As filed with the Securities and Exchange Commission on July 15, 1998
Registration No.333-48759
========================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
Amendment No. 3
to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
INTERACTIVE ENTERTAINMENT LIMITED
(Exact name of registrant as specified in charter)
845 Crossover Lane, Suite D-215
Memphis, Tennessee 38117
Bermuda (901) 537-3800 98-0170199
(State or other jurisdiction of (Address, including zip code, and telephone (I.R.S. Employer
incorporation or organization) number, including area code, of registrant's Identification No.)
principal executive offices)
--------------------
David B. Lamm
845 Crossover Lane, Suite D-215
Memphis, Tennessee 38117
(901) 537-3800
(Name, address, including zip code, and telephone number,
including area code, of agent for service.)
Copy to:
Andrew W. McCune
Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606
(312) 715-4000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
_______________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
- --------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
--------------------
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to such Section
8(a), may determine.
SUBJECT TO COMPLETION, DATED JULY 15, 1998
PROSPECTUS
2,290,814 Shares
INTERACTIVE ENTERTAINMENT
LIMITED
Common Stock
This Prospectus relates to the offer and resale by certain selling
shareholders (collectively, the "Selling Shareholders") of up to 2,290,814
common shares, $0.01 par value per share ("Common Stock"), of Interactive
Entertainment Limited, a Bermuda exempted company ("IEL" or the "Company"). Of
the shares offered hereby, 560,770 shares are being offered by Marshall Capital
Management, Inc. (formerly known as Proprietary Convertible Investment Group
Inc. ("MCM")), 560,770 shares are being offered by CC Investments, LDC ("CCI"),
112,154 shares are being offered by Palisades Holdings, Inc. ("PHI"), 1,035,120
shares are being offered by Henderson International Investments Limited ("HIIL")
and 22,000 shares are being offered by Jay Jacobson. See "Selling Shareholders"
and "Plan of Distribution."
The Common Stock to be sold by MCM, CCI and PHI was issued in connection with
a private placement of convertible preferred securities and warrants to purchase
Common Stock (the "Private Placement"). The Company has agreed with MCM, CCI and
PHI to register 200% of the number of shares Common Stock which could currently
be issued upon conversion of the preferred shares and exercise of the warrants
purchased as part of the Private Placement, which shares are included in the
2,290,814 shares of Common Stock offered hereby. HIIL purchased 748,997 shares
pursuant to a Subscription Agreement with the Company dated October 22, 1997 and
amended April 2, 1998 (the "HIIL Subscription Agreement") and 286,123 shares
pursuant to a purchase on June 5, 1998 on the same terms and received, as a term
of its investment, the right to include such shares in a registration statement
filed on behalf of MCM and CCI. Mr. Jacobson received his shares of Common Stock
to be sold hereunder pursuant to an agreement in March, 1997 to settle certain
amounts owed by the Company for financial relations services previously
performed by Mr. Jacobson on behalf of the Company. See "Risk Factors--Shares
Eligible for Future Sale; Possible Effect on Additional Equity Financing."
The Company has also agreed to pay certain fees and expenses incident to such
registration. It is estimated that the fees and expenses payable by the Company
in connection with the registration of the Common Stock will be approximately
$120,000. The Company intends to keep the registration statement, of which this
Prospectus is a part, effective until no later than June 30, 2000. See "Selling
Shareholders" and "Plan of Distribution."
The Company's Common Stock is quoted on the National Association of
Securities Dealers Automated Quotation System SmallCap Market ("Nasdaq"), under
the symbol IELSF. On July 6, 1998, the last reported sale price of the Company's
Common Stock on Nasdaq was $2.875 per share. SEE "RISK FACTORS" BEGINNING ON
PAGE 5 FOR FACTORS TO BE CONSIDERED IN CONNECTION WITH A PURCHASE OF SHARES OF
COMMON STOCK. Potential purchasers of Common Stock are advised that an
investment in shares of Common Stock is highly speculative and only those
purchasers who can afford to lose their entire investment should purchase shares
of Common Stock.
The Selling Shareholders directly, through agents designated from time to
time, or through brokers, dealers or underwriters also to be designated, may
sell the shares of Common Stock being offered hereby from time to time through
Nasdaq, any other securities exchange on which the Common Stock may be listed or
the over the counter market or through the writing of options on or settlement
of short sales of the Company Stock, at prices and on terms then prevailing
thereon, or in negotiated transactions or otherwise. See "Plan of
Distribution." Each of the Selling Shareholders reserves the sole right to
accept and, together with its agents, brokers, dealers or underwriters from time
to time, to reject in whole or in part any proposed purchase of shares of Common
Stock to be made directly or through any such agents, brokers, dealers or
underwriters.
The Selling Shareholders and any broker, dealers, agents or underwriters that
participate with the Selling Shareholders in the distribution of the shares of
Common Stock may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), and any commissions
received by them and any profit on the resale of shares of Common Stock
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. See "Plan of Distribution" herein for indemnification
arrangements among the Company and the Selling Shareholders.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
No dealer, salesperson or any other person is authorized to give any
information or make any representations in connection with the offering other
than those contained in this Prospectus, and if given or made, such information
or representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell or solicitation of
an offer to buy by anyone in any jurisdiction in which such offer to sell or
solicitation is not authorized, or in which the person making such offer is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to the date
hereof.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents have been filed with the Securities and Exchange
Commission (the "Commission") under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and are incorporated herein by reference:
(1) the Current Report on Form 8-K of the Company dated June 25, 1998;
(2) the Quarterly Report on Form 10-Q/A No. 1 of the Company dated July 8,
1998 for the quarter ended March 31, 1998;
(3) the Quarterly Report on Form 10-Q of the Company dated May 13,
1998 for the quarter ended March 31, 1998;
(4) the Annual Report on Form 10-K/A No. 2 of the Company dated July 8, 1998
for the year ended December 31, 1997;
(5) the Annual Report on Form 10-K/A No. 1 of the Company dated May 7, 1998
for the year ended December 31, 1997; and
(6) the Annual Report on Form 10-K of the Company dated March 31, 1998
for the year ended December 31, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the shares of Common Stock shall be deemed to
be incorporated by reference herein and to be a part hereof from the date of
filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus has been delivered, upon written or oral request, a copy of any or
all of the documents referred to above which have been or may be incorporated by
reference herein, other than exhibits to such documents (unless such exhibits
are specifically incorporated by reference therein). Requests for such copies
should be directed to Interactive Entertainment Limited, 845 Crossover Lane,
Suite D-215, Memphis, Tennessee 38117, Attention: David B. Lamm, Corporate
Secretary, telephone number (901) 537-3800. Copies of certain of these documents
may also be obtained from the website maintained by the Commission at
http://www.sec.gov.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that include, among
others, statements concerning the Company's plans to implement its software
products, commence generating revenue from certain of its products, expectations
as to funding its capital requirements, the impact of competition, future plans
and strategies, statements which include the words "believe," "expect" and
"anticipate," and other statements of expectations, beliefs, anticipated
developments and other matters that are not historical facts. These statements
reflect the Company's views with respect to such matters. Management cautions
the reader that these forward-looking statements are subject to risks and
uncertainties, including those described in the information set forth in "The
Company," "Risk Factors," "Description of Capital Stock" and "Shares Eligible
for Future Sale" and the documents incorporated into this Prospectus by
reference that could cause actual events or results to materially differ from
those expressed or implied by the statements.
