraudulent transfer or other
laws, now or hereafter in effect relating to or limiting creditors' rights
generally, and (ii) the remedy of specific performance and other forms of
equitable relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought;
(i) neither the execution and delivery of this Subscription Agreement
or the other agreements, documents and instruments contemplated hereby, nor
the consummation by the Subscriber of the transactions contemplated hereby,
(i) will or do violate or conflict with any statute, ordinance, rule,
regulation, order or decree of any court or of any public governmental or
regulatory body, agency or authority applicable to the Subscriber, (ii)
will require any filing with, or permit, consent or approval of, or the
giving of any notice to any public, governmental or regulatory body, agency
or authority by the Subscriber (except for permits, consents or approvals
which have been obtained or filings or notices which have been timely
given), or (iii) will result in a violation or breach of or constitute
(with or without notice or lapse of time or both) a default (or give rise
to any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any contract, note, bond, mortgage,
license, franchise, permit, lease or other agreement to which the
Subscriber is a party or by which the Subscriber may be bound;
(j) in order to adequately evaluate the merits and risks of an
investment in the Company, the Subscriber has had an opportunity to (i) ask
questions and receive answers from the Company and its representatives
concerning the Company and the Subscriber's investment therein, and (ii)
obtain any additional information which the Subscriber has requested with
respect to the Company and the Subscriber's investment therein;
(k) the Subscriber understands that no federal, state or foreign
governmental agency has recommended or endorsed the purchase of shares of
Common Stock or the Warrant or made any determination or finding as to the
fairness of the provisions of this Subscription Agreement;
(l) all information which the Subscriber has heretofore furnished, or
in connection herewith is furnishing, to the Company is correct and
complete as of the date hereof, and, if there should be any material change
in such information prior to the Subscriber's acquisition of the shares of
Common Stock and the Warrant, the Subscriber will promptly furnish such
revised or corrected information to the Company; and
(m) (i) the Subscriber's financial situation is such that the
Subscriber can afford to bear the economic risk of holding the shares of
Common Stock for an indefinite period; (ii) the Subscriber can afford to
suffer the complete loss of the investment in the shares of Common Stock
and the Warrant; (iii) the Subscriber understands and is cognizant of all
the risk factors related to the purchase of the shares of Common Stock and
the Warrant; and (iv) the Subscriber's knowledge and experience in
financial and business matters is such that the Subscriber is capable of
evaluating the risks of an investment in the shares of Common Stock and the
Warrant.
As used herein, "Transfer" means any transfer, sale, assignment, pledge,
encumbrance or other disposition of shares or the Warrant, irrespective of
whether any of the foregoing are effected voluntarily or involuntarily, by
operation of law or otherwise, or whether inter vivos or upon death.
3. Company Representations and Warranties. In connection with the
subscription for and purchase of Shares pursuant to this Subscription Agreement,
the Company represents and warrants to Subscriber that:
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(a) the Company is duly organized, validly existing and in good
standing under the laws of Bermuda; the Company has full power and
authority to enter into and perform its obligations under this Subscription
Agreement; the execution and delivery by the Company of this Subscription
Agreement and the performance by the Company of its obligations hereunder
have been duly authorized and approved by all requisite action; and this
Subscription Agreement has been duly executed and delivered by a duly
authorized officer of the Company;
(b) the execution, delivery and performance of this Subscription
Agreement by the Company do not and shall not conflict with, violate or
cause a breach of any of the terms or provisions of the Memorandum of
Continuance of the Company or the Bye-Laws of the Company, or any
agreement, contract or instrument to which the Company is a party, or any
judgment, order or decree to which the Company is subject;
(c) the Subscription Agreement constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms, except that (i) such enforcement may be limited by or
subject to any bankruptcy, insolvency, fraudulent transfer or other laws,
now or hereafter in effect relating to or limiting creditors' rights
generally, and (ii) the remedy of specific performance and other forms of
equitable relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought;
(d) neither the execution and delivery of the Subscription Agreement
or the other agreements, documents and instruments contemplated hereby, nor
the consummation by the Company of the transactions contemplated hereby (i)
will or do violate or conflict with any statute, ordinance, rule,
regulation, order or decree of any court or of any public governmental or
regulatory body, agency or authority applicable to the Company, (ii) will
require any filing with, or permit, consent or approval of, or the giving
of any notice to any public, governmental or regulatory body, agency or
authority by the Company (except for permits, consents or approvals which
have been obtained or filings or notices which have been timely given), or
(iii) will result in a violation or breach of or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any contract, note, bond, mortgage, license,
franchise, permit, lease or other agreement to which the Company is a party
or by which the Company may be bound;
(e) upon full payment by the Subscriber to the Company for the shares
of Common Stock and the Warrant subscribed by the Subscriber pursuant to
this Subscription Agreement and receipt of payment in full by the Company
for such shares of Common Stock and the Warrant, such shares shall be duly
authorized, validly issued, fully paid and non-assessable, and upon full
payment by the holder of the Warrant of the exercise price stated therein
and receipt in full by the Company of such exercise price, the shares of
Common Stock issuable upon exercise of the Warrant shall be duly
authorized, validly issued, fully paid and non-assessable.
4. The Company will not, during the eighteen (18) month period following
the effective date hereof (the "Limitation Period") offer for sale or sell
any Common Stock (or security convertible into, exercisable or exchangeable
for Common Stock) (the "Future Offering") unless the Company shall have
first delivered to the Subscriber at least ten (10) business days prior to
the closing of such Future Offering, written notice describing the proposed
Future Offering, including the terms and conditions thereof, and providing
the Subscriber with an option during the ten (10) business day period
following delivery of such notice to purchase such amount of the securities
being offered in the Future Offering on the same terms as
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contemplated by such Future Offering as equals the product of (i) the
quotient (A) of the number of shares of Common Stock held by Subscriber and
acquired pursuant to this Agreement over (B) the total number of shares of
Common Stock outstanding and (ii) the total amount of securities being
offered in the Future Offering (the limitations referred to in this
sentence are collectively referred to as the "Capital Raising
Limitations"). The Capital Raising Limitations shall not apply to any
transaction involving the issuances of securities as consideration in a
merger, consolidation, acquisition or sale of assets (in each case, the
primary purpose of which is not to raise equity capital) or pursuant to a
strategic partnership or joint venture which is formed for a bona fide
commercial purpose, or as consideration for the acquisition of a business,
product or license by the Company or in connection with the exercise of
options by employees, directors or consultants. The Capital Raising
Limitations also shall not apply to (i) the issuance of Common Stock in a
transaction pursuant to a public offering (other than an offering conducted
pursuant to Rule 415 under the Securities Act), (ii) the issuance of
securities upon the exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof,
or (iii) the grant of additional options or warrants, or the issuance of
additional securities, under any Company stock option or restricted stock
plan for the benefit of the Company's employees, directors, or consultants.
5. Registration.
(a) Legend. All certificates representing shares of Common Stock
sold hereunder shall bear the following legend:
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or the securities laws of any
jurisdiction and may not be sold or otherwise disposed of except
pursuant to an effective registration statement under such Act and
applicable securities laws or there is presented to the Company an
opinion of counsel satisfactory to the Company to the effect that such
registration is not necessary."
