<PAGE>
As filed with the Securities and Exchange Commission on September 12, 1997
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
OR
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22622
INTERACTIVE ENTERTAINMENT LIMITED
(FORMERLY SKY GAMES INTERNATIONAL LTD.)
(Exact name of Registrant as specified in its charter)
Bermuda
(Jurisdiction of incorporation or organization)
845 Crossover Lane, Suite D-215
Memphis, Tennessee 38117
(Address of principal executive offices)
Securities to be registered pursuant to Section 12(b) of the Act.
None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Stock, U.S. $.01 par value (formerly Cdn. $.01 par value)
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
13,314,020
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 Item 18 X
--- ---
1
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Form 20-F/A
ITEM Page No.
- ---- --------
<S> <C>
PART I
------
ITEM 1 DESCRIPTION OF BUSINESS 3
ITEM 2 DESCRIPTION OF PROPERTY 9
ITEM 3 LEGAL PROCEEDINGS 10
ITEM 4 CONTROL OF REGISTRANT 10
ITEM 5 NATURE OF TRADING MARKET 11
ITEM 6 EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS 11
ITEM 7 TAXATION 11
ITEM 8 SELECTED FINANCIAL DATA 14
ITEM 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 16
ITEM 10 DIRECTORS AND OFFICERS OF REGISTRANT 19
ITEM 11 COMPENSATION OF DIRECTORS AND OFFICERS 21
ITEM 12 OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR
SUBSIDIARIES 21
ITEM 13 INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS 22
ITEM 14 DESCRIPTION OF SECURITIES TO BE REGISTERED 22
PART III
--------
ITEM 15 DEFAULTS UPON SENIOR SECURITIES 22
ITEM 16 CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES 22
PART IV
-------
ITEM 17 FINANCIAL STATEMENTS 24
ITEM 18 FINANCIAL STATEMENTS 24
ITEM 19 FINANCIAL STATEMENTS AND EXHIBITS 24
</TABLE>
2
<PAGE>
PART I
------
ITEM 1 DESCRIPTION OF BUSINESS
Unless otherwise noted, all dollar amounts are quoted in U.S. dollars.
The Company
Corporate History and Development. Interactive Entertainment Limited
(formerly Sky Games International Ltd., the "Company") was incorporated pursuant
to the laws of the Province of British Columbia on January 28, 1981 under the
name Tu-Tahl Petro Inc. On May 10, 1990, the Company changed its name to Creator
Capital Inc. The Company was reincorporated through the continuance of its
corporate existence from the Province of British Columbia to the Yukon Territory
on July 15, 1992. On January 23, 1995, the Company changed its name to Sky Games
International Ltd. Effective February 22, 1995, the Company continued its
corporate existence from the Yukon Territory to Bermuda as an exempted company
under the Companies Act 1981 (Bermuda) (the "Bermuda Act"). In June, 1997, the
Company changed its name to Interactive Entertainment Limited following
consummation of the amalgamation of the Company's wholly-owned subsidiary, SGI
Holding Corporation Limited ("SGIH"), and SGIH's formerly 80% owned subsidiary,
then known as Interactive Entertainment Limited ("IEL"), which was followed
immediately by an amalgamation of the Company with the survivor of the first
amalgamation, (the "Amalgamations"). Unless the context otherwise requires, the
term "Company" refers to Interactive Entertainment Limited, its wholly-owned
subsidiaries, Sky Games International, Corp. ("SGIC"), and Creator Island
Equities Inc., and for periods prior to June 17, 1997, also SGIH and IEL,
which was the Company's principal operating subsidiary from December 30, 1994,
through such Amalgamations. Also included is IEL (Singapore) Pte. Ltd., a
wholly-owned subsidiary of IEL. However, until the Amalgamations, the management
of the business of IEL had been substantially delegated to a third party manager
and, as a result, the management and affairs of IEL were subject to numerous
contractual requirements and limitations. See "Interactive Entertainment
Limited".
The initial purpose of the Company was natural resource exploration
and development; however, since January 1991 the Company has concentrated its
efforts on acquiring, developing and commercializing a gaming technology for
inflight use by international airline passengers and patrons in other non-
traditional gaming venues. In pursuit of this purpose, the Company in 1991
acquired the principal assets of Nevada-based Sky Games International, Inc. See
"Sky Games System Acquisition". In late 1994, the Company formed IEL as a joint
venture with subsidiaries of Harrah's Entertainment, Inc., ("Harrah's"), which
resulted in the transfer to IEL of the Company's inflight gaming business and
the execution of a management agreement with Harrah's with respect to IEL and
other related relationships. Pursuant to such management agreement, IEL's
operations were managed by a Harrah's subsidiary. The description herein of the
Company's operations from December 30, 1994 through June 17, 1997 with respect
to inflight gaming activities refers to the operations of IEL under the
management of this subsidiary of Harrah's. See "Interactive Entertainment
Limited".
Business Overview. The Sky Games(TM) system was developed to introduce
gaming to international airline passengers. The system is designed to enable
users to play a number of casino-type games from their seats by way of a built-
in, color, interactive, in-seat monitor. The product design in its current form
has only recently been possible since audio-video interactive inflight
entertainment hardware ("IFE") systems have only recently been commercially
introduced. The IEL system is being integrated with the IFE systems offered by
Matsushita Avionics Systems Corporation and is also
3
<PAGE>
intended to interface with systems manufactured by other leading manufacturers
including, among others, B/E Aerospace, Inc.("BEA") and Hughes-Avicom.
The Company believes that an opportunity exists to introduce casino
games on international air flights, based on the following factors: (i) many
commercial international air routes involve long flights which create the
opportunity for the entertainment of passengers; (ii) many airlines have
indicated that they view IFE systems as a source of additional revenue; (iii) in
certain parts of the world and in certain markets, gaming is increasing in
popularity and public acceptance; and (iv) as with all casino style gaming, the
odds are in favor of the "house" when played over a period of time. The Company
has conducted limited field surveys in conjunction with affiliates of Harrah's
to measure passenger reaction to inflight gaming in general and to gather
statistical information related to game preferences, projected passenger
participation, betting limits and acceptance of the Company's software design.
These surveys support the Company's belief regarding inflight gaming.
The Company has made proposals to and held discussions with major
airlines in Europe and Asia, and in April of 1996, the Company announced the
signing of a three-year contract, subject to a two-year extension term, for the
provision of gaming services to Singapore Airlines. The term would commence with
Singapore Airlines' acceptance, for use on its aircraft, of the Company's gaming
software. However, the agreement with Singapore Airlines is subject to a trial
period and to termination by either party upon the occurrence of specified
events. Consequently, the agreement may not be in effect through the entirety of
its initial term or any extension term. The agreement with Singapore Airlines
consists of a license of the Sky Games(TM) system to the airline and a services
agreement under which the Company will manage certain aspects of the airline's
inflight gaming operations. While the Company intends that future contracts will
have a similar structure, the Company recognizes that different arrangements may
be required to work with different airlines. Fees payable by the airline are a
percentage of the net revenues generated from inflight gaming activities. If
results from the Singapore Airlines contract are successful, the Company
believes additional contracts can be reached with additional carriers.
The commencement of gaming operations on an airline will require the
successful installation on the airline's aircraft of an IFE system. The Company
currently does not provide, install or service IFE systems. The Company
understands that in the past several airlines have experienced difficulties with
the installation and testing of IFE systems, but based on discussions among the
Company, these airlines and the IFE system providers, the Company believes that
these difficulties will be overcome in the normal course.
The Product
The IEL system is a closed-loop (i.e., self-contained) computerized
gaming system that enables airline passengers to play popular casino games at
their seats. Airlines can add gaming to aircraft fitted with compatible IFE
equipment with only nominal retrofitting cost and little or no aircraft
downtime.
The IEL software was designed and written in layers. This layered
approach effectively insulates the top-level applications (gaming software) from
the specifics of the underlying hardware. The first level of software is
composed of device and system drivers. Where the hardware is unique to the
specific system, the drivers are provided by the hardware supplier. As
additional layers of software are added, the interface becomes less hardware
specific. The goal is to reach a level of abstraction sufficiently removed from
the hardware details so that the application software need have little, or
4
<PAGE>
perhaps no, direct knowledge of the hardware that is supporting the operating
environment. This top-level interface is the Application Programming Interface
("API"). The IEL software is written to the Microsoft Windows API. The service
integrator will provide an API or APIs that will extend the Windows API by
providing access to IFE specific functions. Any Intel based platform that can
support Microsoft Windows will provide the necessary operating environment for
the gaming software.
The Company has been granted federal registration of the Sky Games
logo and the slogan "We Make Time Fly" by the U.S. Patent and Trademark Office.
In addition, the Company has applied for registration of the Sky Casinos
International logo and the slogan "We Make Time Fly" and the mark "Sea Games
International." At this time the Company has not applied for any patents. Upon
completion of successful testing results, an assessment will be made of the
Company's gaming systems and designs and patent applications may be filed where
appropriate. The Company's proprietary software is copyrighted and contains
security features designed to "lock" the software if it is tampered with.
In order to operate the Sky Games system in commercial settings, the
Company must provide additional hardware and software systems necessary to
properly record and account for gaming activities by patrons. The Company has
designed accounting and financial control systems for the management of inflight
gaming operations, which will rely in part on systems developed by and owned by,
or licensed to, Harrah's and its affiliates and sub-licensed to the Company. It
is contemplated that inflight gaming transactions will be conducted through
major credit cards. The major credit card companies have developed rules for the
use of their cards in connection with inflight gaming wherein, presently, the
maximum purchase of gaming credits on a credit card is U.S. $350 and winnings
are capped at U.S. $3,500.
The Industry
A recent 20-year assessment of air travel demand and airplane supply
requirements by Boeing forecast passenger traffic growth of 4.9% annually. The
report noted that, to meet that growth, airlines are expected to add over 16,000
airplanes worth more than $1.1 trillion to their fleets. Other industry sources
estimate that approximately half of new aircraft deliveries are expected to be
wide body, long-haul aircraft that will represent a substantial market for IFE
systems and inflight gaming. See "Regulatory/Legal".
Another significant trend in the airline industry is the growth in the
outsourcing of traditional in-house functions. The Company believes this is
driven by the need to cut costs and reduce fixed overhead and is a recognition
of the complexity and sophistication of IFE systems and entertainment options.
Industry statistics indicate that gaming, in general, is gaining
increased market acceptance in many regions of the world and that U.S. casino
revenue increased from U.S. $8.9 billion in 1991 to U.S. $22.8 billion in 1996.
North Americans account for only a portion of the worldwide gaming industry.
Casino gambling, for example, also exists in Australia, the Bahamas, Canada,
Denmark, Chile, Germany, Great Britain, Malaysia, Monaco, the Netherlands,
Puerto Rico, South Africa, Switzerland, Turkey and Uruguay. The U.S. Department
of Transportation estimated in March, 1996, that the potential inflight gaming
revenue for non-U.S. airlines is approximately $480 million per year.
5
<PAGE>
Competition
The Company understands that several companies are working on inflight
gaming systems, including InterGame and Interactive Flight Technologies, Inc.
("IFT"). Both of these companies have announced agreements with airlines to
conduct inflight tests of their gaming systems, and IFT launched inflight gaming
with Swiss Air in January, 1997. In addition, IFT offers a limited IFE system
integrated with its gaming system. These companies may have significantly
greater financial and technical resources than the Company and there can be no
assurance that the Company will be able to compete effectively with such
companies. The Company believes that in the event inflight gaming and related
activities become more established, additional competitors with alternate
approaches are likely to enter the business. Other inflight offerings, such as
shopping and movies, could also be considered as indirect competition.
Competition in the development of products for the inflight
entertainment industry is strong; however, the Company believes that few
products currently are being developed that provide the airlines with a means to
generate sources of revenue comparable to inflight gaming.
Market and Marketing
In the very competitive airline market, airlines are seeking a
distinctive, competitive edge to attract and retain paying customers.
Entertainment and service systems are forming a part of airlines' current
business strategy.
The Company's primary target market is Asian and Pacific Rim airlines
whose passengers, with certain exceptions, generally have a broad cultural
acceptance of gaming. The Company believes that the Latin American and European
markets may also hold potential.
The Company believes that the principal benefits of its product to the
airlines will be passenger satisfaction and airline participation in a potential
revenue stream. IFE systems are capital intensive; however, providing passenger
service and comfort, especially for first and business class travelers, is a
major area of competition for airlines. The Company believes that new methods of
increasing revenues while providing a high level of service will be seriously
considered by airlines; however, there can be no assurance that IFE systems or
inflight gaming will be among the alternatives considered by airlines. Although
the system is designed for gaming using money, the Company believes that the
system could be adapted to "pay-for-play" mode in those circumstances where
gambling for money is not legal and that a system utilizing frequent flyer
credits and other rewards can be integrated as part of the gaming program.