2
THE COMPANY
IEL is in the business of developing a proprietary self-contained
computerized gaming system and acquiring additional games technology each for
commercialization in inflight use by international airline passengers and by
patrons in other non-traditional gaming venues. Many cultures do not approve of
gaming and many countries have prohibitions against or restrictions on gaming.
It is unknown how these cultural preferences may affect demand for inflight
gaming or how provision of inflight gaming might be regulated. Currently, gaming
is prohibited under U.S. law on flights to or from the United States on a
foreign air carrier, as well as all international flights of U.S. carriers and
all commercial flights within U.S. airspace. Other jurisdictions have also
imposed similar restrictions or restrictions on advertising or similar
promotional efforts which could reduce utilization of the program from projected
levels. Also, individual airlines or credit card companies may place
restrictions on aggregate and per-player losses, limitations on the amount of
individual wagers or other restrictions, which may limit the amount of revenue
generated by inflight gaming.
The Company's core product is marketed under the trade name Sky Games(TM).
The Sky Games(TM) system was developed to introduce gaming to international
airline passengers. The system enables 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. In order to operate the Sky
Games(TM) 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. Inflight
gaming transactions will be conducted through major credit cards. The major
credit card companies have developed rules for the use of their cards 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 Sky
Games(TM) system has been integrated with the IFE systems offered by Matsushita
Avionics Systems Corporation and is also intended to interface with systems
manufactured by other leading manufacturers, including, among others, B/E
Aerospace, Inc. ("B/EA"), Rockwell International Corp., Sony Trans Com Inc. and
The Network Connection, Inc. The Company does not believe that it has exposure
to the "Year 2000 Problem." Software developed by the Company is compliant with
dates in the year 2000. The Company uses commercial software produced by a
variety of vendors and believes that all of its major systems are compliant.
IEL announced its first contract, which is with Singapore Airlines ("SIA"),
in April of 1996. IEL's agreement with SIA sets forth a specific testing
protocol of the Sky Games(TM) system which, upon successful completion, is
intended to result in a staged roll-out of the system. The Company completed
this testing protocol, and SIA launched the first flight with gaming on June 1,
1998. The roll-out is to be made ultimately to all classes of service on SIA's
fleet of 58 wide-body aircraft. The pace of the roll-out depends on various
factors such as acceptance of the system, time for crew training, necessity of
addressing technical issues and the like. As a result, there is no timetable for
the roll-out and one cannot be predicted. IEL has not yet received and may never
receive significant revenues under its contract with SIA.
3
Based on conversations with SIA, the Company expects that the first
aircraft equipped with the Sky Games(TM) software will be flown for up to two
months from the launch date to evaluate: (i) acceptance of the system by
passengers; and (ii) the effectiveness of the already completed crew training
and to identify and, if necessary, correct any technical issues that may be
discovered during operations. Upon an evaluation satisfactory to SIA, it is
expected that the system would then be rolled out to the remaining SIA fleet of
wide-body aircraft over a period of up to 24 months. It is in SIA's discretion
to determine when and whether the performance of the Company's software is
sufficient such that it is acceptable to SIA. See "Risk Factors--Long Term
Development of Technologies; Limited Commercialization of Products to Date; --
Uncertainty of Achieving Business Objective; --Inability to Integrate Software;
and --New and Untested Product; Competition; Possible Restrictions."
Negotiations are under way with a number of other carriers in Asia and
Europe, and the Company expects it will secure additional airline contracts if
it is able successfully to demonstrate commercial viability on SIA. IEL
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 it is also investigating the potential of other venues such as
cruise ships, ferry boats, trains and hotel rooms. IEL has licensed its Sky
Games(TM) software as it existed on June 17, 1997 to subsidiaries of Harrah's
Entertainment, Inc. solely for use by Harrah's in traditional casino venues,
owned, operated or managed by Harrah's. The license is non-exclusive, royalty-
free, worldwide and non-terminable. The license was granted to Harrah's as part
of the consideration in the Amalgamations, and there was no additional
consideration paid by Harrah's. An affiliate of Harrah's owns 33.1% of the
Company's outstanding shares of Common Stock.
IEL recently acquired London-based Inflight Interactive Limited ("IIL").
The acquisition has resulted in increased product offerings in the way of
computerized games of skill and amusement. As a result of this acquisition, IEL
anticipates that it will gain greater market access to the world's leading air
carriers. The acquisition of IIL enables the Company to equip interested
carriers with computerized games of skill and amusement as possibly a forerunner
to supplying inflight gaming. IIL's games are marketed under the trade name Sky
Play(TM) and are in use on over 50 aircraft operated by Cathay Pacific, Egypt
Air, Lauda Air, Malaysia Airlines, Saudi Arabian Airlines and Virgin Atlantic.
American Airlines recently selected Sky Play(TM) games for inclusion on nine
A300-600 and B767-300ER aircraft beginning July 1, 1998 and 19 Boeing 777
aircraft currently on order, with deliveries to begin in January 1999.
Negotiations are underway with several other international carriers.
IEL has been working on the development and application of its Sky
Games(TM) system for cruise and ferry lines. As a possible extension of IEL's
core business strategy, it conducted a trial installation of in-cabin gaming on
board Princess Cruises' Sun Princess. IEL worked on the installation jointly
with Transdigital Communications Corporation ("TCC") in Brea, California. IEL
was the supplier of both the gaming software and the interfaces with Princess'
guest billing system. The software was integrated with TCC's Transtar
interactive video system which, among other was features, enabled a passenger to
gamble using the television set in the cabin or stateroom. The trial was
conducted in approximately 100 cabins. Based on results of the trial, Princess
Cruises concluded that, although the system was well received by passengers and
functioned as designed, utilization by passengers to purchase merchandise, shore
excursions and movies and to use the gaming features was insufficient to justify
the estimated current level of capital expenditures required to retrofit each
cabin and stateroom.
