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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 March 31, 1998
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 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X___ No _____
The registrant had 20,467,319 shares of common stock outstanding as of May 7,
1998.
Exhibit index is located on page 17.
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INTERACTIVE ENTERTAINMENT LIMITED
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations - Three Months ended March 31, 1998
and One Month ended March 31, 1997 4
Consolidated Statements of Cash Flows - Three Months ended March 31, 1998 5
and One Month ended March 31, 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
PART II. OTHER INFORMATION
Item 2.(c) Changes in Securities 16
Item 6.(a) Exhibits 17
Item 6.(b) Reports on Form 8-K 18
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
------
March 31, December 31,
1998 1997
------------------- -------------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 485,825 $ 1,239,864
Accounts receivable, less allowance
for doubtful accounts of $46,828 104,122 3,859
Prepaid expenses 41,295 97,205
------------------- -------------------
Total current assets 631,242 1,340,928
Furniture, fixtures and equipment, at cost 980,889 974,568
Less: accumulated depreciation (212,618) (154,610)
------------------- -------------------
Furniture, fixtures and equipment, net 768,271 819,958
Software under development 2,031,661 1,930,218
Other assets - 165,599
Goodwill 13,232,046 13,138,704
------------------- -------------------
Total assets $ 16,663,220 $ 17,395,407
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable and accrued expenses $ 747,853 $ 644,051
------------------- -------------------
Total current liabilities 747,853 644,051
Convertible debentures - 530,000
Shareholders' equity
Class A preferred shares, $0.01 par value, authorized -3,000
shares, outstanding - 2,737 shares 27 27
Class B preferred shares, $.01 par value, authorized -5,000,000
shares, outstanding - 1,300 and 1,000 shares 13 10
Common shares, $0.01 par value authorized -50,000,000
shares; outstanding 20,181,196 and 19,428,334 shares 201,812 194,283
Additional paid-in-capital 65,873,333 63,512,559
Accumulated deficit (50,159,818) (47,485,523)
------------------- -------------------
15,915,367 16,221,356
------------------- -------------------
Total liabilities and shareholder's equity $ 16,663,220 $ 17,395,407
=================== ===================
</TABLE>
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INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Month
Ended Ended
March 31, March 31,
1998 1997
------------ ----------
<S> <C> <C>
Revenue $ 54,100 $ -
Operating Expenses
General and administrative 752,770 74,839
Consulting and contract labor 73,744 59,428
Marketing 89,807 16,407
Management fees - 17,500
Legal 77,263 45,396
Depreciation and amortization 1,503,944 7,515
----------- ----------
2,497,528 221,085
Other (Income) and Expense
Interest expense 153,524 111
Interest income (7,877) (2,048)
----------- ----------
145,647 (1,937)
----------- ----------
Net loss $ 2,589,075 $ 219,148
=========== ==========
BASIC AND DILUTED LOSS PER SHARE
Numerator for basic and diluted loss per share:
Net loss $ 2,589,075 $ 219,148
Preferred stock dividends:
Cash 85,220 -
Amortization discount on
preferred stock 48,757 -
----------- ----------
Loss to common shareholders $ 2,723,052 $ 219,148
=========== ==========
Denominator for basic and diluted loss per share:
Weighted average shares outstanding 19,988,066 9,789,020
=========== ==========
Net loss per share $ 0.14 $ 0.02
=========== ==========
</TABLE>
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INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Month
Ended Ended
March 31, March 31,
1998 1997
----------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net Loss $(2,589,075) $(219,148)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization 1,503,944 7,515
Non-cash interest expense 5,493 -
Other 7,133 1,999
Changes in assets/liabilities: (excluding effect of acquisition)
Accounts receivable (27,337) 44,955
Prepaid expenses 35,510 675
Other assets 165,599 -
Accounts payable and accrued expenses 61,678 83,745
----------- ---------
Net cash used in operating activities (837,055) (80,259)
----------- ---------
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment (6,321) -
Software development (101,443) (61,043)
----------- ---------
Net cash used in investing activities (107,764) (61,043)
----------- ---------
FINANCING ACTIVITIES
Issuance of preferred stock 276,000 -
Payment of preferred stock dividends (85,220) -
----------- ---------
Net cash provided by financing activities 190,780 -
----------- ---------
Net decrease in cash (754,039) (141,302)
Cash, beginning of period 1,239,864 626,074
----------- ---------
Cash, end of period $ 485,825 $ 484,772
=========== =========
</TABLE>
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INTERACTIVE ENTERTAINMENT LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
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 Annual Report on Form 10-K for
the year ended December 31, 1997.