The Company expects to derive its income from its share of gambling
earnings and does not anticipate selling its gaming products to generate
revenue. Airlines will receive a percentage of net revenue generated by Sky
Games on their respective flights. Passenger payouts and certain direct
operating costs will be deducted from revenue and the "win" split on a
negotiated basis. Airlines currently have similar revenue-sharing arrangement
with other product/service providers, such as inflight communication companies
(e.g. GTE Airfone). The Company expects to provide certain training, banking,
accounting and administrative functions. The airline will provide the aircraft,
the equipment, the passengers and inflight personnel.
6
<PAGE>
Manufacturing
As a software producer and operator, the Company has no manufacturing
capability. The Company's software is being designed to interface with in-cabin
hardware, including onboard computers, file servers, distribution and
communication systems, manufactured by various suppliers for the airlines.
Employees
As of the end of the fiscal year, the Company maintained a staff of
three in its Vancouver office and one employee at the office of its Singapore
subsidiary. Additional services were provided through a management agreement
with Harrah's and the use of contract labor. Subsequent to the end of the fiscal
year, and in conjunction with the amalgamation of IEL into SGIH and SGIH into
the Company, the Company hired eight former Harrah's employees who had
previously been assigned to work with IEL under the management agreement. The
Company is in the process of consolidating its operations in the Memphis,
Tennessee offices of IEL.
Sky Games System Acquisition
On November 7, 1991, the Company entered into an agreement, with
subsequent amendments, with Sky Games International, Inc. ("SGII") to purchase
technology, proprietary rights and prototypes of the casino games known as "Sky
Games". The purchase price of the assets was 300,000 shares of the Company's
$.01 par value common stock (the "Common Stock") issued to SGII at a deemed
price of $1.65 per share, plus an additional 3,000,000 shares of Common Stock
held in escrow to be released on the basis of one share for each U.S. $1.78 of
net cash flow generated from the assets over a ten-year period (the "Performance
Shares"). Of the 3,000,000 shares, 2,000,000 were issued to SGII and 1,000,000
shares to Anthony Clements, an advisor to and director of the Company. The
Performance Shares are held in escrow by Montreal Trust Company of Canada. The
holders of the Performance Shares have agreed with the Company to tender such
shares to the Company when and if they are released from the escrow, and the
Company has agreed to cancel such shares. The holders of the Performance Shares
have also granted an irrevocable proxy to First Tennessee Bank which has
irrevocably agreed not to vote such shares. See "Events Subsequent to February
28, 1997".
Interactive Entertainment Limited
Effective as of December 30, 1994, the Company, through SGIH, and
Harrah's Interactive Investment Company ("HIIC") completed the formation of IEL
as a joint venture corporation incorporated as an exempted company under the
Bermuda Act. At the same time, (i) IEL entered into a management agreement (the
"Management Agreement") with Harrah's Interactive Entertainment Company (the
"Manager"), (ii) the prior Consulting Agreement between Harrah's and SGIC was
terminated, (iii) SGIC assigned all right, title and interest in the Sky Games
system and related trademarks and trade names to the Company, and (iv) the
Company licensed the Sky Games system and certain related trademarks and trade
names to IEL. IEL was 100% owner of IEL (Singapore) Pte. Ltd. IEL (Singapore)
Pte. Ltd. has one employee and represents IEL in the conduct of its operations
in Singapore. The following is a summary of the principal terms of the
agreements entered into in connection with the formation of IEL and these other
related transactions. In connection with the Amalgamations, the contractual
agreements with the affiliates of Harrah's were terminated. See "Business
Overview" and "Events Subsequent to February 28, 1997".
7
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Shareholders Agreement. The ownership interests of the Company and
HIIC in IEL were 80% and 20%, respectively, at February 28, 1997. The Company
and HIIC had funded a total of $5 million to IEL through February 28, 1997.
Additional capital, if not available from third parties, was to be provided by
the Company and HIIC in proportion to their shareholdings. The Executive
Committee of IEL was to determine whether additional capital was to be provided
as equity or debt. Under the shareholders agreement, each party had certain
options with respect to the other party's stock. The shareholders agreement was
terminated effective June 17, 1997. See "Events Subsequent to February 28,
1997".
Management Agreement. The Manager had been granted and had assumed
broad responsibility for managing the business of IEL, including completing the
development of and improving the Sky Games (TM) software and all other systems,
marketing to airlines and customers and day-to-day gaming operations. The
Management Agreement had a two-year term, but could have been renewed at the
Manager's option for successive two-year terms up to a maximum term of 10 years.
The Manager had a right of first negotiation on a renewal agreement.
Management fees were dependent on the amount of gross revenues, as
defined, with a maximum fee of 7.5% of gross revenues and a minimum monthly fee
of $10,000. IEL was required to pay all operating costs (including capital
expenditures) of the business, which included the cost of services and goods
provided by the Manager and its affiliates under the Management Agreement.
The Manager could declare a default under the Management Agreement if
IEL, SGIH, any of SGIH's affiliates or any of their officers, directors or
employees committed any act that the Manager determined could have affected any
gaming license or approval (whether or not any regulatory action is commenced or
threatened) held by the Manager, any of its affiliates, IEL, SGIH or any of
SGIH's affiliates.
As of the end of the fiscal year, management of the Company had been
substantially delegated to the Manager. Subsequent to year end, the
Amalgamations were consummated and, in conjunction with the Amalgamations, the
Management Agreement was terminated effective June 17, 1997, and management of
the Company assumed direct responsibility for day to day operations. The Company
also entered into a Continuing Services Agreement with Harrah's for certain
services. See "Events Subsequent to February 28, 1997".
Trademark License Agreement. The Company had exclusively licensed IEL
to use certain of the Sky Games trademarks, trade names and other trade rights.
This license was replaced in the Amalgamations by a similar license to Harrah's
for use in traditional casino venues owned, operated or managed by Harrah's. The
license is royalty-free, worldwide and non-terminable.
Assignment Agreement. SGIC assigned to the Company all right, title
and interest in and to the Sky Games software, all related technology assets and
all related trademarks, trade names and other trade rights. The Company is
obligated to pay royalties to SGIC equal to 1 1/2% of the gross revenues derived
by the Company and its wholly owned subsidiaries from the exploitation of the
assigned rights through December 31, 2001.
Termination of Existing Rights. In connection with the Assignment
Agreement and related transactions, the Company and SGIC terminated certain
contractual rights previously granted to BEA in connection with the development
of an earlier generation product for inflight gaming use. In connection with
this termination, the Company issued a U.S. $2,500,000 convertible promissory
note due
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March 30, 1997. The unpaid balance of the note, including accrued interest, was
exchanged for Class A Preference Shares in the Company effective as of February
28, subject to shareholder approval which was obtained on June 16, 1997. See
"Events Subsequent to February 28, 1997".
Regulatory/Legal
The legal issues surrounding inflight gaming are complex and virtually
without precedent. Gaming, while over-flying sovereign air space, may violate
the laws of the country overflown. The Company, in conjunction with Singapore
Airlines, has sought and obtained an exemption from the Gaming Houses Act of
Singapore. This exemption permits gaming outside of Singapore sovereign airspace
on international flights operated by Singapore Airlines to or from Singapore.
The Company, has not yet sought legal opinions with respect to the legality of
gaming in various other jurisdictions which may regulate its business. The
Company plans to deal with these legal matters on a jurisdiction by jurisdiction
and route by route basis. The Company has no assurance at this time that legal
complications involving gaming will be overcome and such restrictions, if
material, will have a substantial impact on the Company's ability to move
forward with its current product and business plan. Additionally, the Company
may be subject to various regulations pertaining to transfer of monies and
monetary products.
Current U.S. law prohibits the installation, transportation or
operation of gaming devices on board any aircraft operated to or from the United
States. In addition, states may prohibit the transportation and use of gaming
devices on flights operating between two points in a single state. The Company's
marketing plan has anticipated that the U.S. market would be the most difficult
to enter. The Company cannot predict whether inflight gaming on flights
operating to or from the U.S. will be permitted under U.S. law at any time in
the future.
Further, all inflight entertainment systems into which the Sky Games
product would be installed would require aviation regulatory agency approvals of
authorities responsible for enforcing passenger and flight safety regulations,
including the FAA in the U.S., should that jurisdiction permit inflight gaming
in the future. The responsibility for meeting such regulations and obtaining
such approvals will rest with the system provider. It is unlikely that the Sky
Games product itself will be subject to such regulatory approval.
The Company intends to have all gaming software and programs tested
and certified by an independent laboratory to ensure the randomness and fairness
of the games.
ITEM 2 DESCRIPTION OF PROPERTY
The Company leases 1,000 square feet for its representative office in
Vancouver, British Columbia, which facilities are leased through February 1,
2000. The Company has vacated the 1,400 square feet it previously occupied in
Las Vegas, Nevada, under a three year lease which expired in July 1997. The
Company leases approximately 9,400 square feet of office space at approximately
$11,000 per month for its Memphis, Tennessee headquarters under a sub-lease from
Harrah's that expires in April, 1999.
The Company owns approximately 73.5 acres of land on Bowen Island
which is located nine miles from the City of Vancouver. The Company's original
strategy in acquiring the land, which was purchased in two separate acquisitions
in 1988 and 1991 for a total consideration of $341,517 Cdn., was to hold the
property for appreciation and possible residential development. In the interim,
the
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Company derived some revenues from the harvesting of commercial timber and
operation of a nursery on a 12 acre portion of the land zoned for agriculture.
During 1993 and 1994 the Company built access roads on the land and built
culverts and drainage facilities in anticipation of eventual development.
In 1994, the Islands Trust, a governmental body of the government of
British Columbia, announced a review of the Official Community Plan ("OCP") for
Bowen Island. This process effectively froze any development applications
pending completion of the review process. Under the revised OCP, large portions
of Bowen Island, including the Company's property, have now been designated
watershed protection areas and are subject to stringent new development
guidelines under a Development Permit Classification. As a consequence, efforts
are underway to sell or otherwise dispose of the property.
ITEM 3 LEGAL PROCEEDINGS
The Company is not a defendant in any proceedings which the directors
consider will have a material effect on the Company's financial position and
results of operations.
ITEM 4 CONTROL OF REGISTRANT
The following table sets forth information as of August 26, 1997 with
respect to (1) each person known to the Company to be the owner of more than ten
percent of the Company's Common Stock and (2) the total amount of Common Stock
owned by the officers and directors as a group. See "Options to Purchase
Securities from Registrant or Subsidiaries." As far as is known to the Company,
it is not directly or indirectly owned or controlled by another corporation or
by any parent.
<TABLE>
<CAPTION>
Number of Shares Percent of
Identity of Person of Common Stock Class Owned (1)
- ----------------- ----------------- ---------------
<S> <C> <C>
Harrah's Interactive Investment
Company 6,886,915 37.8%
All officers and directors as a group
(11 persons) 2,010,004 (2) 11.1%
- -----------
</TABLE>
(1) Based on 18,236,590 shares outstanding as of August 26, 1997. Excludes
3,525,000 Performance Shares which are held in escrow and which are subject to
agreements to tender to the Company when and if released from escrow. The
Company has agreed to cancel the Performance Shares upon release from escrow.
(2) Does not include 2,000,000 shares of Common Stock owned of record by SGII
or 1,000,000 shares owned of record by Anthony P. Clements, a director of the
Company, which are subject to an irrevocable proxy in favor of First Tennessee
Bank and an agreement by First Tennessee Bank not to vote such shares under any
circumstances. James P. Grymyr, a director of the Company, owns 87% of SGII.
Such shares are held in escrow by Montreal Trust Company and are subject to an
agreement by the holders of such shares to tender the shares for cancellation
upon release from escrow. Does not include 333,333 shares which are held in
trust for Porcelain Investments Ltd. (250,000) and Pebble Mill Investments Ltd.
(83,333) for which Mr. Clements is neither trustee nor beneficiary, and as to
which Mr. Clements disclaims beneficial ownership. Includes options on 990,000
shares which are currently exercisable and which are held either directly or
indirectly by officers and directors.
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ITEM 5 NATURE OF TRADING MARKET
Since July 8, 1997, the Company's common shares have been traded on
the Nasdaq Small Cap Market under the symbol "IELSF." From March 1, 1994 until
July 8, 1997, the Company's shares traded under the symbol "SKYGF". Prior to
March 1, 1994, there was no trading market for the securities of the Company in
the United States. Until voluntarily de-listed by the Company on December 30,
1994, the Company's common shares were traded on the Vancouver Stock Exchange
under the symbol "CEV."
The table below sets forth, for each full quarterly period within the
Company's two most recent fiscal years, the reported high and low closing prices
of the common shares in the Nasdaq Small Cap Market.