IEL has also completed the work necessary to make its Sky Play(TM) games
software compatible with all the major inflight interactive video systems. This
allows airlines who have interactive video systems from more than one
manufacturer to offer their passengers a consistent entertainment product across
their fleet. This cross-system compatibility is a feature only offered by IEL's
Sky Play(TM) games. The games have been successfully integrated with the
Matsushita 2000E, Rockwell Collins Passenger Systems Total Entertainment System
(TES), Sony Trans Com Inc. P@ssport, B/EA MDDS and the GMIS 27001K systems.
The mailing address of IEL's principal executive offices is 845 Crossover
Lane, Suite D-215, Memphis, Tennessee 38117, and its telephone number is (901)
537-3800.
4
RISK FACTORS
The securities offered hereby are highly speculative and prospective
purchasers should be aware that the purchase of such securities involves a high
degree of risk. In addition to other information in this Prospectus, the
following factors should be considered carefully in evaluating the Company
before purchasing the securities offered hereby. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth in
the following risk factors and elsewhere in this Prospectus.
History of Operating Losses and Accumulated Deficit
The Company commenced its software development operations in 1992 through a
wholly-owned subsidiary, Sky Games International Corp., a Nevada corporation,
which was formed to acquire, develop and commercialize entertainment
technologies from Sky Games International, Inc. ("SGII") on November 7, 1991.
Effective December 30, 1994, an indirect, majority-owned subsidiary of the
Company was formed under the name Interactive Entertainment Limited ("Old IEL")
by the Company along with Harrah's Entertainment, Inc., a large US-based gaming
company ("Harrah's"), through subsidiaries of Harrah's (the "Harrah's Entities")
as the minority equity holder. At that time, Old IEL acquired the Company's
rights to the Company's inflight gaming technology so it could be developed and
managed by the Harrah's Entities. On June 17, 1997, the Company reorganized by
amalgamating (the "Amalgamations") with its subsidiaries involved in the
development of the inflight gaming technology, including Old IEL, and exchanging
the Harrah's Entities' equity ownership and their contractual rights to manage
Old IEL for an approximate 38.2% equity interest in the Company at such time.
The Company is now responsible for the development of and commercialization of
its inflight gaming software which has not yet been used in any commercial
application. The Company has experienced significant operating losses and, as of
March 31, 1998, had an accumulated deficit of approximately $38.3 million.
The Company expects that it will continue to have a high level of operating
expenses and will be required to make significant up-front expenditures in
connection with development, marketing and implementation of its inflight gaming
technology. As a result, the Company anticipates significant additional
operating losses for 1998 and that such losses will continue thereafter until
such time, if ever, as the Company is able to generate sufficient revenues to
sustain its operations. There can be no assurance that the Company will ever
achieve profitable operations.
Significant Liquidity Restraints; Need for Additional Financing
The Company's cash available for funding its operations as of March 31,
1998 was $486,000. As of such date, the Company had trade payables and accrued
liabilities of $748,000. The Company currently has average monthly cash expenses
of approximately $350,000. Since the Company does not expect to generate
substantial revenues from the sale of any products, services or technologies in
the immediate future, the Company will require substantial additional funds from
other sources to complete its research and development, to conduct additional
tests and to market its product. The Company will attempt to acquire funds for
these purposes through operations, additional equity or debt financings,
collaborative arrangements with corporate partners or from other sources. No
assurance can be given that these funds will be available for the Company to
finance its development on acceptable terms, if at all. Pursuant to various
agreements with current holders of its equity, the Company is limited as to its
ability to incur indebtedness and the price as to which it can sell its equity
securities. If adequate funds are not available from operations or additional
sources of funding, the Company's business will suffer a material adverse
effect.
Ability to Meet Dividend Obligations
Dividends are payable quarterly in cash on the outstanding shares of Class A
Preference Shares at the rate of 9% per annum (or approximately $60,000 per
quarter) and on the outstanding shares of Series A and Series B Class B
Preference Shares at the rate of 8% per annum (or approximately $24,000 per
quarter). While the Company currently has adequate cash reserves for its next
quarterly dividend obligations, the Company's ability to pay dividends on the
Class A Preference Shares and the Series A and Series B Class B Preference
Shares is dependent upon receiving revenue from IEL's contract with SIA or
obtaining alternate financing, as to which there can be no assurance. Failure to
make such payments would have a material adverse effect on the Company. Upon
5
proper prior notification, the Company has the option of paying dividends on the
Series A and Series B Class B Preference Shares in shares of Common Stock. See
"Description of Capital Stock--Class A Preference Shares and --Class B
Preference Shares."
Long Term Development of Technologies; Limited Commercialization of Products to
Date
The Company has not yet begun to generate significant revenues from the sale
of products, services or technologies. Fees from the Company's Sky Play/TM/
software are currently approximately $20,000 per month which, together with
interest income, has been the Company's only source of regular revenue. IEL
launched its first revenue flight of its Sky Games(TM) software on SIA on June
1, 1998. The software is currently operational on just one aircraft and is not
expected to be extended to additional aircraft until approximately August 1,
1998. Because the Company's products are software which is continually being
enhanced and revised, the Company's products and technologies will require
continuing commercialization. There can be no assurance that such products or
technologies will prove an entertainment alternative selected by passengers or
be successfully commercialized and marketed. See "Markets and Marketing" and
"New and Untested Products; Competition; Possible Restrictions."
Goodwill; Three Year Amortization Period
IEL has assigned a three-year life to the goodwill resulting from purchase of
the minority interest as part of the Amalgamations. The Company has assigned a
three-year life to this asset since there is a significant risk that the
technology purchased will become obsolete over a relatively short time period.
The technology industry is characterized by rapid advances, frequent product
introductions and evolving industry standards. IEL believes that its future
success depends on its ability to continue to enhance its existing products and
to develop, on a timely basis, technologically advanced new products that meet
industry standards, perform successfully and achieve market acceptance.