The Company is a Bermuda exempted company which, in June 1997, changed its name
from Sky Games International, Ltd. ("SGI") to Interactive Entertainment Limited.
The Company's activities 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.
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
with SIA and received certification from SIA on October 9, 1997. Following
additional testing on November 7, 1997, SIA authorized the Company to proceed
with a series of technical trials onboard an aircraft. These technical trials
are ongoing. 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 SIA
will be critical to its ability to secure additional airline contracts. The
Company has yet to receive any revenues under its agreement with SIA and may
never receive any such anticipated revenues if its software is not successfully
implemented with SIA.
On January 13, 1998, the Company completed the acquisition of all the
outstanding capital stock of Inflight Interactive Limited ("IIL") in exchange
for 500,000 shares of the Company's $.01 par value common stock (the "Common
Stock"). IIL is a United Kingdom developer and provider of amusement games to
the airline industry. The games are currently operating on a number of
airlines, including Cathay Pacific, Egypt Air, Lauda Air, Malaysia Airlines,
Saudi Arabian Airlines, and Virgin Atlantic. The agreement also provides for
the Company to issue up to 250,000 additional shares of Common Stock to the
previous owners of IIL upon achievement of certain milestones regarding
implementation of the Company's gaming software with an international airline to
be designated by the parties. The acquisition was accounted for using the
purchase method.
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
established companies and may be dilutive to current stockholders.
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 period ending March 31, 1998 and
the one month period ending March 31, 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks and short-term investments
with maturities of three months or less as cash and cash equivalents.
Software Development
All software production costs (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.
Furniture, Fixtures and Equipment
The Company's furniture, fixtures and 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.
Goodwill
The excess of purchase price over net assets acquired, which arose from the
acquisition of the minority interest of Old IEL (as defined and discussed in
Note 3) is being amortized on a straight-line basis over three years. The
amount of amortization expense recorded for the three months ended March 31,
1998 totaled $1,334,765.
The excess of purchase price over net assets acquired, which arose from the
acquisition of IIL, is also being amortized on a straight-line basis over three
years. The amount of amortization expense recorded from the purchase date
(January 13, 1998) through March 31, 1998 totaled $111,170.
Management regularly evaluates whether or not the future undiscounted cash flows
of the Company are sufficient to recover the carrying amount of assets.
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 the assets and,
accordingly, an impairment has occurred, management intends to write down the
carrying amount to its estimated fair value based on discounted cash flows.
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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, no significant impairments of long-lived assets occurred during the
quarter ended March 31, 1998 or the period ended March 31, 1997.
Stock-Based Compensation
The Company accounts for employee stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and related
interpretations.
Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share," ("SFAS No. 128"). SFAS No. 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. For the periods ended March 31, 1998 and 1997, there is no
difference between basic and diluted loss per share as all stock options,
warrants, convertible debentures and convertible preferred stock are
antidilutive for the periods presented. The Performance Shares have no rights
and, therefore are excluded from per share calculations. See Note 8.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries: Sky Games International Corp. (a Nevada
corporation), Creator Island Equities Inc., (a British Columbia corporation),
IEL (Singapore) Pte. Ltd. (a Singapore corporation) and, (since January 13,
1998), Inflight Interactive Limited (a U.K. corporation). For periods prior to
the acquisition of the minority interest in Old IEL discussed in Note 3, the
consolidated financial statements also include the accounts of SGI Holding
Corporation Ltd. and the Company's 80% ownership of Old IEL. All material
intercompany transactions have been eliminated in consolidation.
Comprehensive Income
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130"). The Company adopted this statement as of the beginning of 1998.
SFAS No 130 established new rules for the reporting and display of comprehensive
income and its components. There is no difference between the net loss and the
total comprehensive net loss for the three months ended March 31, 1998 and the
one month ended March 31, 1997.