<TABLE>
<CAPTION>
Nasdaq Small Cap Market
Fiscal 1996 Fiscal 1997
----------- -----------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 6.63 4.50 6.50 2.50
Second Quarter 6.13 3.88 6.38 2.38
Third Quarter 5.00 2.75 4.75 3.25
Fourth Quarter 3.63 1.75 5.13 2.88
</TABLE>
At May 28, 1997, there were 207 holders of record of the Company's
common shares. Of these holders, 172 had registered addresses in the United
States and held a total of 8,688,131 common shares or approximately 65.3% of the
total of 13,304,405 common shares outstanding on that date. Since certain of the
common shares were held by brokers or other nominees, the number of record
holders in the U.S. may not be representative of the number of beneficial
holders or of where the beneficial holders are resident.
There have been no dividends paid to stockholders since the inception
of the Company on January 28, 1981. The Company currently intends to retain any
earnings it may achieve for use in its business, and therefore does not
anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be made by the Board of Directors in
light of the earnings, financial position, capital requirements, credit
agreements and such other factors as the Board of Directors deems relevant.
ITEM 6 EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS
An exempted company is classified as non-resident in Bermuda for
exchange control purposes by the Bermuda Monetary Authority ("BMA").
Accordingly, the Company may convert currency (other than Bermudian currency)
held for its account to any other currency without restriction.
Persons, firms or companies regarded as residents of Bermuda for
exchange control purposes require specific consent under the Exchange Control
Act 1972 of Bermuda, and regulations thereunder, to purchase or sell shares or
warrants of the Company which are regarded as foreign currency securities by the
BMA. Before the Company can issue any further shares or warrants, the Company
must first obtain the prior written consent of the BMA.
ITEM 7 TAXATION
The following paragraphs set forth, in general terms, certain United
States and Bermudian income tax considerations in connection with the ownership
of common shares of the Company. The tax considerations relevant to the
ownership of common shares of the Company are complex, and the tax consequences
of such ownership may vary depending on the individual circumstances of the
shareholder. Accordingly, each shareholder and prospective shareholder is urged
to consult his own tax advisor with specific reference to the tax consequences
of share ownership in his
11
<PAGE>
own situation. In addition, there may be relevant state, provincial or local
income tax considerations which are not discussed.
United States Federal Income Tax Considerations
Passive Foreign Investment Company. Because substantially all of the
Company's recent income has consisted of interest, the Company believes that it
presently constitutes a passive foreign investment company (a "PFIC") within the
meaning of (S) 1295 of the Internal Revenue Code of 1986, as amended. A foreign
corporation is a PFIC if 75% or more of its gross income for the taxable year is
from passive sources such as interest and dividends, or if the average
percentage of its assets during the year that produce passive income is at least
50%.
Certain adverse tax consequences apply to U.S. persons who are
shareholders of a PFIC. Specifically, U.S. shareholders of a PFIC are subject to
maximum rates of tax plus an interest charge on "excess distributions," which
includes gain on the sale of PFIC shares as well as certain distributions. The
interest charge is based upon the value of the deemed tax deferral, and on the
assumption that the excess distribution was earned pro rata over the
shareholder's holding period. In addition, a U.S. shareholder who uses PFIC
stock as security for a loan is treated as having disposed of the stock; a
transfer of the PFIC stock may fail to qualify for nonrecognition treatment that
would otherwise be available; special foreign tax credit limitations will apply
to a U.S. shareholder with respect to earnings of the PFIC; a U.S. shareholder
will not be entitled to a basis step-up in the basis of PFIC stock at death; and
the Company will continue to be treated as a PFIC throughout a U.S.
shareholder's holding period, even if it no longer satisfies the income or asset
tests for a PFIC described above.
The foregoing adverse tax consequences, other than the loss of the
step-up in basis at death, generally will not apply if (i) the U.S. shareholder
has elected to treat the PFIC as a qualified electing fund ("QEF") for each
taxable year in the shareholder's holding period beginning after December 31,
1986 for which the Company was a PFIC, and (ii) the Company complies with
reporting requirements to be prescribed by the IRS. In general U.S. shareholders
of a QEF are taxable currently on their pro rata share of the QEF's ordinary
income and net capital gain, unless they elect to defer payments of tax on
amounts included in income for which no distribution has been received, subject
to an interest charge on the tax deferral.
THE QEF ELECTION FOR A TAXABLE YEAR MUST BE FILED BY THE DUE DATE
(PLUS EXTENSIONS) FOR FILING THE U.S. SHAREHOLDER'S INCOME TAX RETURN FOR THE
YEAR. A U.S. shareholder makes the election by filing a "Shareholder Election
Statement," a "PFIC Annual Information Statement" and Form 8621 with its tax
return. A copy of the Shareholder Election Statement must also be filed with the
IRS Center in Philadelphia.
If the Company has been a PFIC for a taxable year beginning after
December 31, 1986 which includes any portion of a U.S. shareholder's holding
period, the U.S. shareholder may still make a QEF election for the Company and,
if so, may also elect to recognize any gain inherent in the shareholder's PFIC
stock, as of at the beginning of the first year in which the Company becomes a
QEF, as an excess distribution. A U.S. shareholder who makes this gain-
recognition election will thereafter not be subject to the tax regime for excess
distributions described above.
For so long as the Company remains a PFIC, the Company intends to
comply with the reporting requirements that will be prescribed in Treasury
Regulations, and to make available to its U.S. shareholders upon request a PFIC
Annual Information Statement to enable them to make QEF elections.
12
<PAGE>
Gain on Disposition; Distributions. Under certain limited
circumstances, non-U.S. shareholders will be subject to U.S. federal income
taxation at graduated rates upon gain or dividends, if any, with respect to
their common shares, if such gain or income is treated as effectively connected
with the conduct of the recipient's U.S. trade or business. Dividends, if any,
paid to U.S. persons will be generally subject to U.S. federal ordinary income
taxation, except for dividends of earnings that were previously taxed under the
QEF rules discussed above. Dividends will not be eligible for the deduction for
dividends received by corporations (unless such corporation owns by vote and
value at least 10% of the stock of the Company, in which case a portion of such
dividends may be eligible for such deduction). U.S. persons will be entitled,
subject to various limitations including the so-called "basket limitations," to
a credit for Canadian federal income tax withheld from such dividends.
Foreign Personal Holding Company and Controlled Foreign Company. The
Company would be a foreign personal holding company ("FPHC") for a taxable year
if more than 50% of its total combined voting power or the total value of its
stock were owned, actually or constructively, by five or fewer U.S. individuals
and 60% or more of its gross income were derived from passive sources such as
interest or dividends. The Company would be a controlled foreign corporation
("CFC") if more than 50% of the voting power or value of its stock were owned,
directly or indirectly, by U.S. persons each of whom own 10% or more of the
voting power of the Company's stock. The Company does not believe that it is an
FPHC or a CFC. If the Company were, or were to become, an FPHC or a CFC, some or
all U.S. shareholders would be required to include in their taxable income
certain undistributed amounts of the Company's income.
Reporting. Any U.S. person who owns 5% or more in value of the stock
of the Company may be required to file IRS Form 5471 with respect to the Company
and its non-U.S. subsidiaries and to report certain acquisitions or dispositions
of the stock of the Company. Annual filings of Form 5471 would be required from
any U.S. person owning 50% or more of the stock of the Company or, if the
Company were an FPHC or a CFC, from certain U.S. persons owning 10% or more of
the stock of the Company. U.S. shareholders of the Company while it is a PFIC
must filed Form 8621 with the IRS.
Bermudian Income Tax Considerations
Under present Bermuda law, no withholding tax on dividends or other
distributions, nor any Bermuda tax computed on profits or income or on any
capital asset, gain or appreciation will be payable by the Company on its
operations, nor is there any Bermuda tax in the nature of estate duty or
inheritance tax applicable to shares, debentures or other obligations of the
Company. Furthermore, upon continuance of the Company in Bermuda, the Minister
of Finance (Bermuda) gave the usual assurance under the Exempted Undertakings
Tax Protection Act 1966 of Bermuda that no such taxes shall be so applicable
until March 28, 2016, although this assurance will not prevent the imposition of
any Bermuda tax payable in relation to any land in Bermuda leased or let to the
Company or to persons ordinarily resident in Bermuda.
The Company is required to pay an annual Government fee (the
"Government Fee"), which is determined on a sliding scale by reference to a
company's authorized share capital and share premium account, with the minimum
fee being BD $1,680 and the maximum BD $25,000 (the Bermuda dollar is treated at
par with the U.S. dollar). The Government Fee is payable at the end of January
in every year and is based on the authorized share capital and share premium
account as they stood at August 31 in the preceding year.
13
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ITEM 8 SELECTED FINANCIAL DATA
The following selected financial data set forth below for, and as of
each of the five years ended at February 28, 1997, have been derived from the
Consolidated Financial Statements of the Company that have been audited by the
Company's current and former independent accountants. The financial data set
forth below should be read in conjunction with the Consolidated Financial
Statements, related notes and other financial information included elsewhere
within this annual report and with ITEM 9 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Exchange Rates
The following table sets forth, for the periods and dates indicated,
the average, high, low and end-of-period Noon Buying Rates for Canadian dollars
in Canadian dollars per U.S. dollar. The "Noon Buying Rate" means the noon
buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank in New York. On
August 26, 1997, the Noon Buying Rate was $1.3929 Canadian dollar per U.S.
dollar.
<TABLE>
<CAPTION>
Year Ended February 28 or 29 Average* High Low Period End
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1991 1.1457 1.1546 1.1623 1.1495
1992 1.2083 1.1825 1.1902 1.1725
1993 1.3217 1.2898 1.3484 1.2400
1994 1.4018 1.3659 1.4090 1.3085
1995 1.3937 1.3799 1.4238 1.3410
1996 1.3755 1.3455 1.4074 1.3722
1997 1.3607 1.3775 1.3310 1.3617
- -----------
</TABLE>
* The average of the exchange rates on the last day of each full calendar
month during the period.
The Consolidated Financial Statements have been prepared in U.S.
dollars and in accordance with generally accepted accounting principles ("GAAP")
in Canada, which differ in certain significant respects from U.S. GAAP.
Reconciliation to U.S. GAAP is set forth in Note 14 to the Consolidated
Financial Statements. The accounting principles used conform in all material
respects with accounting principles generally accepted in the United States.
There is also a U.S. GAAP table following the Canadian GAAP table.
14
<PAGE>
<TABLE>
<CAPTION>
Canadian GAAP
Years Ended February 28 or 29
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(U.S. Dollars) (Canadian Dollars)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Interest income 63,738 118,163 111,566 99,939 82,665
Lumber -- -- -- 88,834 --
Other -- -- 7,174 5,256 1,974
Expenses
Administration 3,277,601 3,125,022 2,845,128 2,203,728 683,468
Contract Buyout/Asset Write-down 1,796,554 -- 2,500,000 -- --
Net loss 4,637,588 3,006,859 5,226,388 2,009,699 598,829
Net loss per share 0.366 0.262 0.489 0.198 0.101
Weighted average number of shares
of common stock outstanding 12,568,687 11,467,332 10,626,624 10,149,949 5,929,944
Balance Sheet Data:
Working capital (172,131) (279,597) (521,575) 3,014,848 2,033,175
Deferred exploration, development
and administrative costs -- -- -- 105,697 105,697
Mineral claims -- -- 1 13,100 13,100
Total assets 3,524,576 4,318,210 4,058,871 6,177,289 4,183,619
Long-term debt -- 2,346,028 2,550,000 -- --
Total shareholders' equity 2,267,379 403,100 (238,180) 6,064,815 4,119,413
U.S. GAAP
Years Ended February 28 or 29
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(U.S. Dollars) (Canadian Dollars)
Statement of Operations Data:
Revenues
Interest income 63,738 118,163 111,566 99,939 82,665
Lumber -- -- -- 88,834 --
Other -- -- 7,174 5,256 1,974
Expenses
Administration 2,904,772 4,285,297 3,302,403 2,203,728 797,260
Contract Buyout/Asset Write-down 1,339,279 -- 2,500,000 -- --
Net loss 4,180,313 4,167,134 5,683,663 2,009,699 712,621
Net loss per share 0.462 0.525 0.794 0.311 0.134
Weighted average number of shares
of common stock outstanding 9,043,687 7,942,332 7,160,279 6,465,854 5,306,056
Balance Sheet Data:
Working capital (172,131) (279,597) (521,575) 3,014,848 2,033,175
Deferred exploration, development
and administrative costs -- -- -- 105,697 105,697
Mineral claims -- -- 1 13,100 13,100
Total assets 3,524,576 3,860,935 3,601,596 5,538,497 3,544,827
Long-term debt 2,600,000 2,346,028 2,550,000 -- --
Total shareholders' equity (332,621) (54,175) (695,455) 5,426,023 3,480,621
</TABLE>
15
<PAGE>
ITEM 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(all figures in U.S. dollars unless otherwise noted)
General. The Company announced its first contract with Singapore
Airlines ("SIA") in April of 1996. Negotiations are under way with a number of
other carriers, and based on a successful launch with SIA, the Company expects
it will secure additional airline contracts.