Therefore, in order to remain competitive and to provide "state-of-the-art"
entertainment software, the Company expects that it will be necessary to
continue development of its software products. If the Company is not able to
continue development, it is possible that it may not be able to retain existing
customers and to sell its products and services to new customers. There can,
however, be no assurance that IEL will be successful in selecting, developing
and marketing new products that will perform satisfactorily and achieve market
acceptance or in enhancing its existing products. Nor can there be any assurance
that IEL will be able to respond effectively to technological changes or new
product announcements by others or that IEL will be successful in augmenting its
software capability. See "Long Term Development of Technologies; Limited
Commercialization of Products to Date."
Markets 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. IEL's
primary target market is Asian and Pacific Rim airlines whose passengers, with
certain exceptions, generally have a broad cultural acceptance of gaming. IEL
believes that the Latin American and European markets may also hold strong
potential. Gaming is prohibited on the aircraft of U.S. commercial air carriers
and on all flights to and from the United States. Recent economic developments
in Asia may cause airlines to cancel or delay purchases of new aircraft and/or
IFE systems. Most airlines serving the Asian market have recently reported a
decrease in passenger load factors, and some have announced reductions in flight
frequencies and eliminations of service to some markets. It is possible that
these events will adversely affect IEL's ability to execute its business plan.
See "New and Untested Product; Competition; Possible Restrictions" and "Currency
Fluctuations."
Uncertainty of Achieving Business Objective
The business of IEL is currently focused on developing IEL's inflight gaming
software and becoming the preeminent provider of inflight entertainment content.
Although the Sky Games(TM) software is currently operating on one SIA aircraft,
given the inherent difficulties of developing a technologically complex product
such as the software for its gaming system and the delays which IEL has already
experienced in trying to integrate its software with the Matsushita Avionics
Systems Corp. 2000E (the "MAS 2000E") network and operating system and third
party provided software, there can be no assurance as to when or whether IEL
will be able to extend its software to additional aircraft so as successfully to
commercialize its gaming technology since the MAS 2000E system accounts for
approximately 75% of the interactive systems currently in use by international
airlines and is the system used by SIA. Currently, it is not expected that any
significant revenues will be received under IEL's agreements with SIA until
1999. IEL's agreement with SIA is subject to a trial period which is
expected to be from six to nine months in duration from June 1, 1998. During the
trial period, the agreement may be terminated by SIA for any reason.
Difficulty in Integrating Software
IEL attempted to integrate its inflight gaming software with the MAS
2000E network and operating system and other third party provided software with
which it is also required to integrate for over a year before succeeding. The
MAS 2000E system is only one of several competing systems used by major
airlines, and the Company's software will need to be integrated with each system
if the software is to be licensed to airlines using different IFE systems. It is
likely the same or similar problems as encountered integrating with the MAS
2000E system will be encountered with competing systems.
6
New and Untested Product; Competition; Possible Restrictions
Swissair began offering a limited program of inflight gaming in January,
1997 on an operating system provided by Interactive Flight Technologies, Inc.
("IFT"). Lauda Air announced in March, 1998 that it had began offering inflight
gaming in conjunction with InterGame Ltd. on an enhanced MAS 2000E system, which
differs from the MAS 2000E system currently utilized by SIA, on a majority of
its airplanes equipped with an IFE system. IEL does not have any reliable
information about the scale of either program or passenger reaction or
utilization levels. However, IFT has stated that due to receipt of less than
expected cash flow from the inflight gaming system, it is looking for
alternatives for investment of its capital. It is unknown what the acceptance
will be of such a program by passengers or what the actual level of utilization
will be. See "Markets and Marketing."
Many cultures do not approve of gaming and many countries have prohibitions
against or restrictions on gaming. It is unknown how these cultural preferences
may affect demand for inflight gaming or how provision of inflight gaming might
be regulated. Currently, gaming is prohibited under U.S. law on flights to or
from the United States on a foreign air carrier, as well as all international
flights of U.S. carriers and all commercial flights within U.S. airspace. Other
jurisdictions have also imposed similar restrictions or restrictions on
advertising or similar promotional efforts which could reduce utilization of the
program from projected levels. Also, individual airlines or credit card
companies may place restrictions on aggregate and per-player losses, limitations
on the amount of individual wagers or other restrictions, which may limit the
amount of revenue generated by inflight gaming. Geographically broad rejection
of inflight gaming or limitations or prohibitions on conducting inflight gaming
could prevent a market developing for inflight gaming software.
Potential Dilution
A substantial number of shares of Common Stock are or will be issuable by
the Company upon the conversion of the outstanding shares of its convertible
Class A and Class B Preference Stock (collectively, the "Preferred Stock") and
upon the exercise of warrants and options which the Company has issued. Such
issuances could result in dilution to a shareholder's percentage ownership
interest in the Company and could adversely affect the market price of the
Common Stock. Under the applicable conversion formulas of the Class A and Class
B Preference Stock, the number of shares of Common Stock issuable upon
conversion is inversely proportional to the market price of the Common Stock at
the time of conversion (i.e., the number of shares increases as the market price
of the Common Stock decreases); and except with respect to certain redemption
rights of the Company for the Preferred Stock and the limitation under NASD
rules, there is no cap on the number of shares of Common Stock which may be
issued. In addition, the number of shares issuable upon the exercise of warrants
is subject to adjustment upon the occurrence of certain dilutive events. For a
complete description of the rights of holders of Preferred Stock and warrants,
see "Description of Capital Stock." Up to an additional 250,000 shares of Common
Stock may be issued to the former shareholders of IIL under the terms of the
acquisition agreement regarding IIL if certain performance criteria are
achieved.
Shares Eligible for Future Sales; Possible Effect on Additional Equity Financing
On July 3, 1998, there were issued and outstanding a total of 20,797,158
shares of Common Stock. Under the terms and assumptions set forth herein, such
as conversion prices, if all the outstanding convertible Preferred Stock was
converted into shares of Common Stock and if all warrants and options
outstanding were exercised, there would be outstanding 27,447,923 shares of
Common Stock. Of these, the Company currently has registered for resale
3,524,508 shares of Common Stock which is 200% of 1,233,694 shares of Common
Stock plus 1,057,120 Common Stock as contemplated in this Prospectus. B/EA, the
holder of the outstanding Class A Preference Shares, has the right, subject to
certain conditions, to cause IEL to effect one demand registration of not less
than $2 million of its shares of Common Stock. Were B/EA to convert the Class A
Preference Shares into Common Stock and exercise its demand registration rights,
a substantial increase in the number of shares of Common Stock available for
trading would occur. The Company has an agreement with B/EA to redeem its
shares
7
of Class A Preference Shares in monthly installments of $100,000 on June 30,
1998, $200,000 on each of July 31, August 31 and September 30, 1998 and $100,000
on the last business day of each month thereafter beginning October 31, 1998
through May, 2000. See "Description of Capital Stock--Class A Preference
Shares."