(b) If at any time the Company proposes to register under the
Securities Act shares of Common Stock held by Credit Suisse First Boston
("CSFB") pursuant to that certain Securities Purchase Agreement between the
Company and CSFB (the "CSFB Shares"), in connection with the public
offering of such CSFB Shares for cash (a "Proposed Registration"), the
Company shall, at such time, promptly give Subscriber written notice of
such Proposed Registration. Subscriber shall have ten (10) days from its
receipt of such notice to deliver to the Company a written request
specifying the amount of Registrable Securities that Subscriber intends to
sell and such Subscriber's intended method of distribution. Upon receipt of
such request, the Company shall use its best efforts to cause all
Registrable Securities which the company has been requested to register
under the Securities Act to the extent necessary to permit their sale or
other disposition in accordance with the intended methods of distribution
specified in the request of Subscriber; provided, however, that the Company
shall have the right to postpone or withdraw any registration effected
pursuant to this Section 5 without obligation to Subscriber. If, in
connection with any underwritten public offering for the account of the
Company, the managing underwriter(s) thereof shall impose a limitation on
the number of shares of Common Stock which may be included in the
registration statement ("Registration Statement") because, in such
underwriter(s)' judgment, marketing or other factors dictate such
limitation is necessary to facilitate public distributions, then the
Company shall be obligated to include in such Registration Statement only
such limited portion of the Registrable Securities with respect to which
Subscriber has requested inclusion hereunder as such underwriter(s) shall
permit. If an offering in connection with Subscriber is entitled to
registration under this Section 5 is an underwritten offering, then as a
condition of
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<PAGE>
participating in the registration Subscriber shall, unless otherwise agreed
by the Company, offer and sell such Registrable Securities in an
underwritten offering using the same underwriter or underwriters, subject
to the provisions of this Agreement, on the same terms and conditions as
other shares of Common Stock included in the same underwritten offering and
shall join in the same underwriting agreement as the other participants in
the offering. "Registrable Securities" shall mean Common Stock acquired by
Subscriber pursuant to this Agreement.
6. Notice. All notices and other communications which are required or
permitted to be given under this Subscription Agreement shall be in writing and
shall be delivered personally or by certified mail (return receipt requested),
or telecopied and addressed: (a) if to the Company, to:
Interactive Entertainment Limited
845 Crossover Lane
Suite D-215
Memphis, TN 38117
Attn: David B. Lamm
Fax: (901) 537-3801
with a copy to:
Altheimer & Gray
10 South Wacker Drive
Chicago, IL 60606
Attn: Andrew W. McCune, Esq.
Fax: (312) 715-4800
and (b) if to Subscriber to the address set forth below the signature of the
Subscriber on this Subscription Agreement. Each notice or other communication
which shall be delivered, personally mailed or telecopied in the manner
described above shall be deemed sufficiently given, sent, received or delivered
for all purposes as of such time as it is delivered to the addressee (with
return receipt, delivery receipt, the affidavit of messenger or (with return
receipt to a telecopy) the confirmation report being deemed conclusive, but not
exclusive evidence of such delivery) or at such time as delivery is refused by
the addressee upon presentation.
7. Confidentiality. Subscriber agrees and acknowledges that the Company
has provided to Subscriber certain information regarding the Company, and that
such information may be deemed to constitute material non-public information
under the Act. Subscriber agrees that for the longest period permitted by law,
Subscriber shall hold in strictest confidence, and not, without the prior
written approval of the Company, use for its own benefit or for the benefit of
any party other than the Company or disclose to any person, firm or corporation
other than the Company, any of such information (other than as required by law
and other than information which has been publicly disseminated by the Company).
8. Severability. The invalidity of any provision of this Subscription
Agreement or portion of a provision shall not affect the validity of any other
provision of this Subscription Agreement or the remaining portion of the
applicable provision.
9. Counterparts. This Subscription Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all of such
counterparts shall constitute but one instrument.
10. Amendment and Waiver. Neither this Subscription Agreement nor any
provisions hereof shall be modified, discharged or terminated except in writing
signed by the party against whom
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any waiver, change, discharge or termination is sought. All representations and
warranties contained in this Subscription Agreement or made in writing by any
party in connection herewith shall survive the execution and delivery of this
Agreement for a period of one year from the date of the closing of the purchase
made pursuant to this Agreement.
11. Successors and Assigns. This Subscription Agreement shall be binding
on the parties hereto and their respective heirs, representatives, successors
and assigns, including, without limitation. The rights and obligations of the
Subscriber hereunder may not be assigned or transferred by the Subscriber and
any attempted assignment of transfer shall be void. If the Subscriber is more
than one person, the obligations of the Subscriber shall be joint and several,
and the agreements, representations, warranties and acknowledgments herein
contained shall be deemed to be made by and be binding upon each such person and
their respective heirs, executors, administrators, and successors.
12. Governing Law. This Subscription Agreement and the risks of the
parties hereunder shall be construed and interpreted in accordance with the laws
of Bermuda, without application of the rules regarding conflicts of laws.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Subscription Agreement
as of the date first above written.
SUBSCRIBER:
HENDERSON INTERNATIONAL INVESTMENTS LTD
---------------------------------------
By: /s/ AR Corporate Services Limited by Michael Galiver
----------------------------------------------------
Address: c/o Duncan Lawrie IOM
14-15 Mount Havelock
Douglas
Isle of Man IM1 2QG
United Kingdom
Telephone:
---------------------------------------------
Telecopy:
---------------------------------------------
Accepted:
INTERACTIVE ENTERTAINMENT LIMITED
By: /s/ Gordon Stevenson
---------------------
Its: President and CEO
------------------
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EXHIBIT A
FORM OF WARRANT
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. __________ Shares ___________
THIS WARRANT AND THE SHARES OF COMMON STOCK UNDERLYING THIS WARRANT
(COLLECTIVELY, THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE OR FOREIGN SECURITIES
LAWS AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT AND ALL SUCH APPLICABLE
LAWS, OR IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER OF THE SECURITIES, SUCH OFFER, SALE, OR TRANSFER, PLEDGE OR HYPOTHECATION
IS IN COMPLIANCE THEREWITH.
FOR VALUE RECEIVED, Interactive Entertainment Limited (the "Company"), a
Bermuda exempted company, hereby certifies that ___________, or its permitted
assigns, are entitled to purchase from the Company, at any time or from time to
time commencing immediately, and prior to 5:00 p.m., New York City time then
current, on {date 18 months from issue date}, __________ fully paid and non-
assessable shares of the common stock, $.01 par value, of the Company at the
purchase price of $________ per share (which it is agreed represents the average
of the closing prices for shares of Common Stock on the Nasdaq SmallCap Market
during the five trading days immediately preceding {effective date of the
Subscription Agreement}). Hereinafter, (i) said common stock, together with any
other equity securities which may be issued by the Company with respect thereto
or in substitution therefor, is referred to as the "Common Stock", (ii) the
shares of the Common Stock purchasable hereunder are referred to as the "Warrant
Shares", (iii) the aggregate purchase price payable hereunder for the Warrant
Shares is referred to as the "Aggregate Warrant Price", (iv) the price payable
hereunder for each of the shares of the Warrant Shares is referred to as the
"Per Share Warrant Price", and (v) this warrant and all warrants hereafter
issued in exchange or substitution for this warrant are referred to as the
"Warrants".