No revenues have been realized from the Sky Games technology to date.
The Company anticipates that the IFE industry will grow rapidly over the next
three to five years as airlines commit to interactive IFE hardware based on
improved product reliability and demonstrated revenue generation. Accordingly,
the Company is committed to building its core business by focusing initially on
the airline market but also investigating the potential of other venues such as
cruise ships, ferry boats, trains and hotel rooms.
The Company is taking steps to dispose of non-core assets, including
73 acres of free and clear property held for development on Bowen Island in
Vancouver, Canada as well as other miscellaneous assets unrelated to the IFE
business.
Results of Operations
In the year ended February 28, 1997, the Company applied its efforts
and resources to developing and improving its gaming software and airline
business potential through the operations of the Memphis, Tennessee offices of
IEL. The Company continued to fund its substantial financial commitment to its
software and business development programs by raising equity capital through
private placements.
Operating costs for fiscal 1997 were moderately larger than those of
the prior year, being approximately $3,277,000 compared to $3,123,000. The
increased operating expenses in fiscal 1997 discussed below are directly related
to the specific efforts of the Company in perfecting its Sky Games technology
and its intensive marketing and product awareness activity with the
international airlines industry.
Revenue for 1997 consisted solely of interest income of approximately
$64,000 compared to $118,000 for 1996.
Consulting and contract labor costs for 1997 were approximately
$1,108,000 compared to approximately $628,000 in 1996. Included were IEL costs
of approximately $870,000 for 1997 and $434,000 for 1996. The increase is due to
an increase in staffing needs that was fulfilled through the use of contract
labor.
Travel, advertising and product promotional costs increased to
approximately $626,000 from $459,000 in 1996 due to increased marketing of the
Company's product.
Office and administration costs decreased to approximately $444,000
from $543,000 in fiscal 1996 due to the closure of corporate offices in Las
Vegas, Nevada and Los Angeles, California in late 1995.
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<PAGE>
Professional fees, including legal and audit costs, were approximately
$316,000 for 1997 compared to approximately $300,000 in the prior year.
Interest and bank charges declined to approximately $300,000 in 1997
from $606,000 in 1996 due to the Company's efforts at securing equity capital
and reducing reliance on debt instruments to fund operations.
Management fees increased slightly to $211,000 in 1997 from $171,000
the prior year. Management fees include $120,000 paid to Harrah's in each year.
Investor relations and corporate costs were $120,000 in 1997 compared
to $93,000 in 1996, an increase of $27,000.
Amortization costs increased from $49,000 to $88,000 due to the
purchase of additional equipment, primarily computer hardware.
There were no finance fees in 1997 compared to $171,424 for 1996
representing additional corporate loan financing for the Company's financial
commitments to IEL.
Liquidity and Capital Resources
To date, the Company has financed its operations, as well as its
commitments to the IEL joint venture, through the proceeds of private equity
offerings, exercises of share purchase warrants, exercises of options, short
term corporate loan financings and interest on cash deposits.
At February 28, 1997, the Company had a negative working capital
position of $172,131. This compares with a negative working capital balance of
$279,597 at February 29, 1996.
Prior to the acquisition of the Sky Games software technology, the
Company loaned funds to SGII for use as working capital related to the
development of the gaming technology. This loan in the amount of $549,651 was
written off in 1997.
Accounting Principles
The Company's financial statements are reported on a Canadian
generally accepted accounting principles basis. The Company's auditors state
that no items in the financial statement would change materially, other than
the items discussed in Note 14 to the consolidated financial statements, if
reporting were changed to U.S. GAAP.
Lease Commitments
The Company has entered into two lease agreements for office and
development space as follows: (i) an office facility lease in Las Vegas, Nevada,
which expired in July 1997, and (ii) an office facility lease in Vancouver,
Canada, which expires in February 2000, with minimum payments under the lease
agreement of $1,916.02 Cdn. per month. In June, 1997, the Company entered into a
sub-lease agreement with Harrah's to lease approximately 9,400 square fee of
office space in Memphis, Tennessee for the Company's headquarters at
approximately $11,000 per month through April, 1999.
17
<PAGE>
Events Subsequent to February 28, 1997
The Company retained London Select Enterprises, Ltd. to make a private
placement of up to $3.5 million of 8% convertible debentures due March 31, 1999
pursuant to Regulation S, promulgated under the Securities Act of 1933, as
amended. As of August 26, 1997, sales had been closed on $1,863,250 of the
debentures. As of August 26, 1997, debentures with a principal amount of
$763,250 had been converted into 385,655 shares of Common Stock.
On June 16, 1997, the Company held a Special General Meeting of
shareholders at which the shareholders approved certain amendments to the Bye-
Laws of the Company changing the name of the Company to Interactive
Entertainment Limited, increasing the authorized share capital of the Company to
create 3,000 Class A Convertible Redeemable Preference Shares and 5,000,000
Class B Redeemable Preference Shares, and changing the par value of the
Company's Common Stock from Cdn. $.01 to U.S. $.01. Immediately following the
Special General Meeting, and pursuant to a Plan and Agreement of Merger and
Amalgamation dated May 13, 1997, IEL was amalgamated into SGIH (the "Subsidiary
Amalgamation") and then into Sky Games International (the "Parent
Amalgamation"). Prior to the Amalgamations, Harrah's owned 20% of the capital
stock of IEL and did not own any capital stock or other securities of Sky Games
International and had no representatives on the Board of Directors of the
Company, (the "Board"). As a result of the Amalgamations, the outstanding shares
of IEL common stock held by Harrah's were converted into 5,879,040 shares of
Common Stock of the Company. See the Company's Form 6-K dated May 16, 1997,
incorporated herein by reference, for information regarding the Parent
Amalgamation and the Subsidiary Amalgamation.
Pursuant to the Amalgamation Agreement, Harrah's was provided with the
right to appoint persons to the Board and to specified committees in a number
generally proportionate to their share holdings. Additionally, Harrah's was
provided with the right to approve specified significant corporate actions by
the Company for as long as the ownership of Common Stock by Harrah's is in
excess of 20% (10% in some cases) of the outstanding voting shares computed on a
fully-diluted basis.
Upon consummation of the Parent Amalgamation, Sky Games changed its
name to Interactive Entertainment Limited and appointed Gordon Stevenson as
President and Chief Executive Officer. The Company is in the process of
consolidating certain operations formerly performed at its Vancouver, British
Columbia office into its Memphis, Tennessee headquarters.
On June 17, 1997, and in conjunction with the Amalgamations, the
Company entered into a Continuing Services Agreement with Harrah's under which
Harrah's will provide certain telecommunications, computer systems support and
consulting services to the Company.
On June 17, 1997, and in conjunction with the Amalgamations, the
Company entered into a Software License Agreement with Harrah's (the "License
Agreement"). The License Agreement is a fully paid, perpetual, world-wide
license to Harrah's and its affiliates to use the Company's gaming technology in
non-competitive uses in traditional casino venues owned, operated or managed by
Harrah's affiliates. The License Agreement includes source codes for all
software, but neither party to the License Agreement has any obligations to
share or provide any improvements or modifications with the other party.
On June 17, 1997, and in conjunction with the Amalgamations, the
Company entered into a Termination Agreement and Release (the "Termination
Agreement") among SGI Holding Corporation Limited ("SGIHC"), Sky Games
International Corp. ("SGIC"), Harrah's Interactive Entertainment Company
("HIEC"), Harrah's Interactive Investment Company, and the Company's operating
subsidiary, then known as IEL. The Termination Agreement provides for
termination of a management agreement between IEL and HIEC; termination of a
shareholders agreement among the Company, HIIC and IEL; termination of a cross-
license agreement among the Company, SGIHC, SGIC, HIIC and IEL; and termination
of a trademark license among the Company, SGIC, SGIHC and IEL.
As of April 30, 1997, the Company issued to Dr. Rex E. Fortescue,
formerly a director of the Company, and Anthony P. Clements, a director of the
Company, 175,000 and 333,000 shares of Common Stock, respectively, as
consideration for agreements to tender 525,000 and 1,000,000 of the Performance
Shares, respectively, which are held in escrow pursuant to a performance earn-
out, when and if such shares are released from escrow.
As of April 30, 1997, the Company forgave the outstanding balance of a
note made by SGII, a company controlled by James P. Grymyr, a director of the
Company, and his wife to the Company in the approximate amount of $549,651, and
issued to SGII 80,590 shares of Common Stock as consideration for SGII's
agreement to tender 2,000,000 shares of Common Stock owned by SGII which are
held in escrow pursuant to a performance earn-out, when and if such shares are
released from escrow.
As of April 30, 1997, the Company and Mr. Grymyr entered into a
consulting agreement whereby Mr. Grymyr would provide certain consulting
services to the Company. Under the terms of the
18
<PAGE>
agreement, as consideration for his past and future consulting services, the
Company has issued 586,077 shares of Common Stock to Mr. Grymyr. The agreement
will terminate April 30, 1998 unless terminated earlier by the Company.
On May 13, 1997, the Company entered into a Funding Agreement with
Harrah's under which Harrah's provided a loan of $1,000,000. On June 17, 1997,
the loan plus accrued interest was converted into 1,007,875 shares of Common
Stock. In addition, pursuant to the Funding Agreement, for 90 days following
June 17, 1997, the Company had the right to request Harrah's to purchase, under
certain conditions, up to 650,000 shares of Common Stock at a price of $1.00 per
share to provide working capital for the Company. However, the Company has
notified Harrah's that it will not exercise its rights with respect to the
650,000 shares. The above shares received by Harrah's plus the shares received
as a result of the Amalgamations make Harrah's the largest shareholder of the
Company with approximately 37.8% of the outstanding shares as of August 26,
1997.
In December 1994, the Company discontinued an engineering and
marketing arrangement with BEA. As part of the termination, the Company issued
to BEA a promissory note in the original principal amount of $2.5 million at 12%
per annum. The note to BEA, in the approximate amount of $2.7 million as of
January 31, 1997 (including accrued and unpaid interest), was converted into
2,737 Class A Preference Shares.
Subsequent to the end of the year, the Company entered into a
Shareholder Rights Agreement with Harrah's providing for certain rights
contingent upon the share ownership of Harrah's. See "Changes in Securities and
Changes in Security for Registered Securities".
ITEM 10 DIRECTORS AND OFFICERS OF REGISTRANT
Charles L. Atwood has been a director of the Company since June 17,
1997. Mr. Atwood is vice president and treasurer for Harrah's Entertainment Inc.
Mr. Atwood joined Holiday Inns, Inc. in 1979, where he worked on the
acquisition of Harrah's by Holiday Inns, Inc. He moved to Investor Relations in
1980 and handled this function throughout the transitions of the Company from
Holiday Inns to Holiday Corporation, the sale of the Holiday Inn brand, the
spin-off of the Promus Companies, and the spin-off of the Company's hotel brands
to Promus Hotel Corporation. Harrah's Entertainment was created as a result of
the last spin-off. Mr. Atwood is also a director of Perkins Family Restaurants
L.P., a public company.
John M. Boushy has been a director of the Company since June 17, 1997.
He also served as a director of IEL from December, 1994 until June 17, 1997. He
was President of IEL from December, 1994 until November, 1996. Mr. Boushy joined
Harrah's Entertainment in 1979, and he is currently senior vice president of
information technology and marketing services.
Malcolm P. Burke has been a director of the Company since November of
1990. Mr. Burke was also a director of IEL from December of 1994 through June
17, 1997, and IEL (Singapore) Pte. Ltd., the Company's Singapore subsidiary,
from December of 1995 through June of 1997. Mr. Burke served as CEO of the
Company from November 30, 1992 until September 30, 1996 and served as president
of the Company from November 29, 1990 until June 17, 1997. Mr. Burke also served
as an officer and director of the Company's operating subsidiary prior to the
Amalgamations on June 17, 1997. Mr. Burke was previously associated with Royal
LePage Ltd. as a stockholder and investment broker. Mr. Burke is a director of
JPY Holdings LTD., a public company traded on the Vancouver Stock Exchange.
Anthony P. Clements has been a director of the Company since March of
1992. He was also a director of IEL from August 10, 1995 to June 17, 1997. Mr.
Clements is an investment banker with T. Hoare & Co., based in London, England,
where he has worked since 1994. From 1987 to 1994, Mr. Clements was an
investment banker for Rickets & Co., also based in London. Mr. Clements has also
managed the North American portfolio of Postel Investment Management (pension
fund managers for both the Post Office and British Telecom) from 1973 until
1987, and has worked in areas of corporate finance since 1987.