When the Company acquired the rights to the inflight gaming software from
SGII, a portion of the consideration was 2,000,000 and 1,000,000 shares of
Common Stock issued to SGII and Mr. Anthony Clements, respectively, which,
according to then applicable requirements, were placed in escrow (the
"Performance Shares"). An additional 525,000 shares, which were issued to Dr.
Rex E. Fortescue, formerly a director of the Company, are held in the escrow on
the same terms and are also included as Performance Shares. Each of Messrs.
Clements and Fortescue, as of April 30, 1997, have agreed to allow the Company
to redeem and cancel the Performance Shares when and if they are released from
escrow for any reason whatsoever (the "Redemption Agreement"). As consideration
for such agreement to tender the Performance Shares for cancellation by the
Company in the event they are ever released from the escrow, the Company has
issued to Messrs. Clements and Fortescue, 333,333 and 175,000 shares of Common
Stock, respectively. SGII, as of April 30, 1997, has also agreed that it will
tender the 2,000,000 Performance Shares which it holds for cancellation by the
Company when and if such Performance Shares are released from escrow for any
reason whatsoever. In consideration of this agreement and the agreement of
James Grymyr, the principal of SGII and a former director of IEL, to provide
certain consulting services, IEL issued 666,667 shares of Common Stock. As a
result of the foregoing, management of the Company does not consider the
3,525,000 Performance Shares to be outstanding.
All of the 6,886,915 shares of Common Stock owned by the Harrah's Entities
as of July 3, 1998 are available for sale on the public market, subject to the
volume of sale, manner of sale and notice limitations of Rule 144 under the
Securities Act. The Harrah's Entities have the right to cause IEL to effect
three demand registrations and, under certain circumstances, to effect certain
other registrations of their shares of Common Stock. The 1,175,000 shares of
Common Stock issued in connection with the agreed-upon redemption of the
Performance Shares are available for sale on the public market, subject to the
limitations of Rule 144. As of January 13, 1999, the 500,000 shares of Common
Stock issued in connection with the acquisition of IIL will be available for
sale on the public market, subject to the limitations of Rule 144.
The sale, or availability for sale, of a significant number of shares of
Common Stock in the public market could adversely affect the market price of the
Common Stock. Sales, or the possibility of sales, of the shares of Common Stock
held by the Harrah's Entities, the holders of the shares issued in connection
with the acquisition of IIL, or the holders of the shares issued in connection
with the agreements for redemption and cancellation of the Performance Shares
could have an adverse affect on the market price of the shares of Common Stock.
In addition, certain holders of outstanding securities of the Company have
rights to approve and/or participate in certain types of future equity financing
by the Company. The availability to the Company of additional equity financing,
and the terms of any such financing, may be adversely affected by the foregoing.
Controlling Shareholder; Discretion of Largest Shareholder to Appoint Certain
Members of the Board of Directors and Approve Specified Corporate Actions
The Harrah's Entities, affiliates of Harrah's, are the largest shareholders
of IEL, holding, as of July 3, 1998, approximately 33.1% of the outstanding
shares, assuming the cancellation of the Performance Shares, (25.4 % on an
Adjusted Outstanding Basis (as defined in the Bye-Laws)). The Harrah's Entities'
indirect ownership interest will not change as a result of the sales
contemplated by this Prospectus but will be reduced by any issuance of the
shares of Common Stock contemplated to be sold pursuant to this Prospectus upon
conversion of the Series A and Series B Class B Preference Shares and the
warrants issued in the Private Placement. The Harrah's Entities' level of
ownership and their resulting rights pursuant to agreements with the Company and
the Company's constituent documents is expected to enable them to continue to
exercise substantial control over certain corporate actions of IEL. Pursuant to
the provisions of the Company's Bye-Laws and certain contractual agreements
between the Company and the Harrah's Entities, the Harrah's Entities have the
right to designate certain members of the Board of Directors as long as their
ownership is 5% or more of the fully-diluted shares outstanding, and approval of
such members is
8
required for certain significant corporate action, such as incurring debt or
selling equity in excess of certain amounts, making certain acquisitions or
changing lines of business. See "Description of Capital Stock--Common Shares."
Such control or share ownership may also have the effect of delaying or
preventing a change in control of IEL, impede a merger, consolidation, takeover
or other business combination involving IEL or discourage a potential acquiror
from making a tender offer or otherwise attempting to gain control of IEL.
Price Volatility
The market price of the Company's Common Stock has been, and may continue
to be, highly volatile. The Company believes that factors such as quarterly
fluctuations in results of operations, adverse circumstances affecting the
introduction or market acceptance of new products offered by the Company,
changes in or cancellations under existing contracts, change in the market
success of interactive computer networks and other products which utilize or
incorporate the Company's products, announcements of new products by
competitors, changes in accounting principles, sales by existing shareholders
(including sales from time to time of Common Stock issued upon conversion of the
Preferred Stock), short selling, loss of key personnel, and other factors will
continue to cause the market price of the Company's Common Stock to fluctuate
substantially. In addition, stock prices for many technology companies,
including the Company, fluctuate widely for other reasons (such as market
perception of high technology industries) unrelated to operating results or the
Company. These fluctuations as well as general economic, political and market
conditions, such as recessions or military conflicts, may adversely affect the
market price of the Company's Common Stock. Changes in the price of the
Company's Common Stock could affect the Company's ability to successfully
attract and retain qualified personnel or complete other transactions in the
future. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against companies with fluctuating stock prices. Such litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's operating
results and financial condition.
Currency Fluctuations
The Company currently conducts its operations with international airlines.
As a result, certain revenues, expenses, assets and liabilities of the Company's
operations may be denominated in foreign currencies. These foreign denominated
revenues, expenses, assets and liabilities would need to be translated to the
Company's reporting currency, the U.S. dollar. As a result, the Company's
operations may be exposed to a certain degree of exchange rate risk. The Company
does not currently engage in any hedging activities to mitigate its exchange
rate risk. There can be no assurance that the Company will not experience
material losses as a result of changes in the relative value of the foreign
currencies, as compared to the U.S. dollar. The Company may engage in hedging
activities in the future, in which case there can be no assurance that the
Company will not experience losses as a result of such hedging activities.