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NOTE 3 - ACQUISITION OF MINORITY INTEREST
Prior to June 17, 1997, the Company operated its principal business activities
under the name Sky Games International, Ltd. through its indirectly 80%-owned
subsidiary then known as 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
"Amalgamations"). As part of the Amalgamations, the Management Agreement with
Harrah's was terminated. Harrah's received a total of 5,879,040 shares of
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 Amalgamation 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
Amalgamations were announced, or $4.466 per share. The shares issued to
terminate the Management Agreement were also valued at $4.466 per share. 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.
NOTE 4 - CONVERTIBLE DEBENTURES
During the ten months ended December 31, 1997, the Company issued $2,163,250 of
8% convertible debentures due in 1999. The outstanding balance of convertible
debentures as of December 31, 1997 totaled $530,000.
The debentures contained a feature that provided for conversion into Common
Stock at a price below the current market at the time of issue. The value of
this beneficial conversion feature, totaling approximately $628,000 was
capitalized in other assets with a corresponding increase to additional paid-in
capital. Placement fees of $149,000 incurred upon sale of the debentures were
also capitalized. The value of the conversion feature and the placement fees
are amortized to interest expense over the original life of the debenture. Any
unamortized amount is expensed upon conversion of the debenture.
All of the debentures outstanding, including accrued interest, as of December
31, 1997 were converted into 252,862 shares of Common Stock during the three
month period ended March 31, 1998 and all remaining deferred interest charges
and placement fees totaling $148,000 were expensed during the period and are
included as interest expense in the Consolidated Statements of Operations.
NOTE 5 - SHAREHOLDERS' EQUITY
In December 1994, the Company discontinued an engineering and marketing
arrangement with B/E Aerospace, Inc. ("BEA"). As part of the termination, the
Company issued to BEA a promissory note in the original principal amount of $2.5
million at 12% per annum. On February 28, 1997, an agreement was reached with
BEA to exchange the note, 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.
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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 under their terms. 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. The Company
is currently negotiating an agreement with BEA that would provide for a phased
redemption of the Class A Preference Shares over a two year period.
In October 1997, the Company completed an agreement with an investor for the
private placement of 925,747 shares of Common Stock for an aggregate purchase
price of $3.0 million. $1.5 million (approximately $1,352,000 net of offering
expenses), ("Tranche A"), was received upon closing while the remaining $1.5
million ("Tranche B") was to be funded upon and was contingent upon completion
of the first flight with the Company's software available in all seats of a
Singapore Airlines aircraft prior to April 22, 1998. For each five shares of
Common Stock purchased and held for a minimum of six months, the investor was to
have received one warrant for the purchase of additional shares. Warrants were
to be exercisable at a price of $3.8125 per share for 18 months from their
issue. As of April 2, 1998 the Company and the investor agreed to amended terms
under which 50% of the remaining portion ($750,000) was funded immediately while
the other 50% was to be funded under the terms of the original agreement. The
subscription price for the Common Stock purchased in Tranche B was revised to
$2.62125. Warrants issuable under Tranche A will not be issued. However, for
each of the 286,123 Common Share purchased in Tranche B, 0.85 of a warrant to
purchase Common Stock will be issued after a six month holding period for the
Common Stock purchased in Tranche B. The warrants, if issued, will have an
exercise price of $2.62125 and a term of 18 months. The first $750,000 was
funded under the amended terms; however, the flight required for funding of the
second $750,000 did not take place prior to April 22, 1998, and consequently,
the Company does not expect the second $750,000 to be available to it.
As of February 20, 1998, the Company sold 300 shares of Series B Class B
Convertible Preferred Stock at $1,000 per share. The Series B Class B
Convertible Preferred Stock has the same dividend and conversion features as the
Series A Class B Convertible Preferred Stock issued in December, 1997. The
investor also received a warrant to purchase 18,515 shares of Common Stock at a
price of $3.2038 for 18 months.
NOTE 6 - INCOME TAXES
As a Bermuda exempted company, IEL is not currently subject to income tax filing
requirements in Bermuda. The Company operates in the U.S. as a branch of a
foreign corporation. As a foreign corporation with a U.S. trade or business,
the Company will be subject to tax in the U.S. on the income earned that is
effectively connected with that trade or business. Tax carryforwards in taxable
jurisdictions have not been determined. Deferred tax assets, if any, would be
fully reserved. Other than the tax associated with the U.S. earned interest
income, there are no income tax provisions, benefits, liabilities or assets
reflected in the accompanying financial statements.