1. Exercise of Warrant.
-------------------
(a) This Warrant may be exercised, in whole at any time or in part from
time to time, commencing {issue date of warrant} (the "Commencement Date"),
and prior to 5:00 p.m., New York City time then current, on {date 18 months
from Commencement Date} (the "Expiration Date"), by the holder of this
Warrant (the "Holder") by the surrender of this Warrant (with the
subscription form at the end hereof duly executed) at the address set forth
in Subsection 8(a) hereof, together with proper payment of the Aggregate
Warrant Price, or the proportionate part thereof if this Warrant is
exercised in part. Payment for the Warrant Shares shall be made by
certified or official bank check, payable to the order of the Company or by
wire transfer to a bank account designated by an officer of the Company. If
this Warrant is exercised in part, this Warrant must be exercised for a
number of whole shares of Common Stock, and the Holder is entitled to
receive a new Warrant covering the number of Warrant Shares in respect of
which this Warrant has not been exercised. Upon such exercise and surrender
of this Warrant, the Company will (i) issue a certificate or certificates
in the name of the Holder for the number of whole shares of the Common
Stock to which the Holder shall be entitled, and (ii) deliver the other
securities and properties receivable upon the exercise of this Warrant, or
the proportionate part thereof if this Warrant is exercised in part
pursuant to the provisions of this Warrant.
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<PAGE>
(b) Notwithstanding anything to the contrary contained in this Warrant,
this Warrant may be exercised by presentation and surrender of this Warrant
to the Company at its principal executive offices with a written notice of
the Holder's intention to effect a cashless exercise, including a
calculation of the number of shares of Common Stock to be issued upon such
exercise in accordance with the terms hereof (a "Cashless Exercise"). In
the event of a Cashless Exercise, in lieu of paying the exercise price in
cash, the Holder shall surrender this Warrant for the number of shares of
Common Stock determined by multiplying the number of Warrant Shares to
which it would otherwise be entitled by a fraction, the numerator of which
shall be the difference between the then current market price per share of
the Common Stock (as determined by the closing price of Common Stock on the
Nasdaq SmallCap Market on the trading day immediately preceding the date of
the Cashless Exercise) and the exercise price, and the denominator of which
shall be such then current market price per share of Common Stock.
2. Reservation of Warrant Shares. The Company agrees that, prior to the
expiration of this Warrant, the Company will at all times have authorized and in
reserve, and will keep available, solely for issuance or delivery upon the
exercise of this Warrant, such number of shares of Common Stock and such amount
of other securities and properties as from time to time shall be deliverable to
the Holder upon the exercise of this Warrant, free and clear of all restrictions
on sale or transfer (except such as may be imposed under applicable federal and
state securities laws) and free and clear of all preemptive rights and all other
rights to purchase securities of the Company.
3. Protection Against Dilution.
(a) If, at any time or from time to time after the date of this Warrant,
the Company shall distribute with respect to the Common Stock to the
holders of its outstanding Common Stock (i) securities, other than shares
of Common Stock or (ii) property, other than cash dividends, without
payment therefor, then, and in each such case, the Holder, upon the
exercise of this Warrant, shall be entitled to receive the securities and
property which the Holder would have held on the date of such exercise if,
on the date of this Warrant, the Holder had been the holder of record of
the number of shares of Common Stock subscribed for upon such exercise and,
during the period from the date of this Warrant to and including the date
of such exercise, had retained such shares and the securities and
properties receivable by the Holder during such period. Notice of each
such distribution shall be forthwith mailed to the Holder.
(b) If, at any time or from time to time after the date of this Warrant,
the Company shall (i) pay a dividend or make a distribution on its capital
stock in shares of Common Stock, (ii) subdivide its outstanding shares of
Common Stock into a greater number of shares, (iii) combine its outstanding
shares of Common Stock into a smaller number of shares or (iv) issue by
reclassification of its Common Stock any shares of capital stock of the
Company, the Per Share Warrant Price in effect immediately prior to such
action shall be adjusted so that the Holder of any Warrant thereafter
exercised shall be entitled to receive the number of shares of Common Stock
or other capital stock of the Company which he would have owned or been
entitled to receive immediately following the happening of any of the
events described above had such Warrant been exercised immediately prior
thereto. An adjustment made pursuant to this paragraph (b) shall become
effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or reclassification. If, as
a result of an adjustment made pursuant to this paragraph (b), the holder
of any Warrant thereafter surrendered for exercise shall become entitled to
receive shares of two or more classes of capital stock or shares of Common
Stock and of other capital stock of the Company, the Board of Directors
(whose determination shall be conclusive and shall be described in a
written notice to the Holder of any Warrant promptly after such adjustment)
shall determine
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<PAGE>
the allocation of the adjusted Per Share Warrant Price between or among
shares of such classes or capital stock or shares of Common Stock and other
capital stock.
(c) In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another entity of all
or substantially all of the property of the Company, or in the case of any
statutory exchange of securities with another entity (including any
exchange effectuated in connection with a merger of any other corporation
with the Company), the Holder of this Warrant shall have the right
thereafter to convert this Warrant into the kind and amount of securities,
cash or other property which he would have owned or have been entitled to
receive immediately after such consolidation, merger, statutory exchange,
sale or conveyance had this Warrant been exercised immediately prior to the
effective date of such consolidation, merger, statutory exchange, sale or
conveyance and in any such case, if necessary, appropriate adjustment shall
be made in the application of the provisions set forth in this Section 3
with respect to the rights and interests thereafter of the Holder of this
Warrant such that the provisions set forth in this Section 3 shall
thereafter correspondingly be made applicable, as nearly as reasonable, in
relation to any shares of stock or other securities or property thereafter
deliverable on the exercise of this Warrant. In the event of a triangular
merger in which the Company is the surviving corporation, the right to
purchase Warrant Shares hereunder shall terminate on the date of such
merger and thereupon this Warrant shall become null and void, but only if
the controlling corporation shall agree to substitute for this Warrant a
warrant which entitles the holder thereof to purchase upon its exercise the
kind and amount of shares and other securities and property which the
holder would have owned or been entitled to receive had this Warrant been
exercised immediately prior to such merger. The above provisions of this
paragraph 3(c) shall similarly apply to successive consolidations, mergers,
statutory exchanges, sales or conveyances. Notice of any such
consolidation, merger, statutory exchange, sale or conveyance, and of said
provisions so proposed to be made, shall be mailed to the Holder at the
same time as notice is given to the holders of Common Stock. A sale of all
or substantially all of the assets of the Company for a consideration
consisting primarily of securities shall be deemed a consolidation or
merger for the foregoing purposes.
(d) Anything in this Section 3 to the contrary notwithstanding, the
Company shall be entitled to make such reduction in the Per Share Warrant
Price as it in its discretion shall deem to be advisable in order that any
stock dividend, subdivision of shares or distribution of rights to purchase
stock or securities convertible or exchangeable for stock hereafter made by
the Company to its shareholders shall not be taxable.