The Company's agreement with SIA and IIL's agreement with airlines are
denominated in U.S. dollars and, therefore, the revenue to the Company under
such agreement is not exposed to gain or loss on currency fluctuations. However,
as many of SIA's routes are in Asian countries which are currently experiencing
economic difficulties, such difficulties may adversely impact the usage level of
the Company's gaming software, in part because gaming in U.S. dollars will be
more expensive, and have a corresponding adverse impact on the Company's
revenues, once and if gaming begins on SIA.
Anti-Takeover Measures
In addition to the effect of the percentage ownership by the Harrah's
Entities, certain provisions of the Company's Bye-laws may have the effect of
discouraging unsolicited proposals for acquisition of control of the Company.
The Company's Board of Directors can, without obtaining shareholder approval,
issue shares of Class B Preferred Stock of the Company having rights that could
adversely affect the voting power of holders of the Common Stock, including the
right to vote as a class on any proposed change of control. Such an issuance
could have the effect
9
of delaying, deferring, or preventing a change of control of the Company and
might make it difficult to replace incumbent management.
DESCRIPTION OF CAPITAL STOCK
The class of securities to be registered is Common Shares, $0.01 par value
per share.
Capital Stock
The following statements with respect to the Company's capital stock are
subject to the detailed provisions of the Company's Memorandum of Continuance
and Bye-Laws, as amended (the "Bye-Laws"). These statements do not purport to
be complete and are qualified in their entirety by reference to the terms of the
Memorandum of Continuance and the Bye-Laws, each of which are incorporated by
reference into this Prospectus.
The Company is authorized to issue 50,000,000 shares of its Common Stock.
The Company also has authorized 3,000 non-voting convertible redeemable Class A
Preference Shares and 5,000,000 redeemable Class B Preference Shares. As of
July 3, 1998, 20,797,158 shares of Common Stock, 2,637.443 Class A Preference
Shares, 900 Series A Class B Preference Shares and 300 Series B Class B
Preference Shares were issued and outstanding.
Common Shares
Subject to the class rights of the Harrah's Entities, each share of Common
Stock of the Company entitles the holder thereof to one vote on all matters
submitted to a vote of the shareholders. In electing directors, shareholders
are not entitled to cumulative voting. Holders of Common Stock do not have any
preemptive rights or rights to subscribe to additional securities of the
Company. There are no conversion rights, redemption provisions or sinking fund
provisions applicable to the Common Stock nor is it subject to calls or
assessments by the Company. Upon liquidation, the holders of the Common Stock
are entitled to receive, pro rata, the net assets of the Company available for
distribution to shareholders. Holders of Common Stock are entitled to share
ratably in dividends when and as declared by the Board of Directors of the
Company out of funds legally available therefor.
Class Rights of the Harrah's Entities. The rights of the Harrah's Entities
under the Bye-Laws of the Company vary depending on their aggregate ownership of
Voting Shares on a fully-diluted basis as such term is defined in the Bye-Laws.
The Harrah's Entities do not have any obligations to the Company (e.g., to
provide financial, managerial or any other support) in connection with or as a
result of their class rights or otherwise. For purposes of the Bye-Laws,
"fully-diluted basis" mean at any time that number of (A) shares of Common Stock
equal to the sum, without duplication, of (i) the total number of shares of
Common Stock then outstanding (other than the 3,525,000 Performance Shares),
plus (ii) the total number of shares of Common Stock into which all then
outstanding Preferred Stock or any other shares of the Company are then
convertible directly or indirectly, provided that shares of Common Stock
issuable upon conversion of Class A Preference Shares shall not be included
until such conversion occurs, plus (iii) the total number of shares of Common
Stock then issuable directly or indirectly upon exercise of all then outstanding
options, warrants, unexercised stock subscriptions, convertible debentures and
other convertible securities plus (B) Voting Shares (other than Common Stock)
equal to the sum, without duplication (including without duplication of any
Common Stock) of (i) the total number of Voting Shares (other than Common Stock)
then outstanding, plus (ii) the total number of Voting Shares (other than Common
Stock) into which all then outstanding Preferred Stock or any other shares of
the Company are then convertible directly or indirectly, plus (iii) the total
number of Voting Shares (other than Common Stock) then issuable directly or
indirectly upon exercise of all then outstanding options, warrants, unexercised
stock subscriptions, convertible debentures and other convertible securities.
The number of Voting Shares on a fully-diluted basis may be different from or
the same as the number of Voting Shares on an Adjusted Outstanding Basis. As
used in the Bye-Laws, "Voting Shares" means all shares of voting securities of
the Company and "Adjusted Outstanding Basis" means the number of outstanding
shares of Common
10
Stock on an actual basis increased by 5,778,248, which represents the number of
shares of Common Stock issuable pursuant to certain convertible securities and
options outstanding at the time of the Amalgamations.
Board Representation. The Bye-Laws of IEL provide board representation
rights which apply to the Harrah's Entities in accordance with specified
percentages of equity ownership by the Harrah's Entities. These board
representation rights provide that: (i) at any time at which the Harrah's
Entities own 10% or more of the Voting Shares of IEL on a fully-diluted basis
(as defined in the Bye-Laws), the Harrah's Entities shall be entitled to appoint
a percentage of directors (rounded up to the nearest 10%) which bears the same
proportion to the size of the entire Board as the number of Voting Shares held
by the Harrah's Entities bears to the total number of Voting Shares of the
Company on a fully-diluted basis (as defined in the Bye-Laws), and the Harrah's
Entities would be entitled to proportionate representation on the Executive,
Compensation and Audit Committees of the Board; (ii) at any time at which the
Harrah's Entities own 5% or more, but less than 10%, of the Voting Shares of the
Company on a fully-diluted basis (as defined in the Bye-Laws), the Harrah's
Entities would be entitled to appoint one director to the Board and one member
of the Executive, Compensation and Audit Committees of the Board; (iii) the
Company may in a general meeting authorize the Board to fill any vacancy on the
Board, other than a vacancy in the office of a Harrah's Entities Appointee; (iv)
the size of the Board shall be fixed at 10 members until the Harrah's Entities
ownership interest falls below 5% of the Voting Shares of the Company on a
fully-diluted basis (as defined in the Bye-Laws); (v) at such time as the
Harrah's Entities own less than 5% of the Voting Shares of the Company on a
fully-diluted basis (as defined in the Bye-Laws) the Board shall consist of not
less than 3 directors; (vi) at least 2 of the directors sitting on the Board,
other than the Harrah's Entities Appointees, shall be outside directors; and
(vii) the Compensation Committee will be comprised of non-management directors.