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NOTE 7 - 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 month or a percentage of gross revenues, as defined. The
Management Agreement was terminated June 17, 1997, in conjunction with the
Amalgamations. Management fees totaled $10,000 for the one month period ending
March 31, 1997 and zero for the same period in the current year.
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 period ending March 31, 1998 and the one month period ending
March 31, 1997 totaled zero and approximately $43,000, 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 $50,000 for the one month period ending March 31,
1997. This arrangement ended with termination of the Management Agreement, and
there were no similar charges during the 1998 period.
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 $35,000 during the three month period ending March 31,
1998 under this agreement.
During 1996, the Company entered into a sublicense agreement with Harrah's,
which provides the Company with rights to use an immediate authorization
credit/debit system that Harrah's is developing. The Company reimbursed
Harrah's for a portion of the development costs which totaled $10,000 for the
one month period ending March 31, 1997 and zero for the three month period
ending March 31, 1998.
On June 17, 1997, in conjunction with the Amalgamations, the Company entered
into a Software License Agreement with Harrah's (the "License Agreement"). The
License Agreement is a fully-paid, perpetual, world-wide license to Harrah's and
its affiliates to use the Company's gaming technology in non-competitive uses in
traditional casino venues owned, operated or managed by Harrah's affiliates.
The License Agreement includes source codes for all software, but neither party
to the License Agreement has any obligations to share or provide any
improvements or modifications with the other party.
The Company paid zero and approximately $24,000 during the three month period
ending March 31, 1998 and the one month period ending March 31, 1997,
respectively, to directors and companies with common directors for management
and consulting services and for reimbursement of expenses.
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 would vest upon the closing of a major financing.
The Board determined that the Amalgamations which occurred June 17, 1997
constituted a major financing, and, consequently, the 200,000 shares vested
during 1997. Mr. Geller has been Chairman of the Board of Directors of the
Company since September 30, 1996. The annual compensation of the Chairman of
The Board is $100,000 from September, 1997 and is accrued but unpaid until the
Company generates sufficient cash flows from operations.
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NOTE 8 - 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"). 2,000,000 of the Performance Shares
were issued to SGII (87 % of the outstanding stock of which was owned by James
P. Grymyr, formerly a director of the Company, and his wife) and 1,000,000
shares were issued to Anthony Clements, a director of the Company. An additional
525,000 shares, which were issued to Dr. Rex E. Fortescue, formerly a director
of the Company, are held in the escrow on the same terms and are also included
as Performance Shares. Each of Messrs. Clements and Fortescue, as of April 30,
1997, 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, 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 (the "Redemption and
Cancellation Agreement"). 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. 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.
Each of Messrs. Clements and Fortescue have the right to include the 508,333
shares of Common Stock issued in connection with the Redemption 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 a bank which has agreed not to vote the Performance Shares
at any General Meeting of Shareholders or otherwise. The irrevocable proxy and
the agreement not to vote the Performance Shares will terminate upon the
cancellation of the Performance Shares. The escrow agent is prohibited from
canceling the Performance Shares under the escrow agreement.
The Performance Shares have no rights and, therefore are excluded from per share
calculations for all periods presented. Effective April 30, 1997, the
Performance Shares were no longer considered outstanding for financial statement
purposes.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
- --------
Interactive Entertainment Limited ("IEL" or the "Company"), formerly known as
Sky Games International Ltd. ("SGI"), is a Bermuda exempted company which was
incorporated on January 28, 1981. 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 an
affiliate of Harrah's
Page 12
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Entertainment, Inc. ("Harrah's"), to form a company then known as Interactive
Entertainment Limited ("Old IEL"), the result of which was that Old IEL became
owned 80% by SGIH and 20% by an affiliate of Harrah's. Pursuant to the
Management Agreement (the "Management Agreement"), Old IEL was managed by an
affiliate of Harrah's.
At a Special General Meeting of shareholders held on June 16, 1997, pursuant to
a Plan and Agreement of Merger and Amalgamation dated May 13, 1997, (the
"Amalgamation Agreement"), Old IEL was merged into SGIH and then into SGI (the
"Amalgamations"). Prior to the Amalgamations, Harrah's owned 20% of the capital
stock of Old IEL and did not own any capital stock or other securities of SGI
and had no representatives on the Board of Directors. As a result of the
Amalgamations and the termination of the Management Agreement, the outstanding
shares of Old IEL common stock held by Harrah's were converted into 5,879,040
shares of $.01 par value common stock of the Company (the "Common Stock").