19
<PAGE>
Deborah Fortescue-Merrin has been a director of the Company since
October, 1995. She was also a director of IEL from February 14, 1996 to June 17,
1997. Ms. Merrin has been Vice-President of J. Perot Financial Corporation, a
Private Investment Management Company located in Vancouver, British Columbia,
since 1992. Previous to joining J. Perot Financial, Mrs. Merrin was a securities
broker with Yorkton Securities from 1991 to 1992 and with Haywood Securities
from 1986 to 1991 where she specialized in special situations concerning medical
issues.
Laurence S. Geller has been a director of the Company since September
30, 1996. Mr. Geller has also served as the Company's Chairman since September
30, 1996 and as the Company's CEO from September 30, 1996 to June 17, 1997. He
was a director of IEL from November 4, 1996 to June 17, 1997. Mr. Geller
currently is President and CEO of Strategic Hotel Capital Incorporated, a
Chicago based hospitality finance and investment firm. Mr. Geller is also CEO of
Geller & Co., a Chicago based hospitality, finance and consulting firm, which
Mr. Geller formed in 1989. Prior to forming Geller & Co., Mr. Geller was chief
operating officer of Hyatt Development Corporation.
Phillip Gordon has been a director of the Company since December 6,
1996. Mr. Gordon is a partner in the Chicago law firm of Altheimer & Gray, where
he has practiced law for 25 years. Altheimer & Gray has acted as lead corporate
and securities counsel to the Company since March, 1996. Mr. Gordon is admitted
to practice law in New York and Illinois.
James P. Grymyr has been a director of the Company since February of
1993. He has also served as President and as a director of Sky Games
International Corporation, a subsidiary of the Company, since February of 1993.
He has a background in the development of electronic games and game marketing.
Mr. Grymyr was previously the President of an electronic game developer and
manufacturer based in Las Vegas. He has created and manufactured electronic
games for amusement parks and arcades including Circus Circus. His background
includes years spent in advertising and management training industries. Mr.
Grymyr holds a B.A. in Journalism from the University of Minnesota.
Michael A. Irwin, has served as director of finance and administration
for IEL since August, 1995. Mr. Irwin has been chief accounting officer and
assistant secretary of the Company since June 17, 1997. Prior to joining IEL,
Mr. Irwin served in various accounting, finance and human resource management
capacities with Holiday Inns, Inc. from 1975 through 1991. Mr. Irwin was
Administrator of the Group Annuity Participant Protection Association from 1992
to 1996.
David Lamm joined the Company as chief financial officer, treasurer
and secretary on July 14, 1997. Prior to joining the Company, Mr. Lamm was vice
president of finance at McKesson Corporation's Information Technologies and
Capital Investments Divisions from March, 1995 to July, 1997. Prior to McKesson,
Mr. Lamm served as chief financial officer and treasurer at 3Net Systems, a
publicly traded software development company specializing in client/server
applications for the healthcare industry from October, 1993 to February, 1995.
Previously, Mr. Lamm served as vice president of finance for the Travel Services
Division of AMR Information Services, Inc. a wholly-owned subsidiary of AMR
Corp., parent company of American Airlines
Patrick J. Lawless served as chief financial officer and secretary of
the Company from February of 1996 until June 17, 1997. Mr. Lawless was a self
employed Chartered Accountant from 1992 to 1996 and performed work for various
private corporations.
20
<PAGE>
Gordon Stevenson has been CEO and president of the Company since June
17, 1997. Mr. Stevenson served as managing director of IEL from June 9, 1995
until November 4, 1996 when he became president. Mr. Stevenson was also a
director of IEL from August 10, 1995 to June 17, 1997. From 1991 to 1993, Mr.
Stevenson was president of Intrico, a joint venture between Marriott, Hilton,
AMR Corporation and Budget Car Rental. Between 1993 and June 9, 1995, Mr.
Stevenson operated his own management consulting group, assisting international
travel and leisure companies with strategic business planning. Prior to his work
at Intrico, Mr. Stevenson served as vice president of sales and marketing for
Hyatt International Corporation and director of sales and marketing for Europe
and the Middle East for Holiday Inns.
The Company is unaware of any family relationship between any director
or executive officer and any other director or executive officer.
ITEM 11 COMPENSATION OF DIRECTORS AND OFFICERS
For the year ended February 28, 1997, the aggregate compensation paid
or accrued by the Company and its subsidiary SGIC to all directors and officers
as a group (nine persons) for services in all capacities was $335,000. See
"Interest of Management in Certain Transactions."
ITEM 12 OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The following table shows, as of February 28, 1997, all outstanding
options to purchase shares of the Company's Common Stock, including the options
held by certain executive officers of the Company as set forth in the next table
below. As used herein, "options" includes all options, warrants or rights to
purchase such Common Stock.
<TABLE>
<CAPTION>
Number of Shares Exercise Price (U.S. $) Expiration Date
---------------- ----------------------- ---------------
<S> <C> <C>
1,110,000(1) $3.00 Feb 28, 2001
60,000(2) $4.125 Dec 10, 2006
308,528(3) $3.00 Jul 31, 1997
100,000(3) $3.00 Apr 30, 1999
</TABLE>
- --------------
(1) Options on the Company's Common Stock granted under the 1996 Stock Program.
(2) Options on the Company's Common Stock granted under the Directors Option
Plan.
(3) Warrants.
Effective December 6, 1996, the Company established, in concept, a Management
Incentive Plan by authorizing the issuance of options for 4,070,105 shares of
Common Stock. As of June 30, 1997, options allocated under the plan totaled
1,200,000 shares, all of which will vest specifically on sustaining certain
stock price levels. Effective December 6, 1996, the Company established a
Directors Option Plan covering 500,000 shares of Common Stock pursuant to which
all directors holding office at December 10th of each year will automatically be
granted options for 10,000 shares of Common Stock at the trading price on such
day.
21
<PAGE>
The following table shows all options and warrants to purchase Common
Stock as of February 28, 1997 for the primary executive officers of the Company
and for the directors and officers as a group.
<TABLE>
<CAPTION>
Optionee/Warrant Holder Number of Shares Exercise Price Expiration Date
- ------------------------- ---------------- -------------- ---------------
<S> <C> <C> <C>
Sopo Investments Ltd. (1) 300,000 $3.00 Feb 28, 2001
Geller & Co. (2) 200,000 $3.00 Feb 28, 2001
Malcolm P. Burke (3) 10,000 $4.125 Dec 10, 2006
Laurence Geller (3) 10,000 $4.125 Dec 10, 2006
All Officers & Directors 930,000 $3.00 Feb 28, 2001
All Officers & Directors 60,000 $4.125 Dec 10, 2006
</TABLE>
(1) All of the outstanding equity is owned by Malcolm P. Burke.
(2) Laurence Geller is a principal of Geller and Co.
(3) Options issued under the Director Option Plan.
ITEM 13 INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
See the Company's Form 6-K dated May 16, 1997, incorporated herein by
reference, for information regarding the interests of management in certain
transactions.
The Company paid $335,000 (1996 - $226,460) in consulting and
management fees to officers and to companies with common directors.
Included in accounts payable is approximately $586,000 due to Harrah's
Interactive Entertainment. This amount has been paid subsequent to the year end.
ITEM 14 DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable
PART III
--------
ITEM 15 DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 16 CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES
On June 17, 1997, in connection with the Amalgamations, the Company
entered into a Shareholder Rights Agreement (the "Shareholder Rights Agreement")
with HIIC. Pursuant to the Shareholder Rights Agreement, the Company has agreed
that for so long as Harrah's owns 20% or more of the outstanding voting shares
on a fully-diluted basis, any of the following actions by the Company require
the approval of the majority of the Board and the Harrah's appointees to the
Board: (i) the sale of all or any material portion of the assets of the Company
together with its subsidiaries; (ii) the incurrence, renewal, prepayment or
amendment of the terms of indebtedness of the Company together with its
subsidiaries in excess of $5 million in any one fiscal year; (iii) the Company
or any of its subsidiaries entering into any material joint venture or
partnership arrangement outside of its previously approved scope of business;
(iv) any material acquisition of assets by the Company or any of its
subsidiaries,
22
<PAGE>
including by lease or otherwise (other than by merger, consolidation or
amalgamation) other than pursuant to a previously approved budget or plan, or
the acquisition by the Company or any of its subsidiaries of the stock of
another entity, in each case involving an acquisition valued at $5 million or
more; (v) any material change in the nature of the business conducted by the
Company or any of its subsidiaries; (vi) any material amendments to the
Management Incentive Plan for 12 months following the Amalgamations; (vii) any
material changes in accounting policies; (viii) the adoption of any stock option
plans for greater than 5% of the then outstanding Common Stock of the Company on
a fully-diluted basis, other than the Management Incentive Plan, in any one
fiscal year; and (ix) the creation or adoption of any shareholder rights plan.
For so long as Harrah's owns 10% or more of the outstanding voting shares on a
fully-diluted basis, as to (x) any change in or conduct of the Company's
business or proposed business, or (y) any action or inaction of or by the
Company or any of its subsidiaries which Harrah's determines in its reasonable
business judgment would result in, in the case of either (x) or (y), any actual
or threatened disciplinary action or any actual or threatened regulatory
sanctions with respect to or affecting the loss of, or the inability to obtain
or failure to secure the reinstatement of, any registration, certification,
license or other regulatory approval held by Harrah's in any jurisdiction in
which Harrah's is actively conducting business or has received final approval or
authorization to proceed, even on a preliminary basis, from its respective board
of directors (or any appropriate committee established by such board of
directors) of plans to conduct business (each such change, conduct, action or
inaction a "Disqualifying Action"); provided, the reasonable business judgment
to be exercised by Harrah's in determining whether a Disqualifying Action has
occurred or would result need not involve any consideration of the effect of the
Disqualifying Action alone or together with its subsidiaries because the purpose
of the protections afforded by the determination of a Disqualifying action is
for the benefit of the separate businesses and investments of Harrah's.
On June 17, 1997, and in connection with the Amalgamations, the
Company entered into a Registration and Preemptive Rights Agreement with
Harrah's (the "Registration Rights Agreement"). Under the Registration Rights
Agreement, Harrah's has two demand registration rights to cause the Company to
register the Common Stock owned by Harrah's. Prior to June 30, 1998, no such
demand registration can be brought for a number of shares in excess of one
million shares unless the Company receives the opinion of its investment banker
that the trading price of the Common Stock would not fall by more than 25% for
more than 15 consecutive trading days as a result of such sale, in which case a
demand could be brought with respect to up to such number of shares of Common
Stock as would not cause the market price to fall below such level. Each such
offering is required to be underwritten on a firm commitment basis by an
underwriter chosen by the Company. Pursuant to the Registration Rights
Agreement, (until the earlier of when Harrah's owns less than 5% of the
outstanding voting shares of the Company on a fully-diluted basis), Harrah's has
customary piggy-back rights to include their shares of Common Stock in
registered offerings by the Company. Pursuant to the Registration Rights
Agreement, Harrah's has the right to purchase securities offered by the Company
for as long as Harrah's owns 20% or more of the outstanding Common Stock on a
fully-diluted basis at the same price and terms such securities are otherwise
being offered. Harrah's also has the right for as long as Harrah's owns 20% or
more of the outstanding voting shares, on a fully-diluted basis, to participate
on a proportionate basis in any non-pro rata stock repurchases or redemptions
conducted by the Company. Additionally, at any time that Harrah's owns less
than 10% of the outstanding voting shares, on a fully-diluted basis, the Company
has the right to cause Harrah's to sell their voting shares pursuant to a
registered sale, and Harrah's has the right to cause the Company to file a
registration statement to sell their voting shares in the event of any change in
or conduct of the business or proposed business of the Company or any of its
subsidiaries or any other action or inaction of the Company or any of its
subsidiaries which would jeopardize Harrah's gaming related licenses or if the
Company does not redeem a "Disqualified Holder" (as defined
23
<PAGE>
in and pursuant to the Company's Bye-Laws) of its securities, in each case at
the Company's expense without being subject to the limitations on demand rights
set forth above.
See the Company's Form 6-K dated May 16, 1997, incorporated herein by
reference, for information regarding changes in securities.
Forward-looking statements
Information included in this report may constitute forward-looking
statements that involve a number of risks and uncertainties. From time to time,
information provided by the Company or statements made by its employees may
contain other forward-looking statements. Factors that could cause actual
results to differ materially from the forward-looking statements include but are
not limited to: general economic conditions including their impact on
international air travel; technical aspects of integrating the Company's
software with third party hardware, networks and operating systems and other
third party software; changes in legal and cultural trends affecting the
legality and acceptance of inflight gaming; the timely development and
introduction of competitive products; entry of new competitors into the inflight
entertainment industry. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publicly update or revise any forward-
looking statement, whether as a result of new information, future events or
otherwise.
PART IV
-------
ITEM 17 FINANCIAL STATEMENTS
The Company has responded to Item 18 in lieu of responding to this
item.
ITEM 18 FINANCIAL STATEMENTS
The registrant's statements and schedules are contained on pages F-1
through F-20.