4. Fully Paid Stock; Taxes. The Company agrees that the shares of Common
Stock represented by each and every certificate for Warrant Shares delivered on
the exercise of this Warrant in accordance with the terms hereof shall, at the
time of such delivery, be validly issued and outstanding, fully paid and non-
assessable and not subject to preemptive rights or other contractual rights to
purchase securities of the Company, and the Company will take all such actions
as may be necessary to assure that the par value or stated value, if any, per
share of Common Stock is at all times equal to or less than the then Per Share
Warrant Price.
5. Limited Transferability.
(a) This Warrant is not transferable or assignable by the Holder except
pursuant to the laws of descent and distribution and is so transferable
only upon the books of the Company which it shall cause to be maintained
for the purpose. The Company may treat the registered holder of this
Warrant as he or it appears on the Company's books at any time as the
Holder for all purposes. The Company shall permit any holder of a Warrant
or his duly authorized attorney, upon written request during ordinary
business hours, to inspect and copy or make
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extracts from its books showing the registered holders of Warrants. All
Warrants will be dated the same date as this Warrant.
(b) By acceptance hereof, the Holder represents and warrants that this
Warrant is being acquired, and all Warrant Shares to be purchased upon the
exercise of this Warrant will be acquired, by the Holder solely for the
account of such Holder and not with a view to the fractionalization and
distribution thereof and will not be sold or transferred except in
accordance with the applicable provisions of the Act and the rules and
regulations of the Securities and Exchange Commission promulgated
thereunder, and the Holder agrees that neither this Warrant nor any of the
Warrant Shares may be sold or transferred except under cover of a
Registration Statement under the Act which is effective and current with
respect to such Warrant Shares or pursuant to an opinion, in form and
substance reasonably acceptable to the Company's counsel, that registration
under the Act is not required in connection with such sale or transfer.
Any Warrant Shares issued upon exercise of this Warrant shall bear the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE OR FOREIGN SECURITIES LAWS AND MANY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT AND ALL SUCH APPLICABLE LAWS OR, IN THE
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF
THE SHARES REPRESENTED BY THIS CERTIFICATE, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH."
6. Loss, etc., of Warrant. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and
of indemnify reasonably satisfactory to the Company, if lost, stolen or
destroyed, and upon surrender and cancellation of this Warrant, if
mutilated, and upon reimbursement of the Company's reasonably incidental
expenses, the Company shall execute and deliver to the Holder a new Warrant
of like date, tenor and denomination.
7. Warrant Holder Not Shareholders. Except as otherwise provided herein, this
Warrant does not confer upon the Holder any right to vote or to consent to
or receive notice as a shareholder of the Company, as such, in respect of
any matters whatsoever, or any other rights or liabilities as a
shareholder, prior to the exercise hereof.
8. Communication. No notice or other communication under this warrant shall
be effective unless, but any notice or other communication shall be
effective and shall be deemed to have been given if, the same is in writing
and is personally delivered, mailed by first-class mail, postage prepaid,
or sent by confirmed telecopy, addressed to:
(a) the Company at: Interactive Entertainment Limited
845 Crossover Lane
Suite D-215
Memphis, TN 38117
Attn: David B. Lamm
Fax: (901) 537-3801
with a copy to: Altheimer & Gray
10 South Wacker Drive
Suite 4000
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Chicago, IL 60606
Attn: Andrew W. McCune, Esq.
Fax: (312) 715-4800
or such other address as the Company may designate in writing to the
Holder; or
(b) the Holder at:
--------------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
or such other address as the Holder may designate in writing to the
Company.
9. Headings. The headings of this Warrant have been inserted as a mater of
convenience and shall not affect the construction hereof.
10. Applicable Law. This Warrant shall be governed by and construed in
accordance with the laws of Bermuda without giving effect to the principles
of conflicts of law thereof.
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<PAGE>
IN WITNESS WHEREOF, Interactive Entertainment Limited has caused this Warrant to
be signed by its Chief Financial Officer and its corporate seal to be hereunto
affixed and attested by its Assistant Secretary this ____th day of __________,
1998.
INTERACTIVE ENTERTAINMENT LIMITED
By:
-------------------------------
Its: Chief Financial Officer
ATTEST:
By:
-------------------------------
Its: Assistant Secretary
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<PAGE>
EXERCISE
- --------
The undersigned,_________________, pursuant to the provisions of the
foregoing Warrant, hereby agrees to subscribe for and purchase ________ shares
of Common Stock of Interactive Entertainment Limited covered by said Warrant,
and makes payment therefor in full at the price per share provided by said
Warrant.
Dated:__________________ _____________________________________
Signature:_______________________________
Address:_________________________________
_________________________________________
_________________________________________
_________________________________________
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<PAGE>
EXHIBIT B
WIRE TRANSFER INSTRUCTIONS
Beneficiary Bank: First Tennessee Bank
165 Madison Avenue
Memphis, TN 38103
ABA Number: 084000026
Account Name: Interactive Entertainment Limited
Account Number: 100121556
Reference: (Sender's Name)
Page 38
<PAGE>
Exhibit 3.23
------------
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT ("Subscription Agreement") is made as of
October 22, 1997, between Michael A. Irwin (the "Subscriber") and Interactive
Entertainment Limited, a Bermuda exempted company (the "Company").
R E C I T A L S:
---------------
A. The Subscriber desires to subscribe for and purchase shares of common
stock, par value $.01 per share ("Common Stock"), of the Company, and a warrant
to purchase shares of Common Stock, and the Company desires to issue and sell
such Common Stock and warrant to the Subscriber, on the terms and subject to the
conditions herein contained.
B. In connection with the issuance of such shares of Common Stock and
warrant to the Subscriber, the parties have agreed that Subscriber's shares of
Common Stock shall be subject to the restrictions provided herein.
A G R E E M E N T S:
-------------------
NOW, THEREFORE, the parties agree as follows:
1. Subscription for Shares. The Subscriber hereby subscribes for and
agrees to purchase from the Company and the Company hereby agrees to sell to the
Subscriber 61,716 shares of Common Stock and, subject to the provisions of this
paragraph, a warrant to purchase 12,343 shares of Common Stock (the "Warrant"),
which Warrant will be in the form attached hereto as Exhibit A, for an aggregate
purchase price of US$200,000 (which it is agreed represents the product of (x)
the number of shares of Common Stock subscribed for hereunder and (y) 85% of the
average of the closing prices for shares of Common Stock on the Nasdaq SmallCap
Market during the five trading days immediately preceding the date hereof) (the
"Subscription Price"). The Subscription Price shall be payable by the
Subscriber by wire transfer to the Company's account identified on Exhibit B
attached hereto. Upon delivery to the Company of the Subscription Price, the
proper officers of the Company shall execute and deliver to the Subscriber
certificates representing said shares of Common Stock. If (and only if) on
April 22, 1998, the Subscriber still holds all of the Shares of Common Stock
purchased hereunder, the proper officers of the Company on that date shall
execute and deliver to the Subscriber the Warrant. The subscriber acknowledges
that, by signing this Agreement, he is making an irrevocable offer to purchase
shares of Common Stock and the Warrant. The Subscriber understands and agrees
that this subscription is subject to acceptance by the Company, and that the
Company reserves the right to accept or reject this subscription. If this
subscription is rejected, the Company will return the Subscriber's payment for
the Subscription Price.