Harrah's also received 1,007,875 shares of Common Stock upon conversion of a
loan, (the "Harrah's Loan"), made to Old IEL. Harrah's therefore became the
largest shareholder of the Company holding approximately 38.6% of the
outstanding shares at the time of the Amalgamations.
Pursuant to the Amalgamation Agreement, Harrah's was provided with the right to
appoint persons to the Board and to specified committees in a number generally
proportionate to their share holdings calculated on a "fully diluted" basis as
defined in the Company's bye-laws. Additionally, Harrah's was provided with the
right to approve specified significant corporate actions by the Company for as
long as the ownership of Common Stock by Harrah's is in excess of 20% (10% in
some cases) of the outstanding voting shares computed on a fully diluted basis.
Upon consummation of the Amalgamations, SGI changed its name to Interactive
Entertainment Limited. The Company has consolidated operations formerly
performed at its Vancouver, British Columbia office into its Memphis, Tennessee
headquarters.
The Company has yet to generate any significant operating revenues and has no
assurance of future revenues. Its principal activities through March 31, 1998,
consisted of developing, testing and marketing the inflight gaming software. As
of March 31, 1998, IEL had a contract to provide its gaming software to
Singapore Airlines ("SIA"), 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 SIA are not yet in the six-month trial
period which begins following acceptance by SIA of the Company's software for
operation on one of SIA's aircraft. 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 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.
Although SIA currently has the Matsushita Avionics Systems Corporation ("MASC")
2000E interactive inflight entertainment ("IFE") system installed on 55 of its
wide-body aircraft, only now are the true interactive features of the system
being implemented. Inflight gaming is expected to provide the first significant
comprehensive interactive use of the IFE system. Inflight gaming is also
expected to be the first use of the IFE system, other than telephones, which
generates financial transactions. Therefore, both SIA and IEL have insisted on
rigorous testing prior to offering IEL's product to SIA's passengers. In October
1997, the Company completed an initial phase of laboratory testing of its
inflight gaming system in conjunction with SIA and MASC and received laboratory
certification from Singapore Airlines. Testing of the system then progressed to
a series of test procedures on various aircraft on the ground. Among other
items, this series of tests revealed inconsistencies in third party provided
Page 13
<PAGE>
software (with which the Company's software must be integrated) from aircraft to
aircraft and, in some cases, from one server to another server on the same
aircraft. Once these issues were resolved, testing moved to an airborne
environment. One airborne test was completed in March 1998. The Company is
currently addressing issues that surfaced during this test. The Company's
inflight gaming system is comprised of three primary sets of software programs.
One set of programs operates the games, one set controls the operation and
communications between servers on the aircraft, and one set performs cabin
management functions. Recent issues have been with the programs controlling
cabin management functions which were written and customized to SIA
specifications. Each test series is typically composed of a sequence of
laboratory procedures and tests on a grounded aircraft followed by airborne
tests. The laboratory tests in the latest series were successfully completed on
April 22, 1998. Management expects that testing will be completed and the
inflight gaming product will be launched during the second quarter of 1998.
The Company is currently in discussions with several additional airlines and is
negotiating terms of an agreement with one of these airlines.
On April 4, 1998, the Company initiated a trial of its interactive gaming
application in 85 cabins of the cruise ship Sun Princess, operated by Princess
Cruises. In addition to providing the gaming application, the Company designed,
developed and installed an order management system that functions between the
set-top box in each of the trial cabins and the ship's guest billing system.
This system allows passengers to order certain merchandise and services,
including gaming, from the television sets in their cabins, provides order
tracking and manages in-cabin movies, while providing an interface to the ship's
guest billing system to allow charges to be posted directly to their folios.
This trial is being 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 Princess or result in any definitive agreement with either
Transdigital or Princess. Initial results of the trial indicate that passengers
view the system favorably; however, management believes that insufficient data
has been gathered to predict future utilization.
On January 13, 1998, the Company completed the acquisition of all the
outstanding stock of Inflight Interactive Limited ("IIL") in exchange for
500,000 shares of the Company's Common Stock. IIL is a U. K. developer and
provider of amusement games to the airline industry marketed under the name Sky
Play(TM). IIL's games are currently operating on 54 aircraft of six airlines,
including Cathay Pacific, Egypt Air, Lauda Air, Malaysia Airlines, Saudi Arabian
Airlines and Virgin Atlantic. Development efforts are underway with additional
airlines.