ITEM 19 FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
(a) Financial Statements
<S> <C>
Index to Consolidated Financial Statements and Supplementary
Data F-1
Fiscal Year Ended February 28, 1997
Independent Auditors' Report F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Deficit F-4
Consolidated Statement of Operations F-5
Consolidated Statement of Changes in Financial Position F-6
Notes to Consolidated the Financial Statements F-7
Consolidated Capital Assets and Accumulated Amortization F-20
Segmented Information by Industry F-23
</TABLE>
24
<PAGE>
(b) Exhibits
Exhibit
Number Description of Exhibits
- ------ ----------------------------------------------
1.1. Articles of Incorporation and Bylaws of the Company (Yukon Territory).
1.2+ Articles of Continuance and Bye Laws (Bermuda)
3.1. Asset Purchase Agreement, as amended, dated November 7, 1991, among
Sky Games International, Inc. ("SGII"), the Company and Sky Games
International, Corp. (formerly Forty-Four Inc.) ("SGIC") and
amendments thereto.
3.2. Escrow Agreement dated May 27, 1992, as amended, among Montreal Trust
Company of Canada, the Company and certain shareholders.
3.4. Indemnification Agreement dated February 19, 1993, between SGII and
SGIC.
3.5. Cooperation Agreement dated May 20, 1993, by and among BE Aerospace,
Inc. ("BEA"), the Company and SGII.
3.6. Lease dated November 3, 1992, between Leifer Trust and the Company.
3.7. Lease dated March 17, 1992, between Murray & Company Limited and the
Company.
3.8# Termination Agreement and Mutual Release, dated as of December 30,
1994, among the Company, BEA and SGIC.
3.9+** Services Agreement, Dated as of November 7, 1995, between IEL and
Singapore Airlines Limited.
3.10+** Software License and Software Services Agreement, dated as of November
7, 1995, between IEL and Singapore Airlines Limited.
3.11 Sublease Agreement dated as of June 5, 1997, between IEL and Harrah's
Operating Company, Inc.
3.12 Redemption Agreement, dated as of February 25, 1997, between the
Company and Anthony Clements and Rex Fortescue.
3.13 Redemption and Cancellation Agreement, dated as of April 30, 1997,
between the Company and Sky Games International, Inc.
3.14 Consulting Agreement, dated as of April 30, 1997, between the Company
and James P. Grymyr.
3.15 Shareholder Rights Agreement, dated June 17, 1997, between the Company
and Harrah's Interactive Investment Company.
25
<PAGE>
3.16** Software License Agreement, dated June 17, 1997, between the Company
and Harrah's Interactive Investment Company. (20 pages omitted.)
3.17 Continuing Services Agreement, dated June 17, 1997, between the
Company and Harrah's Interactive Entertainment Company.
3.18++ Plan and Agreement of Merger and Amalgamation, dated as of May 13,
1997, among the Company, SGI Holding Corporation Limited, IEL and
Harrah's Interactive Investment Company.
3.19++ Registration and Preemptive Rights Agreement, Dated June 17, 1997,
between the Company and Harrah's Interactive Investment Company.
3.20++ Registration Rights Agreement, dated June 17, 1997, between the
Company and B/E Aerospace, Inc.
3.21 Termination Agreement and Release, dated as of June 17, 1997, among
the Company, SGI Holding Corporation Limited, IEL, Harrah's
Interactive Investment Company, and Harrah's Interactive Entertainment
Company.
6.1 Consent of Buckley Dodds
.Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form 20-F (File No. 0-22622) as filed with the
Securities and Exchange Commission on October 12, 1993.
+Incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 20-F (File No. 0-22622) as filed with the Securities and
Exchange Commission on October 30, 1995.
#Incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 20-F (File No. 0-22622) as filed with the Securities and
Exchange Commission on September 16, 1996.
++Incorporated by reference to the exhibits to the Company's Form 8-K as filed
with the Securities and Exchange Commission on June 26, 1997.
**Confidential treatment has been requested.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, as amended, the registrant certifies that it meets all of the
requirements for filing Form 20-F/A and has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 1, 1998 INTERACTIVE ENTERTAINMENT LIMITED
(FORMERLY SKY GAMES INTERNATIONAL LTD.)
By: /s/ David Lamm
------------------------------------
Chief Financial Officer
27
<PAGE>
SKY GAMES INTERNATIONAL LTD.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
PAGE
AUDITORS' REPORT
CONSOLIDATED BALANCE SHEET 1
CONSOLIDATED STATEMENT OF DEFICIT 2
CONSOLIDATED STATEMENT OF OPERATIONS 3
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION 4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5-17
CONSOLIDATED CAPITAL ASSETS AND ACCUMULATED AMORTIZATION SCHEDULE 1
SEGMENTED INFORMATION BY INDUSTRY SCHEDULE 2
F-1
<PAGE>
[LETTERHEAD OF BUCKLEY DODDS]
AUDITORS' REPORT
To the Shareholders of Sky Games International Ltd.:
We have audited the consolidated balance sheets of Sky Games International Ltd.
as at February 28, 1997 and February 29, 1996, and the consolidated statements
of operations, deficit and changes in financial position for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at February 28, 1997
and February 29, 1996 and the results of its operations and the changes in its
financial position for the years then ended in accordance with Canadian
generally accepted accounting principles.
Vancouver, B.C.
April 28, 1997, except as to Note 11 (b) which is /s/ Buckley Dodds
as of May 14, 1997 Chartered Accountant
F-2
<PAGE>
SKY GAMES INTERNATIONAL LTD. 1.
CONSOLIDATED BALANCE SHEET
AS AT FEBRUARY 28, 1997 WITH COMPARATIVE FIGURES AT FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
ASSETS
1997 1996
<S> <C> <C>
CURRENT
Cash $ 626,074 $ 725,222
Accounts receivable 76,000 92,915
Prepaid expenses 61,975 3,729
Notes receivable (Note 3) 43,768 217,542
----------- ------------
807,817 1,039,408
COMPUTER GAMING TECHNOLOGY (Note 2b) - 457,275
DUE FROM AFFILIATED COMPANY (Note 4) - 560,753
SOFTWARE DEVELOPMENT (Note 2f) 1,357,869 393,895
CAPITAL ASSETS (Schedule 1) 1,358,890 1,866,879
----------- ------------
$ 3,524,576 $ 4,318,210
=========== ============
LIABILITIES
CURRENT
Payables and accruals $ 979,948 $ 822,852
Loans payable (Note 5) - 496,153
----------- ------------
979,948 1,319,005
NOTE PAYABLE (Note 6) - 2,346,028
----------- ------------
NON-CONTROLLING INTEREST (Note 277,249 250,077
----------- ------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 7) 106,752 97,451
CONTRIBUTED SURPLUS (Note 7) 15,324,379 11,431,813
PREFERRED SHARES ALLOTTED (Not 2,600,000 -
DEFICIT (15,763,752) (11,126,164)
----------- ------------
APPROVED BY THE DIRECTORS: 2,267,379 403,100
----------- ------------
/s/ Malcolm P. Burke $ 3,524,576 $ 4,318,210
- ------------------------------ =========== ============
Director
/s/ Deborah Fortescue-Merrin
- ---------------------------------
Director
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
SKY GAMES INTERNATIONAL LTD. 2.
CONSOLIDATED STATEMENT OF DEFICIT
FOR THE YEAR ENDED FEBRUARY 28, 1997 WITH COMPARATIVE FIGURES
FOR THE YEAR ENDED FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
BALANCE, beginning of year $11,126,164 $ 8,119,305
NET LOSS FOR THE YEAR 4,637,588 3,006,859
----------- ------------
BALANCE, end of year $15,763,752 $11,126,164
=========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
SKY GAMES INTERNATIONAL LTD. 3.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1997 WITH COMPARATIVE FIGURES
FOR THE YEAR ENDED FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
EXPENSES
Consulting and contract labour $ 1,108,492 $ 627,926
Travel, and advertising and promotion 625,945 459,497
Office and administration 443,908 542,715
Professional fees 315,929 300,153
Interest and bank charges 300,388 605,929
Management fees 211,000 171,307
Investors relations and corporate awareness 120,082 92,748
Amortization 87,976 48,903
Exchange loss 20,793 22,190
Filing and listing fees 20,301 44,170
Repairs and maintenance 18,236 4,358
Transfer agent 4,551 23,741
Finance fees - 171,424
Miscellaneous - 8,095
----------- -----------
3,277,601 3,123,156
----------- -----------
LOSS FROM OPERATIONS (3,277,601) (3,123,156)
----------- -----------
OTHERS
Interest income 63,738 118,163
Write-down of assets (Note 12) (1,796,554) (315,456)
----------- -----------
(1,732,816) (197,293)
----------- -----------
NET LOSS BEFORE NON-CONTROLLING INTEREST (5,010,417) (3,320,449)
NON-CONTROLLING INTEREST IN SUBSIDIARY 372,829 313,590
----------- -----------
NET LOSS FOR THE YEAR $(4,637,588) $(3,006,859)
=========== ===========
LOSS PER SHARE $0.366 $0.262
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
SKY GAMES INTERNATIONAL LTD. 4.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR ENDED FEBRUARY 28, 1997 WITH COMPARATIVE FIGURES
FOR THE YEAR ENDED FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES
Net loss for the year $(4,637,588) $(3,006,859)
Items not involving cash:
Amortization 87,976 48,903
Write-down of assets 1,796,554 315,456
Non-controlling interest (372,829) (313,590)
----------- -----------
3,125,887 (2,956,090)
Changes in non-cash working capital items
Accounts receivable 16,915 (78,882)
Prepaid expenses (58,246) 32,292
Payables and accruals 157,096 124,119
----------- -----------
(3,010,122) (2,878,561)
----------- -----------
FINANCING ACTIVITIES
Issue of common shares 3,901,867 3,648,139
Preferred shares allotted (Note 6) 2,600,000 -
Advances to affiliated company 11,103 (40,107)
Loans payable (496,153) (475,860)
Notes payable (2,346,028) (203,972)
Non-controlling interest 400,000 500,000
----------- -----------
4,070,789 3,428,200
----------- -----------
INVESTING ACTIVITIES
Purchase of capital assets (231,812) (9,278)
Notes receivable 35,971 14,967
Software development (963,974) (393,895)
----------- -----------
(1,159,815) (388,206)
----------- -----------
INCREASE(DECREASE) IN CASH (99,148) 161,433
CASH, BEGINNING OF YEAR 725,222 563,789
----------- -----------
CASH, END OF YEAR $ 626,074 $ 725,222
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
SKY GAMES INTERNATIONAL LTD. 5.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 1 BUSINESS DESCRIPTION
The Company is engaged in the business of developing implementing and
operating a computerized remote gaming device for use on international
air flights.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Consolidation
These consolidated financial statements include the accounts of Sky
Games International Ltd. (a Bermuda exempted company) and its
wholly-owned subsidiaries: Sky Games International, Corp. (a Nevada
corporation), Creator Island Equities Inc., SGI Holdings Corporation
Limited (a Bermuda exempted company) and its 80 percent owned
subsidiary Interactive Entertainment Limited (a Bermuda exempted
company).
b) Computer Gaming Technology
Computer Gaming Technology consists of the technology, proprietary
rights and prototypes of the casino gaming systems known as the "Sky
Games". These costs were written off in the year as in the opinion
of management the technology has been replaced by the Software
Development technology in the year.
F-7
<PAGE>
SKY GAMES INTERNATIONAL LTD. 6.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
c) Capital Assets
Capital assets are recorded at cost and are amortized in the
following manner:
Computer Equipment 30% Declining Balance
Construction Equipment 30% Declining Balance
Vehicles 30% Declining Balance
Office Equipment 20% Declining Balance
Computer Software 10% Declining Balance
Green House 10% Declining Balance
Irrigation System 10% Declining Balance
Shop Improvements 5 Years Straight Line
In the year of acquisition amortization is calculated at one-half of
the above-noted rates.
Gaming technology parts are to be used for the assembly of "Sky
Games" demonstration units. The units will be amortized over their
useful estimated life upon commencement of commercial use. The parts
were written down to current market value at February 28, 1997.
d) Foreign Currency Translation
Canadian currency assets and liabilities are translated into United
States dollars at the exchange rate prevailing at the balance sheet
date. Revenue and expenses are translated at the average exchange
rate during the year. The resulting gains or losses are expensed.
F-8
<PAGE>
SKY GAMES INTERNATIONAL LTD. 7.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
e) Loss Per Share
Basic loss per share has been computed based on the weighted average
number of common shares outstanding.
f) Software Development
Software Development costs are charged to research and development
until such time as the software reaches a stage where technological
feasibility has been established. Software production costs for the
year in Interactive Entertainment Limited have been capitalized.
After software production is completed and the software is placed in
service, the costs will be amortized on the straight line method
over the remaining economic life of the asset.
g) Measurement Uncertainty
The Write Down of Assets (note 12) is based on estimates of the
current market value of certain capital assets and notes receivable.