2. Subscriber's Representations and Warranties. In connection with the
subscription for and purchase of shares of Common Stock and the Warrant pursuant
to this Subscription Agreement, the Subscriber represents and warrants to the
Company and agrees and acknowledges, that:
(a) all shares of Common Stock and the Warrant acquired by or for the
Subscriber pursuant to this Subscription 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 Common
Stock or the Warrant, and that, irrespective of any other provisions of
this Subscription Agreement, any Transfer (as herein defined) of such
Common Stock or the Warrant by the Subscriber will be made only in
compliance with all
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<PAGE>
applicable federal, state and foreign securities laws, including, without
limitation, the Securities Act of 1933, as amended (the "Act");
(b) neither the shares of Common Stock nor the Warrant acquired by or
for the Subscriber will be registered under the Act or under any other
applicable securities laws and must be held by the Subscriber until such
shares of Common Stock are registered under the Act and under applicable
securities laws or an exemption from such registration is available; the
Company will have no obligation to take any actions that may be necessary
to make available any exemption from registration under the Act or under
applicable state securities laws; and the Company shall place "stop
transfer" restrictions on the party responsible for recording Transfers of
shares of Common Stock in violation of the foregoing provisions of this
clause (b);
(c) the Subscriber 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 Common Stock, which are acquired from
the issuer of such securities in a transaction not involving any public
offering); the Subscriber is aware that reliance on Rule 144 to Transfer
securities is subject to other restrictions and limitations, as set forth
in such Rule;
(d) in connection with a Transfer of the Common Stock pursuant to an
exemption from registration under the Act, or if available, under Rule 144
or pursuant to some other exemption, such Subscriber may be required by the
Company to deliver to the Company an opinion from counsel for such
Subscriber, and/or receive an opinion from counsel for the Company, to the
effect that all applicable federal and state securities law requirements
have been met;
(e) The Subscriber is an "accredited investor" as that term is
defined in Rule 501(a) of Regulation D under the Securities Act because:
(i) the Subscriber is a natural person whose individual net
worth or joint net worth with the Subscriber's spouse, as of the
date hereof, exceeds $1,000,000;
(ii) the Subscriber is a natural person who had individual
income in excess of $200,000 (or joint income with the
Subscriber's spouse in excess of $300,000) in each of the past
two calendar years and reasonably expects to reach the same
income level in the current calendar year;
(iii) the Subscriber is (1) a bank as defined in Section 3(a)(2)
of the Securities Act, or a savings and loan association or other
institution as defined in Section 3(a)(5)(A) of the Securities
Act, whether acting in its individual or fiduciary capacity; (2)
a broker dealer registered pursuant to Section 15 of the Exchange
Act; (3) an insurance company as defined in Section 2(13) of the
Securities Act; (4) an investment company registered under the
Investment Company Act or a business development company defined
in Section 2(a)(48) of the Investment Company Act; (5) a Small
Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or 301(d) of the Small
Business Investment Act of 1958 ("SBIA"); (6) a plan established
and maintained by a state, its political subdivisions, or any
agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, which has total
assets in excess of $5 million; or (7) an employee benefit plan
within the meaning of Title I of ERISA, if the investment
decision is made by a plan
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<PAGE>
fiduciary, as defined in Section 3(21) of ERISA, which is either
a bank, savings and loan association, insurance company, or
registered investment advisor, or if the employee benefit plan
has total assets in excess of $5 million or, if a self-directed
plan, with investment decisions made solely by persons that are
accredited investors;
(iv) the Subscriber is a private business development company
as defined in Section 202(a)(22) of the Investment Advisers Act
of 1940, as amended;
(v) the Subscriber is an organization described in Section
501(c)(3) of the Code, a corporation, a business trust, or a
partnership, in each case not formed for the specific purpose of
acquiring Common Stock, with total assets in excess of $5
million;
(vi) the Subscriber is a trust, with total assets in excess of
$5 million, not formed for the specific purpose of acquiring
shares of Common Stock, whose purchase is directed by a
sophisticated person with such knowledge and experience in
financial and business matters that such person is capable of
evaluating the merits and risks of the prospective investment; or
(vii) the Subscriber is an entity in which all of the equity
owners are "accredited investors" of the types described in one
or more of the foregoing clauses (i) through (vi).
(f) the execution, delivery and performance of this Agreement by the
Subscriber have been duly authorized and this Agreement constitutes the
valid, legal and binding obligation of the Subscriber enforceable against
the Subscriber in accordance with its terms. If the Subscriber is an
entity, the Subscriber's governing instruments permit it to purchase, and
it is duly qualified to purchase, the shares of Common Stock and the
Warrant subscribed for hereunder;
(g) if the Subscriber is an individual, the Subscriber is at least 21
years of age, a citizen or permanent resident of the United States and the
state set forth under Subscriber's signature on the signature page hereto;
is of sufficient legal capacity to execute this Subscription Agreement, to
the extent applicable;
(h) the Subscriber has the power and authority to execute and perform
the terms of this Subscription Agreement and this Subscription Agreement
constitutes a valid and binding obligation of the Subscriber, enforceable
against the Subscriber in accordance with its terms, except that (i) such
enforcement may be limited by or subject to any bankruptcy, insolvency,
fraudulent transfer or other laws, now or hereafter in effect relating to
or limiting creditors' rights generally, and (ii) the remedy of specific
performance and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought;
(i) neither the execution and delivery of this Subscription Agreement
or the other agreements, documents and instruments contemplated hereby, nor
the consummation by the Subscriber of the transactions contemplated hereby,
(i) will or do violate or conflict with any statute, ordinance, rule,
regulation, order or decree of any court or of any public governmental or
regulatory body, agency or authority applicable to the Subscriber, (ii)
will require any filing with, or permit, consent or approval of, or the
giving of any notice to any public, governmental or regulatory body, agency
or authority by the Subscriber (except for permits, consents or approvals
which have been obtained or filings or notices which have been timely
given), or (iii)
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<PAGE>
will result in a violation or breach of or constitute (with or without
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any contract, note, bond, mortgage, license,
franchise, permit, lease or other agreement to which the Subscriber is a
party or by which the Subscriber may be bound;
(j) in order to adequately evaluate the merits and risks of an
investment in the Company, the Subscriber has had an opportunity to (i) ask
questions and receive answers from the Company and its representatives
concerning the Company and the Subscriber's investment therein, and (ii)
obtain any additional information which the Subscriber has requested with
respect to the Company and the Subscriber's investment therein;
(k) the Subscriber understands that no federal, state or foreign
governmental agency has recommended or endorsed the purchase of shares of
Common Stock or the Warrant or made any determination or finding as to the
fairness of the provisions of this Subscription Agreement;
(l) all information which the Subscriber has heretofore furnished, or
in connection herewith is furnishing, to the Company is correct and
complete as of the date hereof, and, if there should be any material change
in such information prior to the Subscriber's acquisition of the shares of
Common Stock and the Warrant, the Subscriber will promptly furnish such
revised or corrected information to the Company; and
(m) (i) the Subscriber's financial situation is such that the
Subscriber can afford to bear the economic risk of holding the shares of
Common Stock for an indefinite period; (ii) the Subscriber can afford to
suffer the complete loss of the investment in the shares of Common Stock
and the Warrant; (iii) the Subscriber understands and is cognizant of all
the risk factors related to the purchase of the shares of Common Stock and
the Warrant; and (iv) the Subscriber's knowledge and experience in
financial and business matters is such that the Subscriber is capable of
evaluating the risks of an investment in the shares of Common Stock and the
Warrant.