Approval Rights. The Bye-Laws also provide that at any time that the
Harrah's Entities own 20% or more of the Voting Shares of the Company on a
fully-diluted basis (as defined in the Bye-Laws), any of the following actions
would require the approval of a majority of the Harrah's Entities Appointees as
part of the necessary majority of the Board of directors and the Harrah's
Entities' consent, as part of the necessary shareholder approval: (i) the
amalgamation, merger or consolidation of the Company; and (ii) any amendment to
the Bye-Laws of the Company which would have a material adverse effect on the
Harrah's Entities' rights under the Bye-Laws including their right to Board or
committee representation or Board or shareholder approval rights.
Shareholder Approval Rights. The Bye-Laws of IEL further provide for
certain approval rights to the Harrah's Entities as shareholders of the Company.
At any time that the Harrah's Entities own 20% or more of the Voting Shares of
the Company on a fully-diluted basis (as defined in the Bye-Laws), any of the
following actions would require the Harrah's Entities' consent, as part of the
necessary shareholder approval: (i) the dissolution or winding up of the
Company; and (ii) the appointment of the Company's independent auditors.
Rights to Protect Gaming Licenses and Integrity. The gaming industry is
highly regulated and gaming service providers are dependent on public perception
and regulatory licensing in order to conduct their business. Because public
perception and regulatory licenses can be jeopardized by the acquisition by
certain persons of material portions of the capital stock of entities engaged in
providing gaming, it is customary for participants in the gaming industry to
include in their charter documents provisions which enable them to redeem the
shares of persons whose acquisition of stock would put such participant's public
perception and regulatory gaming licenses at risk. Additionally, as a
relatively new venue for gaming, inflight gaming is, to a great degree, as of
yet, unregulated. Because inflight gaming is not, in many instances, subject to
intense regulatory scrutiny that other sectors of the gaming industry are
subject, IEL anticipates that it is incumbent upon market participants to be
highly vigilant in protecting its public perception and operational integrity.
Therefore, to protect its public perception and operational integrity and
ability to obtain the anticipated regulatory licenses, the Bye-Laws provide
that the Company is required to redeem, for cash at fair market value, the
shares of any holder of the shares of capital stock of the Company (such holder,
a "Disqualified Holder") (1) who, either individually or when taken together
with any other holders of shares of the Company, is or would reasonably be
expected to be determined by any gaming regulatory agency to be unsuitable, or
has or would reasonably be expected to have an application for a gaming license
or permit or other necessary regulatory approval rejected, or has or would
reasonably be expected to have a previously issued gaming license or permit or
other
11
necessary regulatory approval rescinded, suspended, revoked, not renewed or not
reinstated, as the case may be, whether or not any of the foregoing is or would
reasonably be expected to be final and nonappealable, or (2) whose holding of
shares, either individually or taken together with the holdings of others, could
reasonably be expected to cause the Company (or any other company engaged in the
gaming business in any jurisdiction if such holder of shares were a shareholder
of that company) to be denied a license, permit or other necessary regulatory
approval to engage in any aspect of the gaming business or the serving or sale
of alcoholic beverages in connection with the operation of a gaming business. A
Disqualified Holder's shares shall (i) be required to be redeemed whenever the
Harrah's Entities own 10% or more of the Voting Shares on a fully-diluted basis
(as defined in the Bye-Laws) and (ii) be subject to redemption by action of the
Board whenever the Harrah's Entities own less than 10% of the Voting Shares on a
fully-diluted basis (as defined in the Bye-Laws). Additionally, the Bye-Laws
provide for the automatic disqualification of any director or officer of the
Company who would be a Disqualified Holder if he were to own shares of the
Company.
Class A Preference Shares
All of the 2,637.443 outstanding shares of Class A Preference Shares are
held by B/EA. The Company has an agreement with B/EA pursuant to which B/EA and
the Company have agreed that the Company will redeem the Class A Preference
Shares held by B/EA at their redemption price of $1,000 per share plus accrued
and unpaid dividends in installments equal to $100,000 on June 30, 1998,
$200,000 on each of July 31, August 31 and September 30, 1998 and $100,000 on
the last business day of each month thereafter beginning October 31, 1998
through May, 2000. If the Company is in compliance with its redemption
obligations, B/EA has agreed not to convert any of its Class A Preference
Shares. Subject to the terms of such agreement, the Class A Preference Shares
are otherwise convertible by their terms at any time into a number of shares of
Common Stock, determined by dividing $1,000 per share of Class A Preference
Shares, plus any accrued and unpaid dividends thereon by: (i) prior to February
28, 1999, a conversion price equal to 70% of the average mean of the closing bid
and ask prices of the Common Stock for the 20 trading days prior to the
conversion (the "Market Price"); (ii) after February 28, 1999 and prior to
August 31, 1999, a conversion price equal to 65% of the Market Price; and (iii)
after August 31, 1999, a conversion price equal to 60% of the Market Price. In
the event the aggregate value of (i) the number of shares of Common Stock then
issued upon conversion of the Class A Preference Shares multiplied by the then
prevailing Market Price plus (ii) the number of shares of Common Stock issuable
upon further conversion of the Class A Preference Shares in accordance with the
foregoing formula multiplied by the then prevailing Market Price plus (iii) all
amounts received by B/EA in redemption of the Class A Preference Shares by IEL
plus (iv) all amounts received by B/EA as proceeds from the sale of shares of
Common Stock issued upon conversion of the Class A Preference Shares is less
than $2,737,443 (the "Loan Amount"), then IEL would be obligated to either (x)
issue such additional number of shares of Common Stock to B/EA such that at the
Market Price the aggregate value of B/EA's Common Stock, Class A Preference
Shares and redemption proceeds would equal the Loan Amount or (y) purchase all
Common Stock and Class A Preference Shares issued to B/EA for an amount equal to
the Loan Amount less B/EA's prior redemption proceeds. Dividends on the Class A
Preference Shares are cumulative as of February 28, 1997 and payable quarterly
at an annual dividend rate of 9% per $1,000. IEL, at its option, can redeem the
Class A Preference Shares, in whole or in part, at any time and from time to
time, at a redemption price of $1,000 per share to be redeemed plus any accrued
and unpaid dividends thereon. IEL is not required to redeem the Class A
Preference Shares. Upon liquidation, holders of the Class A Preference Shares
will be entitled to repayment of an amount equal to $1,000 per share plus
accrued and unpaid dividends, prior to any distributions to holders of Common
Stock. The Class A Preference Shares do not have any voting rights.