By their nature, these estimates are subject to measurement
uncertainty and the effect on the financial statements in such
estimates could be significant.
NOTE 3 NOTES RECEIVABLE
Notes receivable are represented by the following:
1997 1996
a) A promissory note with interest at
10% per annum is due on December 31,
1996. The Company has the option to
to convert the note into a 20% equity
position. A Lola Indy Lite race car
is pledged as Collateral for this
loan, however as the Indy Lite
format changed in the year the
company has written off the note
receivable in the year. - 127,200
F-9
<PAGE>
SKY GAMES INTERNATIONAL LTD. 8.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 3 NOTES RECEIVABLE (Continued)
1997 1996
b) A 10% promissory note due on Decem-
ber 31, 1996. The note may be repaid
by an offset against advertising
over the 3 year period of the note.
$49,756 was offset against the note
to advertising for the year ended
February 28, 1997,(1996: $49,879) - 49,756
c) An unsecured promissory note with in-
terest at 15% per annum due from
Painted Hills Partners Limited Part-
nership. This note was due on Sept-
ember 1, 1991 and has been extended.
The note and all outstanding interest
payments will be repaid upon the sale
of the property held by the partner-
ship. 43,768 40,586
----------- -----------
$ 43,768 $ 217,542
=========== ===========
NOTE 4 DUE FROM AFFILIATED COMPANY
The amount due from affiliated company is an unsecured promissory note
due from a company with a common director bearing interest at 6% per
annum and it was payable on or before February 19, 1996 which was
extended to August 31, 1997 and provided for quarterly payments of
$7,200 commencing March 1, 1996. Management is currently negotiating
with the affiliated company to redeem and cancel certain escrow shares
held by the affiliated company (subject to regulatory approval or
release of share from escrow) and terminate a management agreement (see
Note 10(a). As a result, management deems it likely that this loan
receivable will be expensed as part of the terms of the negotiation and
as a result the note receivable has been written off in the year.
F-10
<PAGE>
SKY GAMES INTERNATIONAL LTD. 9.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 5 LOANS PAYABLE
Loans payable are represented by the following:
1997 1996
A demand loan payable with interest
calculated at 12% per annum. $ - $ 57,011
A loan payable with interest cal-
culated at 12% per annum, payable
monthly and was due December 31, 1996. - 439,142
--------- ----------
$ - $ 496,153
========= ==========
NOTE 6 PREFERRED SHARES ALLOTTED
The Company bought out its engineering and marketing contract with BE
Aerospace, Inc. by issuing a senior convertible note due March 30, 1997
payable to BE Aerospace, Inc. with interest calculated at 12% per annum.
The note was convertible to common shares of the Company at the option
of BE Aerospace Inc. (BEA). At February 28, 1997 the Company entered
into an agreement with BEA to convert the senior convertible note in the
amount of $2,600,000, including accrued interest, into Convertible
Redeemable Preferred Shares subject to the creation of 3,000 Convertible
Redeemable Preferred Shares. As a result the amount has been disclosed
as Preference Shares allotted in shareholders' equity.
The preferred shares will have a value of $1,000 per share, are non-
voting and will have an annual dividend rate of 9%. The dividend is
payable quarterly and is cumulative.
BEA may convert the Preferred shares in whole or in part into common
stock of SGI at a conversion price of 70% of the average share price
prior to February 28, 1999, 65% of the average share price after
February 28, 1999 to August 31, 1999 and 60% thereafter. SGI is
obligated to issue sufficient shares on conversion to ensure the
outstanding balance of $2,600,000 is paid in common shares at the
prevailing market price.
SGI at its option may redeem the Preferred stock at a redemption price
of $1000 per share plus any accrued and unpaid dividends.
F-11
<PAGE>
SKY GAMES INTERNATIONAL LTD. 10.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 7 SHARE CAPITAL
Share capital is represented by the following:
Authorized: 50,000,000 Common Shares of no par value $0.01 per share
<TABLE>
<CAPTION>
Issued for: 1997 1996
<S> <C> <C> <C> <C>
NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE
Share Capital
Balance, beginning
Of year 12,046,434 $ 97,451 10,815,624 $ 88,193
Issued for
Warrants 893,086 6,547 - -
Issued for
Stock options 37,500 276 103,500 792
Issued for private
Placements 175,000 1,287 994,310 7,472
Issued for debt
Conversion 162,000 1,191 125,000 945
Issued for finders
Fee - - 8,000 49
---------- ---------- ---------- -----------
Balance,
end of year 13,314,020 $ 106,750 12,046,434 $ 97,451
========== ========== ========== ===========
1997 1996
Contributed Surplus, beginning of year $11,431,813 $ 7,792,932
Issued for warrants 2,784,961 -
Issued for stock options 63,833 193,459
Issued for private placements 479,963 2,975,431
Issued for debt conversion 563,809 499,160
Issued for finders fee - 43,956
----------- -----------
15,324,379 11,504,938
Less: private placement issue costs - (73,125)
----------- -----------
Contributed Surplus, end of year $15,324,379 $11,431,813
=========== ===========
</TABLE>
F-12
<PAGE>
SKY GAMES INTERNATIONAL LTD. 11.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1997 AND FEBRUARY 28, 1996
(U.S. Dollars)
NOTE 7 SHARE CAPITAL (Continued)
The continuance of the Company in Bermuda required that the authorized
and outstanding share capital of the Company be restructured and
reorganized in order to conform to the laws of Bermuda. As a result, par
value of $0.01 (Cdn) per share has been placed on the shares which
results in contributions over that amount to be classified as contributed
surplus.
At February 28, 1997 the following stock options to directors and
employees were outstanding:
NUMBER OF EXERCISE
SHARES PRICE EXPIRY DATE
1,190,000 U.S.$3.00 February 29, 2001
There are 3,525,000 common shares held in escrow. A total of 3,000,000
common shares were issued pursuant to the terms of the asset agreement
in connection with the acquisition with Sky Games International, Inc.
(Note 4} during the 1993 fiscal year. The remaining 525,000 common
shares were previously issued as principal's shares. All of the escrow
shares may be earned out on a pro rata basis of one share for each $1.78
U.S. of cumulative cash flow generated by Sky Games International, Corp.
At February 28, 1997, the following warrants were outstanding:
<TABLE>
<CAPTION>
NUMBER
OF WARRANTS EXERCISE PRICE EXPIRY DATE
<S> <C> <C> <C>
308,528 US $3.00 July 31, 1997
100,000 US $3.00 April 30,1999
</TABLE>
The Company was obligated to issue the 100,000 warrants at an exercise
price of US $3.00 for services rendered for the year ended February 29,
1996.
F-13
<PAGE>
SKY GAMES INTERNATIONAL LTD. 12.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 8 SIGNIFICANT EVENTS
a) The Company formed Interactive Entertainment Limited ("IEL"), a
Bermuda exempted company, on November 7, 1994 for the purpose of
entering into an arrangement with Harrah's Interactive Investment
Company ("Harrah's) to complete and develop a video system for
gaming activities. SGI Holding Corporation Limited ("SGIH") was
formed on the same day for the purpose of holding the Company's
interest. SGIH is a wholly owned subsidiary of the Company and SGIH
holds 80% of the issued and outstanding share capital of IEL.
Subsequent to the year end the Company proposes to purchase the
remaining 20% ownership of IEL and amalgamate the companies (Note
11a).
Harrah's and IEL are also parties to a Cross-License Agreement dated
December 30, 1994 with the Company. Pursuant to the Cross-License
Agreement (i)Sky Games granted IEL a license to software comprising
or related to the interactive video gaming entertainment system,(ii)
IEL granted Sky Games a license to improvements to said software,
and (iii)Sky Games and IEL granted licenses to Harrah's for software
and improvements, pursuant to which Sky Games granted a license to
IEL in certain trademarks, tradenames, service marks and service
names.
b) On December 30, 1994, IEL and Harrah's Interactive Entertainment, a
Nevada corporation, entered into a Management Agreement for an
initial period of 2 years with four separate successive extension
terms of two years each. Monthly fees to be paid to Harrah's is
equal to the greater of i) $10,000 per month, or ii) 6% to 7.5%
depending on revenue. Harrah's has the sole and exclusive right to
direct the management and operation of IEL's business. The
agreement shall automatically extend for each of the Extension
Term(s) unless Harrah's provides IEL with at least 120 days written
note of Harrah's intention not to extend the agreement prior to the
expiration of the initial or any extension term. A marketing
contribution fee of 1/2% of gross revenues is also required.
Subsequent to the year end the management agreement will terminate
on the proposed amalgamation of IEL into SGIH (Note 11a).
F-14
<PAGE>
SKY GAMES INTERNATIONAL LTD. 13.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 8 SIGNIFICANT EVENTS (Continued)
c) On December 30, 1994, SGI Holding Corporation Limited, IEL and
Harrah's entered into a Shareholder Agreement which among other
things, (i) imposes obligations on Shareholders in connection with
election of the Board of IEL, (ii) restricts transfer of the common
stock or other securities of IEL, (iii)provides Harrah's with
certain approval rights in connection with the securities, debt and
structure of IEL, (iv) defines the scope of IEL's business, (v) sets
forth a covenant of the Shareholders not to compete, (vi) sets forth
rules regarding capital contribution requirements and payment of
dividends, (vii) creates options to purchase shares held by SGI and
Harrah's in certain circumstances, (viii) creates a put right in
favor of Harrah's in certain circumstances, (ix) prohibits certain
actions of the Shareholders pursuant to a standstill provision, (x)
creates certain rights of first refusal upon a proposed transfer,
(xi) sets forth certain permitted transfers, and (xii) sets forth
provisions governing assignment of options or rights if first
refusal to IEL. Subsequent to the year end the Shareholder Agreement
will terminate on the proposed amalgamation of IEL into SGIC (note
11a).
NOTE 9 INCOME TAXES
As Bermuda exempted companies, Sky Games International Ltd. and
Interactive Entertainment Limited are not currently subject to income
tax filing requirements in Bermuda. Accordingly, there are no income
tax provisions, benefits, liabilities or assets reflected in the
accompanying statements. After operations begin, income earned by the
Companies may be subject to income tax in the country in which such
income is generated.
NOTE 10 RELATED PARTY TRANSACTIONS
a) During the year, the Company paid $335.000 (1995 - $226,460)for
consulting and management fees to officers and to companies with
common directors.
b) Included in accounts payable is $586,560 (1996: $181,583) due to
Harrah's by Interactive Entertainment Limited.
F-15
<PAGE>
SKY GAMES INTERNATIONAL LTD. 14.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 11 SUBSEQUENT EVENTS
a) Subsequent to the year end management has proposed an Agreement and
Plan of Amalgamation (the "Amalgamation Agreement") by and among the
Company, Harrah's Interactive Investment Company, a Nevada
Corporation ("HIIC"), SGI Holdings Corporation Limited, a Bermuda
exempted Company ("SGIHC") and Interactive Entertainment Limited, a
Bermuda exempted company ("IEL") pursuant to which, among other
things: (i) IEL will amalgamate with and into SGIHC (the "Subsidiary
amalgamation"); and (ii) the Company will convert HIIC's 1,00,000
shares of the common stock of IEL into 5,879,040 shares of common
stock, par value $.01 per share, of the Company (the "Conversion
Shares"), subject to adjustment. Additionally, it is contemplated
by the Amalgamation Agreement that, immediately after the Subsidiary
Amalgamations, SGIHC will amalgamate with and into the Company (the
"Parent Amalgamation").
As a result, management proposes to take certain other actions
required in connection with the Amalgamations including: (i)
entering into a Shareholder Rights Agreement with HIIC ; (ii)
entering into a Registration and Preemption Rights and Repurchase
Agreement with HIIC; (iii) entering into a Continuing Services
Agreement with Harrah's; (iv) entering into a License Agreement with
Harrah's; (v) amending the Bye -Laws of the Company to effect
certain covenants in the Amalgamation Agreement and to improve
management controls and shareholder protections; (vi) changing the
name of the Company to "Interactive Entertainment Limited"; (vii)
changing the par value of the authorized share capital of the
Company to U.S. $.01 each from Cdn. $.01 each; (vii) authorizing an
increase in the authorized share capital of the Company by the
creation of 3,000 Convertible Redeemable Preference Shares; and
(viii) authorizing an increase in the authorized share capital of
the Company by the creation of 5,000,000 Redeemable Preference
Shares.
The Amalgamation Agreement and the actions proposed by management in
connection with the Amalgamation are subject to shareholder and
regulatory approval.
b) Subsequent to the year end the company entered into a Private
Placement Agreement with London Select Enterprises, Ltd. pursuant to
which they would agree to place on a "best efforts" basis up to
$3,500,000,00. of 8% two year convertible debentures on behalf of
the Company, and an additional $2,000,000,00. of Convertible
Debentures on the same terms completed by August 1, 1997. Up to May
14, 1997 $763,250 has been received by the Company from the
placement of convertible debentures.