As used herein, "Transfer" means any transfer, sale, assignment, pledge,
encumbrance or other disposition of shares or the Warrant, irrespective of
whether any of the foregoing are effected voluntarily or involuntarily, by
operation of law or otherwise, or whether inter vivos or upon death.
3. Company Representations and Warranties. In connection with the
subscription for and purchase of Shares pursuant to this Subscription Agreement,
the Company represents and warrants to Subscriber that:
(a) the Company is duly organized, validly existing and in good
standing under the laws of Bermuda; the Company has full power and
authority to enter into and perform its obligations under this Subscription
Agreement; the execution and delivery by the Company of this Subscription
Agreement and the performance by the Company of its obligations hereunder
have been duly authorized and approved by all requisite action; and this
Subscription Agreement has been duly executed and delivered by a duly
authorized officer of the Company;
(b) the execution, delivery and performance of this Subscription
Agreement by the Company do not and shall not conflict with, violate or
cause a breach of any of the terms or provisions of the Memorandum of
Continuance of the Company or the Bye-Laws of the Company, or any
agreement, contract or instrument to which the Company is a party, or any
judgment, order or decree to which the Company is subject;
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<PAGE>
(c) the Subscription Agreement constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms, except that (i) such enforcement may be limited by or
subject to any bankruptcy, insolvency, fraudulent transfer or other laws,
now or hereafter in effect relating to or limiting creditors' rights
generally, and (ii) the remedy of specific performance and other forms of
equitable relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought;
(d) neither the execution and delivery of the Subscription Agreement
or the other agreements, documents and instruments contemplated hereby, nor
the consummation by the Company of the transactions contemplated hereby (i)
will or do violate or conflict with any statute, ordinance, rule,
regulation, order or decree of any court or of any public governmental or
regulatory body, agency or authority applicable to the Company, (ii) will
require any filing with, or permit, consent or approval of, or the giving
of any notice to any public, governmental or regulatory body, agency or
authority by the Company (except for permits, consents or approvals which
have been obtained or filings or notices which have been timely given), or
(iii) will result in a violation or breach of or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any contract, note, bond, mortgage, license,
franchise, permit, lease or other agreement to which the Company is a party
or by which the Company may be bound;
(e) upon full payment by the Subscriber to the Company for the shares
of Common Stock and the Warrant subscribed by the Subscriber pursuant to
this Subscription Agreement and receipt of payment in full by the Company
for such shares of Common Stock and the Warrant, such shares shall be duly
authorized, validly issued, fully paid and non-assessable, and upon full
payment by the holder of the Warrant of the exercise price stated therein
and receipt in full by the Company of such exercise price, the shares of
Common Stock issuable upon exercise of the Warrant shall be duly
authorized, validly issued, fully paid and non-assessable.
4. Legend. All certificates representing shares of Common Stock sold
hereunder shall bear the following legend:
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or the securities laws of any
jurisdiction and may not be sold or otherwise disposed of except
pursuant to an effective registration statement under such Act and
applicable securities laws or there is presented to the Company an
opinion of counsel satisfactory to the Company to the effect that such
registration is not necessary."
5. Notice. All notices and other communications which are required or
permitted to be given under this Subscription Agreement shall be in writing and
shall be delivered personally or by certified mail (return receipt requested),
or telecopied and addressed: (a) if to the Company, to:
Interactive Entertainment Limited
845 Crossover Lane
Suite D-215
Memphis, TN 38117
Attn: David B. Lamm
Fax: (901) 537-3801
with a copy to:
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<PAGE>
Altheimer & Gray
10 South Wacker Drive
Chicago, IL 60606
Attn: Andrew W. McCune, Esq.
Fax: (312) 715-4800
and (b) if to Subscriber to the address set forth below the signature of the
Subscriber on this Subscription Agreement. Each notice or other communication
which shall be delivered, personally mailed or telecopied in the manner
described above shall be deemed sufficiently given, sent, received or delivered
for all purposes as of such time as it is delivered to the addressee (with
return receipt, delivery receipt, the affidavit of messenger or (with return
receipt to a telecopy) the confirmation report being deemed conclusive, but not
exclusive evidence of such delivery) or at such time as delivery is refused by
the addressee upon presentation.
6. Confidentiality. Subscriber agrees and acknowledges that the Company
has provided to Subscriber certain information regarding the Company, and that
such information may be deemed to constitute material non-public information
under the Act. Subscriber agrees that for the longest period permitted by law,
Subscriber shall hold in strictest confidence, and not, without the prior
written approval of the Company, use for its own benefit or for the benefit of
any party other than the Company or disclose to any person, firm or corporation
other than the Company, any of such information (other than as required by law
and other than information which has been publicly disseminated by the Company).
7. Severability. The invalidity of any provision of this Subscription
Agreement or portion of a provision shall not affect the validity of any other
provision of this Subscription Agreement or the remaining portion of the
applicable provision.
8. Counterparts. This Subscription Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all of such
counterparts shall constitute but one instrument.
9. Amendment and Waiver. Neither this Subscription Agreement nor any
provisions hereof shall be modified, discharged or terminated except in writing
signed by the party against whom any waiver, change, discharge or termination is
sought. All representations and warranties contained in this Subscription
Agreement or made in writing by any party in connection herewith shall survive
the execution and delivery of this Agreement for a period of one year from the
date of the closing of the purchase made pursuant to this Agreement.
10. Successors and Assigns. This Subscription Agreement shall be binding
on the parties hereto and their respective heirs, representatives, successors
and assigns, including, without limitation. The rights and obligations of the
Subscriber hereunder may not be assigned or transferred by the Subscriber and
any attempted assignment of transfer shall be void. If the Subscriber is more
than one person, the obligations of the Subscriber shall be joint and several,
and the agreements, representations, warranties and acknowledgments herein
contained shall be deemed to be made by and be binding upon each such person and
their respective heirs, executors, administrators, and successors.
11. Governing Law. This Subscription Agreement and the risks of the
parties hereunder shall be construed and interpreted in accordance with the laws
of Bermuda, without application of the rules regarding conflicts of laws.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Subscription Agreement
as of the date first above written.
SUBSCRIBER:
/s/ Michael A. Irwin
---------------------
Print Name: Michael A. Irwin
Address: Smith Barney, Inc. Rollover Custodian
1614 Arcadia Street
Memphis, Tn 38119
Telephone: 901 685-9667
Telecopy: 901 537-3801
Accepted:
INTERACTIVE ENTERTAINMENT LIMITED
By: /s/ Gordon Stevenson
---------------------
Its: President and CEO
---------------------
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<PAGE>
EXHIBIT A
FORM OF WARRANT
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. __________ Shares ___________
THIS WARRANT AND THE SHARES OF COMMON STOCK UNDERLYING THIS WARRANT
(COLLECTIVELY, THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE OR FOREIGN SECURITIES
LAWS AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT AND ALL SUCH APPLICABLE
LAWS, OR IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER OF THE SECURITIES, SUCH OFFER, SALE, OR TRANSFER, PLEDGE OR HYPOTHECATION
IS IN COMPLIANCE THEREWITH.