The Company does not believe that it has exposure to the "Year 2000 Problem."
Software developed by the Company is compliant with dates in the year 2000. The
Company uses commercial software produced by a variety of vendors and believes
that all of its major systems are compliant.
Results of Operations
- ---------------------
Three Months Ended March 31, 1998 and One Month Ended March 31, 1997
During 1997, the Board of Directors changed the Company's fiscal year from the
last day of February to the last day of December. As a result of the change, the
first quarter of the fiscal year ending December 31, 1997 was a short quarter
consisting only of the month of March 1997. Therefore the following discussion
compares a one month period in 1997 with a three month period in 1998. Amounts
are rounded to the nearest $1,000.
Revenue from operations for the 1998 quarter was $54,000. Revenue consisted
solely of fees generated from the Sky Play(TM) amusement games acquired with the
purchase of IIL. Since the IIL acquisition was completed in January 1998, there
was no comparable revenue in the 1997 period.
Page 14
<PAGE>
General and administrative expense increased by $674,000. This includes an
increase in payroll and related costs of $337,000 due to a increased staffing
during 1998 and a three month period versus a one month period. Travel costs
increased by $117,000 due to increased travel associated with testing of the
Company's software product and a three month period versus a one month period.
Other items included in general and administrative expense generally increased
due to the three month versus one month comparison.
Depreciation and amortization expenses increased by $1,496,000. Amortization of
goodwill associated with the Amalgamations and the purchase of IIL was
approximately $1,335,000 and $111,000, respectively, during the 1998 quarter.
Since the Amalgamations took place in June, 1997 and the IIL purchase was in
January 1998, there were no comparable expenses in the 1997 period. Depreciation
expense increased by $50,000 due to increases in furniture, fixtures and
equipment that occurred in late 1997.
Interest expense, including amortization of finance fees on Company debt,
increased by $153,000. The 1998 expense is composed of interest on convertible
debentures and amortization of finance fees related to the debentures. There
were no convertible debentures outstanding during the 1997 period.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1998 the Company had a working capital deficit of $117,000. The
Company's primary source of funding has been through sales of its equity and
securities convertible into equity.
Effective February 20, 1998, the Company sold 300 shares of Series B Class B
Convertible Preferred Stock at $1,000 per share. The Series B Class B
Convertible Preferred Stock has the same dividend and conversion features as the
Series A Class B Convertible Preferred Stock issued in December 1997. The
investor also received a warrant to purchase 18,515 shares of Common Stock at a
price of $3.2038 for 18 months. (See Part II, Item 2, Changes in Securities.)
In October 1997, the Company completed an agreement with an investor for the
private placement of 925,747 shares of Common Stock for an aggregate purchase
price of $3.0 million. $1.5 million (approximately $1,352,000 net of offering
expenses), ("Tranche A") was received upon closing while the remaining $1.5
million ("Tranche B") was to be funded upon and was contingent upon completion
of the first flight with the Company's software available in all seats of a
Singapore Airlines aircraft prior to April 22, 1998. For each five shares of
Common Stock purchased and held for a minimum of six months, the investor was to
have received one warrant for the purchase of additional shares. Warrants were
to be exercisable at a price of $3.8125 per share for 18 months from their
issue. As of April 2, 1998, the Company and the investor agreed to amended terms
under which 50% of the remaining portion ($750,000) was funded immediately while
the other 50% was to be funded under the terms of the original agreement. The
subscription price for the Common Stock purchased in Tranche B was revised to
$2.62125. Warrants issuable under Tranche A will not be issued. However, for
each of the 286,123 Common Share purchased in Tranche B, 0.85 of a warrant to
purchase Common Stock will be issued after a six month holding period of the
Common Stock purchased in Tranche B. The warrants, if issued, will have an
exercise price of $2.62125 and a term of 18 months. The first $750,000 was
funded under the amended terms; however, the flight required for funding of the
second $750,000 did not take place prior to April 22, 1998, and consequently,
the Company does not expect the second $750,000 to be available to it.
During the second quarter of 1997, the Company established a target of raising a
total of $8.0 million in equity to provide funding for the Company's operating
needs until such time as management believes that the Company will be receiving
a positive cash flow from operations. Through March 1998 a total of $6.5 million
had been either raised or committed to the Company. The Company is currently
negotiating commitments for additional capital to complete its equity target and
believes that these efforts will be successful during the second quarter of
1998.