F-16
<PAGE>
SKY GAMES INTERNATIONAL LTD. 15.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 1997 AND FEBRUARY 28, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
NOTE 12 WRITE DOWN OF ASSETS
<S> <C>
</TABLE>
The following assets were written down to a nominal or current value
in the year due to impairment in the assets value:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer gaming technology (Note 2b) 457,275 -
Notes receivable (Note 3) 135,803 315,456
Due from affiliated company (Note 4) 549,651 -
Capital assets (Schedule 1)
- Land 442,238 -
- Gaming technology 209,587 -
---------- --------
$1,796,554 $315,456
========== ========
</TABLE>
NOTE 13 COMPARATIVE FIGURES
Certain of the 1996 comparative figures have been reclassified to
conform with the presentation adopted in 1997.
NOTE 14 DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
a) Primary earnings (loss) per common share calculated in accordance
with U.S. generally accepted accounting principles excluded shares
held in escrow pending the satisfaction of conditions other than
through the mere passage of time (i.e., "contingent" shares).
Accordingly, primary earnings (loss) per common share in accordance
with U.S. generally accepted accounting principles differs from
basic earnings (loss) per common share under Canadian generally
accepted accounting principles.
F-17
<PAGE>
SKY GAMES INTERNATIONAL LTD. 16.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 14 DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (Continued)
b) The Company includes in its costs basis of the computer gaming
technology acquired all costs relating to the purchase such as
shares issued, professional fees, finders fees, and research and
development expenditures funded. Under U.S. generally accepted
accounting principles, only the costs to the transferors are
recorded with any excess of their costs recorded as a preferential
distribution. As the computer gaming technology was written off in
the year (Note 2b), the effect on the statement of deficit at
February 28, 1997 has been eliminated.
c) The Company recorded the conversion of the note payable to BE
Aerospace, Inc. into Convertible Redeemable Preferred Shares based
upon an agreement entered into by the Company and BE Aerospace, Inc.
prior to the creation of the Convertible Redeemable Preferred
Shares. Under U.S. generally accepted accounting principles, the
conversion is recorded only after the creation of the Convertible
Redeemable Preferred Shares.
d) The Company did not record any expense when stock options were
issued in 1996 to non-employees and non-directors under the Sky
Games International Ltd. Stock Program. Under U.S. generally
accepted accounting principles the fair market value of the stock
options issued to non-employees and non-directors should be
recognized as expense at the grant date.
I) The following is the net loss per share for the purposes of U.S.
generally accepted accounting principles.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Loss per share according to
generally accepted accounting
principles in the U.S. $ 0.462 $ 0.525
============ ============
</TABLE>
II) The following is a reconciliation of the statement of deficit under
Canadian accepted accounting principles to U.S. generally accepted
accounting principles.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deficit as shown in the
financial statements $(15,763,752) $(11,126,164)
============ ============
Description of items having
the effect of increasing
reported deficit:
1) Increase in net loss
resulting from the
acquisitions of computer
gaming technology. - (93,276)
2) Preferential distribution
resulting from the acquisition
of computer gaming technology - (363,999)
3) Increase in net loss resulting
from the issuance of stock
options to non-employees and
non-directors under the Sky
Games International Ltd. Stock
Program (703,000) (703,000)
Deficit according to generally
accepted accounting principles
in the U.S. $(16,466,752) $(12,286,439)
============ ============
</TABLE>
F-18
<PAGE>
SKY GAMES INTERNATIONAL LTD. 17.
NOTES TO THE CONSOLIDATED STATEMENTS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
NOTE 14 DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (Continued)
III) The following is a reconciliation of the balance sheet under Canadian
generally accepted accounting principles.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer gaming technology as shown
in the financial statements $ - $ 457,275
Description of items having the
effect of decreasing reported
computer gaming technology:
1) Consulting, finders fees,and
R&D expenditures charged to
expenses as shown in Item II - (93,276)
2) Preferential distribution as
as shown in Item II - (363,999)
---------- ------------
Computer gaming technology according
To generally accepted accounting
principles in the U.S. $ - $ -
========== ============
</TABLE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Note payable as shown in the
financial statements $ - $2,346,028
Description of item having the
effect of increasing reported
note payable:
1) Conversion of note payable into
convertible redeemable preferred
shares prior to the creation of
the convertible redeemable
preferred shares 2,600,000
---------- ----------
Note payable according to generally
accepted accounting principles in
the U.S. $2,600,000 $2,346,028
========== ==========
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Preferred shares allotted as
shown in the financial statements $ 2,600,000 $ -
Description of item having the
effect of decreasing reported
preferred shares allotted:
1) Conversion of note payable
into convertible redeemable
preferred shares prior to the
creation of the convertible
redeemable preferred shares (2,600,000) -
----------- -----------
Preferred shares allotted
according to generally accepted
accounting principles in the U.S. $ - $ -
=========== ===========
</TABLE>
IV) The following is a reconciliation of the statement of operations under
Canadian accepted accounting principles to U.S. generally accepted
accounting principles.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net loss for the year as shown
in the financial statements $(4,637,588) $(3,006,859)
Description of items having the
effect on increasing or decreasing
reported net loss for the year:
1) Increase in net loss resulting
from the issuance of stock
options to non-employees and
non-directors under the
Sky Games International Ltd.
Stock Program (703,000)
2) Decrease (increase) in net loss
resulting from the acquisitions
of computer gaming technology
which was written off in 1997 93,276 (93,276)
3) Preferential distribution resulting
from the acquisition of computer
gaming technology which was
written off in 1997 363,999 (363,999)
----------- -----------
Net loss for the year according
to generally accepted accounting
principles in the U.S. $(4,180,313) $(4,167,134)
=========== ===========
</TABLE>
F-20
<PAGE>
SKY GAMES INTERNATIONAL LTD. SCHEDULE 1
CONSOLIDATED CAPITAL ASSETS AND ACCUMULATED AMORTIZATION
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
ACCUMULATED 1997 1996
COST AMORTIZA- NET BOOK NET BOOK
TION VALUE VALUE
<S> <C> <C> <C> <C>
LAND
Opening Balance $1,282,666 $ - $1,282,666 $1,282,666
Additions 4,318 - 4,318 -
Recovery of GST (44,746) - (44,746) (44,746)
Write down of value (442,238) - (442,238) -
---------- -------- ---------- ----------
Closing Balance 800,000 - 800,000 1,237,920
---------- -------- ---------- ----------
CONSTRUCTION EQUIPMENT
Opening Balance 151,837 104,170 47,667 68,095
Provision - 14,300 (14,300) (20,428)
---------- -------- ---------- ----------
Closing Balance 151,837 118,470 33,367 47,667
---------- -------- ---------- ----------
IRRIGATION SYSTEM
Opening Balance 19,831 5,817 14,014 15,574
Provision - 1,401 (1,401) (1,560)
---------- -------- ---------- ----------
Closing Balance 19,831 7,218 12,613 14,014
---------- -------- ---------- ----------
OFFICE EQUIPMENT
Opening Balance 81,943 14,895 67,048 20,927
Additions 232,439 - 232,439 54,024
---------- -------- ---------- ----------
314,382 14,895 299,487 74,951
Provision - 46,929 (46,929) (7,903)
---------- -------- ---------- ----------
Closing Balance 314,382 61,824 252,558 67,048
---------- -------- ---------- ----------
</TABLE>
.../Continued
See accompanying notes to the consolidated financial statements.
F-21
<PAGE>
SKY GAMES INTERNATIONAL LTD.
CONSOLIDATED CAPITAL ASSETS AND ACCUMULATED AMORTIZATION (Continued)
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
ACCUMULATED 1997 1996
COST AMORTIZA- NET BOOK NET BOOK
TION VALUE VALUE
<S> <C> <C> <C> <C>
VEHICLES
Opening Balance $ 60,833 $35,919 $24,914 $ 35,590
Provision - 7,474 (7,474) (10,676)
-------- ------- ------- --------
Closing Balance 60,833 43,393 17,440 24,914
-------- ------- ------- --------
GREEN HOUSES
Opening Balance 20,450 4,529 15,921 17,689
Provision - 1,591 (1,591) (1,768)
-------- ------- ------- --------
Closing Balance 20,450 6,120 14,330 15,921
-------- ------- ------- --------
NURSERY EQUIPMENT
Opening Balance 10,109 4,057 6,052 7,564
Provision - 1,106 (1,106) (1,512)
-------- ------- ------- --------
10,109 5,163 4,946 6,052
Disposals (10,109) (5,163) (4,946) -
-------- ------- ------- --------
Closing Balance - - - 6,052
-------- ------- ------- --------
SHOP IMPROVEMENTS
Opening Balance 17,592 10,559 7,033 11,433
Provision - 7,033 (7,033) (4,400)
-------- ------- ------- --------
Closing Balance 17,592 17,592 - 7,033
-------- ------- ------- --------
</TABLE>
.../Continued
See accompanying notes to the consolidated financial statements.
F-22
<PAGE>
SKY GAMES INTERNATIONAL LTD.
CONSOLIDATED CAPITAL ASSETS AND ACCUMULATED AMORTIZATION (Continued)
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
1997 1996
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
<S> <C> <C> <C> <C>
COMPUTER
Opening Balance 49,084 21,947 27,137 38,763
Provision - 8,141 (8,141) (11,626)
---------- --------- ---------- ----------
Closing Balance 49,084 30,088 18,996 27,137
---------- --------- ---------- ----------
GAMING TECHNOLOGY PARTS
Opening Balance 419,173 - 419,173 419,713
Write down of value (209,587) - (209,587) -
---------- --------- ---------- ----------
Closing Balance 209,586 - 209,586 419,173
---------- --------- ---------- ----------
TOTALS TO FEBRUARY, 1997 $1,643,595 $ 284,705 $1,358,890 $1,866,879
========== ========= ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-23
<PAGE>
SKY GAMES INTERNATIONAL LTD. SCHEDULE 2
SEGMENTED INFORMATION BY INDUSTRY
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(U.S. Dollars)
<TABLE>
<CAPTION>
1997
Gaming Nursery
Technology Land Operation Consolidated
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Segment operating loss $1,864,145 $ 503,437 $ - $2,367,582
---------- ---------- --------- ----------
General corporate expense 2,342,447
Interest expense 300,388
----------
5,010,417
Non-controlling interest 372,829
----------
Net loss $4,637,588
==========
Amortization $ 55,070 $ 32,906 $ - $ 87,976
---------- ---------- --------- ----------
Capital expenditures $ 232,439 $ 4,318 $ - $ 236,757
---------- ---------- --------- ----------
Identifiable assets $ 481,140 $ 877,750 $ - $1,358,890
---------- ---------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
1996
Gaming Nursery
Technology Land Operation Consolidated
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Segment operating loss $1,616,680 $ 47,504 $ 34,968 $1,699,152
---------- ---------- --------- ----------
General corporate expense 1,018,448
Interest expense 602,849
----------
3,320,449
Non-controlling interest 313,590
----------
Net loss $3,006,859
==========
Amortization $ 19,529 $ 35,504 $ 4,818 $ 59,851
---------- ---------- --------- ----------
Capital expenditures $ 54,024 $ - $ - $ 54,024
---------- ---------- --------- ----------
Identifiable assets $1,364,528 $1,147,534 $ 205,987 $2,718,049
---------- ---------- --------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-24
<PAGE>
EXHIBIT 6.1
<PAGE>
BUCKLEY DODDS
================================================================================
Chartered Accountants Suite 1140 - 1185 West Georgia Street
Vancouver, B.C. Canada V6E 4E6
Telephone: (604) 688-7227
Fax: (604) 681-7716
March 2, 1998
Securities Exchange Commission
Dear Sirs:
Re: Interactive Entertainment Limited, "the Company" (formerly Skygames
--------------------------------------------------------------------
International Inc.)
-------------------
We refer to the Form 20-F/A of the Company dated August 29, 1997.
We consent to the use in the above mentioned Form 20-F/A of our report dated
April 28, 1997, (except for Note 14 which is revised as of February 1, 1998), to
the shareholders of the Company on the following financial statements:
- Consolidated balance sheets as at February 28, 1997 and February 29,
1996;
- Consolidated statements of operations, deficit and changes in
financial position for the years then ended.
We report that we have read the Form 20-F/A and have no reason to believe that
there are any misrepresentations in the information contained therein that is
derived from the financial statements upon which we have reported or that is
within our knowledge as a result of our audit of such financial statements.
This letter is provided to the Securities Regulatory Authority to which it is
addressed pursuant to the requirements of their securities legislation and not
for any other purpose.
Yours truly,
/s/ Buckley Dodds
- ---------------------
BUCKLEY DODDS
Chartered Accountants
=====================================A Partnership of Incorporated Professionals