FOR VALUE RECEIVED, Interactive Entertainment Limited (the "Company"), a
Bermuda exempted company, hereby certifies that ____________________________,
or its permitted assigns, are entitled to purchase from the Company, at any time
or from time to time commencing immediately, and prior to 5:00 p.m., New York
City time then current, on {date 18 months from issue date}, __________ fully
paid and non-assessable shares of the common stock, $.01 par value, of the
Company at the purchase price of $________ per share (which it is agreed
represents the average of the closing prices for shares of Common Stock on the
Nasdaq SmallCap Market during the five trading days immediately preceding
{effective date of the Subscription Agreement}). Hereinafter, (i) said common
stock, together with any other equity securities which may be issued by the
Company with respect thereto or in substitution therefor, is referred to as the
"Common Stock", (ii) the shares of the Common Stock purchasable hereunder are
referred to as the "Warrant Shares", (iii) the aggregate purchase price payable
hereunder for the Warrant Shares is referred to as the "Aggregate Warrant
Price", (iv) the price payable hereunder for each of the shares of the Warrant
Shares is referred to as the "Per Share Warrant Price", and (v) this warrant and
all warrants hereafter issued in exchange or substitution for this warrant are
referred to as the "Warrants".
1. Exercise of Warrant.
-------------------
(a) This Warrant may be exercised, in whole at any time or in part from
time to time, commencing {issue date of warrant} (the "Commencement Date"),
and prior to 5:00 p.m., New York City time then current, on {date 18 months
from Commencement Date} (the "Expiration Date"), by the holder of this
Warrant (the "Holder") by the surrender of this Warrant (with the
subscription form at the end hereof duly executed) at the address set forth
in Subsection 8(a) hereof, together with proper payment of the Aggregate
Warrant Price, or the proportionate part thereof if this Warrant is
exercised in part. Payment for the Warrant Shares shall be made by
certified or official bank check, payable to the order of the Company or by
wire transfer to a bank account designated by an officer of the Company.
If this Warrant is exercised in part, this Warrant must be exercised for a
number of whole shares of Common Stock, and the Holder is entitled to
receive a new Warrant covering the number of Warrant Shares in respect of
which this Warrant has not been exercised. Upon such exercise and
surrender of this Warrant, the Company will (i) issue a certificate or
certificates in the name of the Holder for the number of whole shares of
the Common Stock to which the Holder shall be entitled, and (ii) deliver
the other securities and properties receivable upon the exercise of this
Warrant, or the proportionate part thereof if this Warrant is exercised in
part pursuant to the provisions of this Warrant.
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(b) Notwithstanding anything to the contrary contained in this Warrant,
this Warrant may be exercised by presentation and surrender of this Warrant
to the Company at its principal executive offices with a written notice of
the Holder's intention to effect a cashless exercise, including a
calculation of the number of shares of Common Stock to be issued upon such
exercise in accordance with the terms hereof (a "Cashless Exercise"). In
the event of a Cashless Exercise, in lieu of paying the exercise price in
cash, the Holder shall surrender this Warrant for the number of shares of
Common Stock determined by multiplying the number of Warrant Shares to
which it would otherwise be entitled by a fraction, the numerator of which
shall be the difference between the then current market price per share of
the Common Stock (as determined by the closing price of Common Stock on the
Nasdaq SmallCap Market on the trading day immediately preceding the date of
the Cashless Exercise) and the exercise price, and the denominator of which
shall be such then current market price per share of Common Stock.
2. Reservation of Warrant Shares. The Company agrees that, prior to the
expiration of this Warrant, the Company will at all times have authorized and in
reserve, and will keep available, solely for issuance or delivery upon the
exercise of this Warrant, such number of shares of Common Stock and such amount
of other securities and properties as from time to time shall be deliverable to
the Holder upon the exercise of this Warrant, free and clear of all restrictions
on sale or transfer (except such as may be imposed under applicable federal and
state securities laws) and free and clear of all preemptive rights and all other
rights to purchase securities of the Company.
3. Protection Against Dilution.
(a) If, at any time or from time to time after the date of this Warrant,
the Company shall distribute with respect to the Common Stock to the
holders of its outstanding Common Stock (i) securities, other than shares
of Common Stock or (ii) property, other than cash dividends, without
payment therefor, then, and in each such case, the Holder, upon the
exercise of this Warrant, shall be entitled to receive the securities and
property which the Holder would have held on the date of such exercise if,
on the date of this Warrant, the Holder had been the holder of record of
the number of shares of Common Stock subscribed for upon such exercise and,
during the period from the date of this Warrant to and including the date
of such exercise, had retained such shares and the securities and
properties receivable by the Holder during such period. Notice of each such
distribution shall be forthwith mailed to the Holder.
(b) If, at any time or from time to time after the date of this Warrant,
the Company shall (i) pay a dividend or make a distribution on its capital
stock in shares of Common Stock, (ii) subdivide its outstanding shares of
Common Stock into a greater number of shares, (iii) combine its outstanding
shares of Common Stock into a smaller number of shares or (iv) issue by
reclassification of its Common Stock any shares of capital stock of the
Company, the Per Share Warrant Price in effect immediately prior to such
action shall be adjusted so that the Holder of any Warrant thereafter
exercised shall be entitled to receive the number of shares of Common Stock
or other capital stock of the Company which he would have owned or been
entitled to receive immediately following the happening of any of the
events described above had such Warrant been exercised immediately prior
thereto. An adjustment made pursuant to this paragraph (b) shall become
effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or reclassification. If, as
a result of an adjustment made pursuant to this paragraph (b), the holder
of any Warrant thereafter surrendered for exercise shall become entitled to
receive shares of two or more classes of capital stock or shares of Common
Stock and of other capital stock of the Company, the Board of Directors
(whose determination shall be conclusive and shall be described in a
written notice to the Holder of any Warrant promptly after such adjustment)
shall determine
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<PAGE>
the allocation of the adjusted Per Share Warrant Price between or among
shares of such classes or capital stock or shares of Common Stock and other
capital stock.
(c) In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another entity of all
or substantially all of the property of the Company, or in the case of any
statutory exchange of securities with another entity (including any
exchange effectuated in connection with a merger of any other corporation
with the Company), the Holder of this Warrant shall have the right
thereafter to convert this Warrant into the kind and amount of securities,
cash or other property which he would have owned or have been entitled to
receive immediately after such consolidation, merger, statutory exchange,
sale or conveyance had this Warrant been exercised immediately prior to the
effective date of such consolidation, merger, statutory exchange, sale or
conveyance and in any such case, if necessary, appropriate adjustment shall
be made in the application of the provisions set forth in this Section 3
with respect to the rights and interests thereafter of the Holder of this
Warrant such that the provisions set forth in this Section 3 shall
thereafter correspondingly be made applicable, as nearly as reasonable, in
relation to any shares of stock or other securities or property thereafter
deliverable on the exercise of this Warrant. In the event of a triangular
merger in which the Company is the surviving corporation, the right to
purchase Warrant Shares hereunder shall terminate on the date of such
merger and thereupon this Warrant shall become null and void, but only if
the controlling corporation shall agree to substitute for this Warrant a
warrant which entitles the holder thereof to purchase upon its exercise the
kind and amount of shares and other securities and property which the
holder would have owned or been entitled to receive had this Warrant been
exercised immediately prior to such merger. The above provisions of this
paragraph 3(c) shall similarly apply to successive consolidations, mergers,
statutory exchanges, sales or conveyances. Notice of any such
consolidation, merger, statutory exchange, sale or conveyance, and of said
provisions so proposed to be made, shall be mailed to the Holder at the
same time as notice is given to the holders of Common Stock. A sale of all
or substantially all of the assets of the Company for a consideration
consisting primarily of securities shall be deemed a consolidation or
merger for the foregoing purposes.