Page 15
<PAGE>
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.
Forward-Looking Information
- ---------------------------
This Form 10-Q contains forward-looking statements that include among others,
statements concerning the Company's plans to implement its software products,
commence generating revenue from certain of its products, expectations as to
funding its capital requirements, the impact of competition, future plans and
strategies, statements which include the words "believe," "expect," and
"anticipate" and other statements of expectations, beliefs, anticipated
developments and other matters that are not historical facts. These statements
reflect the Company's views with respect to such matters. Management cautions
the reader that these forward-looking statements are subject to risks and
uncertainties that could cause actual events or results to materially differ
from those expressed or implied by the statements.
PART II. OTHER INFORMATION
Item 2 - Changes in Securities
Effective February 20, 1998, the Company issued 300 shares of Series B
Convertible Preference Shares of the Company's Class B Preferred Stock to
Palisades Holding, Inc., a California corporation, for a total consideration of
$300,000 ($276,000 net of expenses). The Series B Class B Preference Shares are
convertible after three months into a number of shares of Common Stock,
determined by dividing the stated value of $1,000 per share by the lesser of:
$3.2038 (the "Fixed Conversion Price") and a price (the "Floating Conversion
Price") calculated by (i) determining the average of the three lowest closing
bid prices for the Common Stock during the thirty trading days occurring
immediately prior to, but not including, the conversion date, and (ii)
multiplying such average by a defined conversion percentage (the "Conversion
Percentage"). The Conversion Percentage decreases from 100% to 85% as the
holding period increases. Dividends are cumulative and may be paid, at the
option of the Company and with prior notice, in additional shares of Common
Stock at an annual dividend rate of 8%. A warrant for the purchase of 18,515
shares of Common Stock was issued in connection with the issuance of the Series
B Class B Convertible Preference Shares. The warrant, which has an exercise
price of $3.2038, is exercisable beginning August 20, 1998 and expires on
February 20, 2000. The Series B Class B Preference Shares do not have any voting
rights.
There was no broker or underwriter for the placement of the Series B Class B
Preference Shares and the warrant. The Series B Class B Preference Shares and
warrant were placed in reliance on the exemption from registration under the
Securities Act provided by Regulation D promulgated under the Securities Act.
Page 16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
2. Plan and Agreement of Merger and Amalgamation, dated as of May 13,
1997, among the Company, SGI Holding Corporation Limited, IEL and
Harrah's Interactive Investment Company. (1)
3.i(a) Articles of Incorporation (Yukon Territory). (2)
3.i(b) Certificate of Continuance (Bermuda). (3)
3.ii Bye-Laws as amended. (21)
4.1 Escrow Agreement dated May 27, 1992, as amended, among Montreal Trust
Company of Canada, the Company and certain shareholders. (4)
4.2 Redemption Agreement, dated as of February 25, 1997, between the
Company and Anthony Clements and Rex Fortescue. (5)
4.3 Redemption and Cancellation Agreement, dated as of April 30, 1997,
between the Company and Sky Games International, Inc. (6)
4.4 Shareholder Rights Agreement, dated June 17, 1997, between the Company
and Harrah's Interactive Investment Company. (7)
4.5 Registration and Preemptive Rights Agreement, dated June 17, 1997,
between the Company and Harrah's Interactive Investment Company. (8)
4.6 Registration Rights Agreement, dated June 17, 1997, between the
Company and B/E Aerospace, Inc. (9)
4.7 Subscription Agreement, dated as of October 22, 1997, between the
Company and Henderson International Investments Limited. (10)
4.8 Subscription Agreement, dated as of October 22, 1997, between the
Company and Michael A. Irwin. (11)
4.9 First Amendment to Registration and Preemptive Rights Agreement dated
March 18, 1998 between the Company and Harrah's Interactive Investment
Company. (12)
4.10 First Amendment to Subscription Agreement between the Company and
Henderson International Investments Limited dated as of April 2, 1998.
(13)
10.5* Services Agreement, dated as of November 7, 1995, between IEL and
Singapore Airlines Limited. (14)
10.6* Software License and Software Services Agreement, dated as of November
7, 1995, between IEL and Singapore Airlines Limited. (15)
10.7 Sublease Agreement dated as of June 5, 1997, between IEL and Harrah's
Operating Company, Inc. (16)
10.8 Consulting Agreement, dated as of April 30, 1997, between the Company
and James P. Grymyr. (17)
10.9* Software License Agreement, dated June 17, 1997, between the Company
and Harrah's Interactive Investment Company. (18)
10.10 Continuing Services Agreement, dated June 17, 1997, between the
Company and Harrah's Interactive Entertainment Company. (19)
10.11 Termination Agreement and Release, dated as of June 17, 1997, among
the Company, SGI Holding Corporation Limited, IEL, Harrah's
Interactive Investment Company, and Harrah's Interactive Entertainment
Company. (20)
27** Financial Data Schedule
</TABLE>
Footnotes
(1) Incorporated by reference to the same numbered exhibit to the Registrant's
Form 8-K as filed with the Securities and Exchange Commission on June 27,
1997.
(2) Incorporated by reference to Exhibit 1.1 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on October 12, 1993.
Page 17
<PAGE>
(3) Incorporated by reference to Exhibit 1.2 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on September 16, 1996.
(4) Incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on October 12, 1993.
(5) Incorporated by reference to Exhibit 3.12 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on September 12, 1997.
(6) Incorporated by reference to Exhibit 3.13 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on September 12, 1997.
(7) Incorporated by reference to Exhibit 3.15 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on September 12, 1997.
(8) Incorporated by reference to the Exhibit 4(a) to the Registrant's Form 8-K
as filed with the Securities and Exchange Commission on June 27, 1997.
(9) Incorporated by reference to the Exhibit 4(b) to the Registrant's Form 8-K
as filed with the Securities and Exchange Commission on June 27, 1997.
(10) Incorporated by reference to Exhibit 3.22 to the Registrant's Quarterly
Report on Form 10-Q as filed with the Securities and Exchange Commission on
November 19, 1997.
(11) Incorporated by reference to Exhibit 3.23 to the Registrant's Quarterly
Report on Form 10-Q as filed with the Securities and Exchange Commission on
November 19, 1997.
(12) Incorporated by reference to Exhibit 99.22 to the Registrant's Amended
Registration Statement on Form S-3 as filed with the Securities and
Exchange Commission on May 7, 1998
(13) Incorporated by reference to Exhibit 99.23 to the Registrant's Amended
Registration Statement on Form S-3 as filed with the Securities and
Exchange Commission on May 7, 1998
(14) Incorporated by reference to Exhibit 3.9 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on September 16, 1996.
(15) Incorporated by reference to Exhibit 3.10 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on September 16, 1996.
(16) Incorporated by reference to Exhibit 3.11 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on September 12, 1997.
(17) Incorporated by reference to Exhibit 3.14 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on September 12, 1997.
(18) Incorporated by reference to Exhibit 3.16 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on September 12, 1997.
(19) Incorporated by reference to Exhibit 3.17 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on September 12, 1997.
(20) Incorporated by reference to Exhibit 3.21 to the Registrant's Annual Report
on Form 20-F (File No. 0-22622) as filed with the Securities and Exchange
Commission on September 12, 1997.
(21) Incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on March 31, 1998.
*Confidential treatment has been requested.
**Submitted herewith.
(b) REPORTS FILED ON FORM 8-K
None
Page 18
<PAGE>
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
May 12, 1998 BY: /s/ David B. Lamm
---------------------------------------
Chief Financial Officer
May 12, 1998 BY: /s/ Michael A. Irwin
---------------------------------------
Director of Finance and Administration
(Chief Accounting Officer)
Page 19
<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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 485,825
<SECURITIES> 0
<RECEIVABLES> 150,950
<ALLOWANCES> 48,828
<INVENTORY> 0
<CURRENT-ASSETS> 631,242
<PP&E> 980,889
<DEPRECIATION> 212,618
<TOTAL-ASSETS> 16,663,220
<CURRENT-LIABILITIES> 747,853
<BONDS> 0
0
40
<COMMON> 201,812
<OTHER-SE> 15,713,515
<TOTAL-LIABILITY-AND-EQUITY> 16,663,220
<SALES> 54,100
<TOTAL-REVENUES> 61,977
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,497,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153,524
<INCOME-PRETAX> (2,589,075)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,589,075)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,589,075)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
<FN>
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>