(d) Anything in this Section 3 to the contrary notwithstanding, the Company
shall be entitled to make such reduction in the Per Share Warrant Price as
it in its discretion shall deem to be advisable in order that any stock
dividend, subdivision of shares or distribution of rights to purchase stock
or securities convertible or exchangeable for stock hereafter made by the
Company to its shareholders shall not be taxable.
4. Fully Paid Stock; Taxes. The Company agrees that the shares of Common
Stock represented by each and every certificate for Warrant Shares delivered on
the exercise of this Warrant in accordance with the terms hereof shall, at the
time of such delivery, be validly issued and outstanding, fully paid and non-
assessable and not subject to preemptive rights or other contractual rights to
purchase securities of the Company, and the Company will take all such actions
as may be necessary to assure that the par value or stated value, if any, per
share of Common Stock is at all times equal to or less than the then Per Share
Warrant Price.
5. Limited Transferability.
(a) This Warrant is not transferable or assignable by the Holder except
pursuant to the laws of descent and distribution and is so transferable
only upon the books of the Company which it shall cause to be maintained
for the purpose. The Company may treat the registered holder of this
Warrant as he or it appears on the Company's books at any time as the
Holder for all purposes. The Company shall permit any holder of a Warrant
or his duly authorized attorney, upon written request during ordinary
business hours, to inspect and copy or make
Page 48
<PAGE>
extracts from its books showing the registered holders of Warrants. All
Warrants will be dated the same date as this Warrant.
(b) By acceptance hereof, the Holder represents and warrants that this
Warrant is being acquired, and all Warrant Shares to be purchased upon the
exercise of this Warrant will be acquired, by the Holder solely for the
account of such Holder and not with a view to the fractionalization and
distribution thereof and will not be sold or transferred except in
accordance with the applicable provisions of the Act and the rules and
regulations of the Securities and Exchange Commission promulgated
thereunder, and the Holder agrees that neither this Warrant nor any of the
Warrant Shares may be sold or transferred except under cover of a
Registration Statement under the Act which is effective and current with
respect to such Warrant Shares or pursuant to an opinion, in form and
substance reasonably acceptable to the Company's counsel, that registration
under the Act is not required in connection with such sale or transfer. Any
Warrant Shares issued upon exercise of this Warrant shall bear the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE OR FOREIGN SECURITIES LAWS AND MANY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT AND ALL SUCH APPLICABLE LAWS OR, IN THE
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF
THE SHARES REPRESENTED BY THIS CERTIFICATE, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH."
6. Loss, etc., of Warrant. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and
of indemnify reasonably satisfactory to the Company, if lost, stolen or
destroyed, and upon surrender and cancellation of this Warrant, if
mutilated, and upon reimbursement of the Company's reasonably incidental
expenses, the Company shall execute and deliver to the Holder a new Warrant
of like date, tenor and denomination.
7. Warrant Holder Not Shareholders. Except as otherwise provided herein, this
Warrant does not confer upon the Holder any right to vote or to consent to
or receive notice as a shareholder of the Company, as such, in respect of
any matters whatsoever, or any other rights or liabilities as a
shareholder, prior to the exercise hereof.
8. Communication. No notice or other communication under this warrant shall
be effective unless, but any notice or other communication shall be
effective and shall be deemed to have been given if, the same is in writing
and is personally delivered, mailed by first-class mail, postage prepaid,
or sent by confirmed telecopy, addressed to:
(a) the Company at: Interactive Entertainment Limited
845 Crossover Lane
Suite D-215
Memphis, TN 38117
Attn: David B. Lamm
Fax: (901) 537-3801
with a copy to: Altheimer & Gray
10 South Wacker Drive
Suite 4000
Page 49
<PAGE>
Chicago, IL 60606
Attn: Andrew W. McCune, Esq.
Fax: (312) 715-4800
or such other address as the Company may designate in writing to the
Holder; or
(b) the Holder at: _______________________________________
_______________________________________
_______________________________________
_______________________________________
or such other address as the Holder may designate in writing to the
Company.
9. Headings. The headings of this Warrant have been inserted as a matter of
convenience and shall not affect the construction hereof.
10. Applicable Law. This Warrant shall be governed by and construed in
accordance with the laws of Bermuda without giving effect to the principles
of conflicts of law thereof.
Page 50
<PAGE>
IN WITNESS WHEREOF, Interactive Entertainment Limited has caused this Warrant to
be signed by its Chief Financial Officer and its corporate seal to be hereunto
affixed and attested by its Assistant Secretary this ____th day of __________,
1998.
INTERACTIVE ENTERTAINMENT LIMITED
By:
----------------------------------
Its: Chief Financial Officer
ATTEST:
By:
--------------------------
Its: Assistant Secretary
Page 51
<PAGE>
EXERCISE
- --------
The undersigned, , pursuant to the provisions of the foregoing
Warrant, hereby agrees to subscribe for and purchase shares of Common Stock
of Interactive Entertainment Limited covered by said Warrant, and makes payment
therefor in full at the price per share provided by said Warrant.
Dated:_____________________ ________________________________________
Signature: _______________________
Address:__________________________
__________________________________
__________________________________
__________________________________
Page 52
<PAGE>
EXHIBIT B
WIRE TRANSFER INSTRUCTIONS
<TABLE>
<CAPTION>
<S> <C>
Beneficiary Bank: First Tennessee Bank
165 Madison Avenue
Memphis, TN 38103
ABA Number: 084000026
Account Name: Interactive Entertainment Limited
Account Number: 100121556
Reference: (Sender's Name)
</TABLE>
Page 53
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and the Consolidated Statements of Operations and is
qualified in its entirety by reference to such financial statements.</LEGEND>
<CAPTION>
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 141,305
<SECURITIES> 0
<RECEIVABLES> 50,387
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 379,781
<PP&E> 929,826
<DEPRECIATION> (132,454)
<TOTAL-ASSETS> 18,319,057
<CURRENT-LIABILITIES> 1,054,274
<BONDS> 1,000,000
0
27
<COMMON> 184,431
<OTHER-SE> 16,080,325
<TOTAL-LIABILITY-AND-EQUITY> 18,319,057
<SALES> 0
<TOTAL-REVENUES> 9,189
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,993,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 633,843
<INCOME-PRETAX> (25,838,707)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,838,707)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,824,222)
<CHANGES> 0
<NET-INCOME> (27,662,929)
<EPS-PRIMARY> (1.98)
<EPS-DILUTED> (1.98)
<FN>
Note:
Amounts inapplicable or not disclosed as a separate line item on the Balance
Sheet or Statement of Operations are reported as 0 herein.
</FN>
</TABLE>