B/EA has, subject to certain conditions, one demand registration right with
respect to not less $2 million of the shares of Common Stock received pursuant
to a conversion of the Class A Preference Shares and the right to include its
shares of Common Stock received upon conversion of the Class A Preference Shares
in registered offerings by the Company. In the event that the Class A Preference
Shares issued to B/EA are converted into Common Stock, the number of shares of
Common Stock which were issued to the Harrah's Entities as consideration for the
Amalgamations shall be adjusted for any dilution from such conversion of Class A
Preference Shares. The Harrah's Entities also will have preemptive rights
pursuant to the Registration and Preemptive Rights Agreement which was entered
into in connection with the Amalgamations. See "Shares Eligible for Future
Sale--Registration Rights--The Harrah's Entities."
12
Class B Preference Shares
The Bye-Laws of the Company provide that the Board of Directors is
authorized to issue the Class B Preference Shares on such terms as it deems
appropriate, including, without limitation, the following: (i) the number of
shares of the Class B Preference Shares; (ii) whether dividends, if any, shall
be cumulative or non-cumulative and the dividend rate of the Class B Preference
Shares; (iii) the dates at which dividends, if any, shall be payable; (iv) the
redemption rights of the Class B Preference Shares; (v) the terms and amount of
any sinking fund provided for the purchase or redemption of shares of the Class
B Preference Shares; (vi) the amounts payable on shares of the Class B
Preference Shares in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of IEL; (vii) whether the shares of the
Class B Preference Shares shall be convertible into shares of any other class or
preference shares, or any other security, of the Company or any other company,
and if so, the specification of such other class of preference shares or such
other security, the conversion price or prices or rate or rates, any adjustments
thereof, the date or dates as of which such shares shall be convertible and all
other terms and conditions upon which such conversion may be made; and (viii)
the voting rights, if any, of the holders of the Class B Preference Shares.
The Company has outstanding two series of Class B Preference Shares, Series
A and Series B (collectively, the "Series A and B Class B Preference Shares").
The terms of the Series A and Series B Class B Preference Shares are
substantially identical. The Series A and Series B Class B Preference Shares are
convertible into such number of fully paid and non-assessable shares of Common
Stock ("Conversion Shares") as is computed in accordance with the terms of
resolutions adopted by the Board of Directors of the Company setting forth the
terms of such Series A and Series B Preferred Stock (a "Conversion") at any time
and from time to time, from and after the earlier to occur of (i) the date which
is after March 17, 1998 and (ii) the date on which the Registration Statement
(pursuant to the Registration Rights Agreement discussed below) is declared
effective (the "Initial Conversion Date").
The number of Conversion Shares to be delivered by the Company pursuant to
a Conversion shall be determined by dividing the aggregate stated value of the
Series A and Series B Class B Preference Shares to be converted by the
Conversion Price (as defined herein) in effect on the Conversion Date.
"Conversion Price" shall mean the lesser of (A) $3.2038 (the "Fixed Conversion
Price") and (B) a price (the "Floating Conversion Price") calculated by (i)
determining the average of the three lowest closing bid prices for the Common
Stock during the 30 trading days occurring immediately prior to (but not
including) the Conversion Date, and (ii) multiplying such average by a
percentage determined as described below (the "Conversion Percentage"). In the
event that, prior to the expiration of the period ending on the later of June
17, 1998 or the 45th day following the Effective Date (as defined in the
Registration Rights Agreement), the Company incurs, assumes or guarantees any
indebtedness in excess of $1,500,000, individually or in the aggregate, without
the prior written consent of the holders of two-thirds of the Series A and
Series B Preference Shares then outstanding then the Conversion Percentage for
all conversions of Series A and Series B Class B Preference Shares thereafter
shall be 85%. In the event the Company exceeds the foregoing limitations without
the requisite approval, the Company shall give each holder of Series A and
Series B Class B Preference Shares written notice of such event within five
business days of the date the limitation was exceeded.
The Conversion Percentage shall otherwise be determined in accordance with
the following schedule, where "X" represents the Conversion Date:
13
Number of Days
After December 17, 1997 Conversion Percentage
- -------------------------------------------------------------------------------
0 less than or equal X less than or equal 90 100%
- -------------------------------------------------------------------------------
90 Less-than X less than or equal 120 95%
- -------------------------------------------------------------------------------
120 Less-than X less than or equal 180 92.5%
- -------------------------------------------------------------------------------
180 Less-than X less than or equal 210 90%
- -------------------------------------------------------------------------------
210 Less-than X less than or equal 360 87.5%
- -------------------------------------------------------------------------------
360 Less-than X 85%
- -------------------------------------------------------------------------------
Dividends on the Series A and Series B Class B Preference Shares are
cumulative from their date of issue and payable quarterly in cash, or, upon
proper prior notice, in shares of Common Stock, at an annual dividend rate of 8%
per $1,000.
Warrants
Pursuant to each warrant issued in the Private Placement (each, a "Warrant"
and collectively, the "Warrants"), the holder thereof shall have the right to
exercise the Warrant at any time and from time to time following the expiration
of six months from December 17, 1997 (the issue date) up to and including 5:00
p.m., eastern time, on December 17, 1999 as to all or any part of the shares of
Common Stock covered thereby. The exercise price payable by the holder in
connection with the exercise of a Warrant shall be equal to $3.2038.
In addition to the 80,233 Warrants already issued as part of the Private
Placement and the 123,432 additional Warrants anticipated to be issued in
connection with completing the funding under the Private Placement, as of July
3, 1998 the Company has outstanding warrants exercisable for 112,343 shares of
Common Stock as follows:
Number of
shares issuable Date Became Exercise Expiration
Upon Exercise Exercisable Price/share Date
- --------------- ----------------- ----------- ----------------
4,900 June 1, 1997 $4.00 June 30, 2002
17,500 June 1, 1997 $4.80 June 30, 2002
57,600 September 1, 1997 $4.80 August 31, 2002
20,000 February 11, 1998 $3.50 March 17, 1999
12,343 April 22, 1998 $3.81 October 22, 1999
The Company also has a commitment to issue warrants for 0.85 shares of
Common Stock for each one share of Common Stock purchased by HIIL pursuant to
Tranche B of the HIIL Subscription Agreement and the additional purchase made on
June 5, 1998 provided HIIL continues to hold such shares of Common Stock
purchased by it for at least six months. If issued, the warrants will be
immediately exercisable at an exercise price of $2.62125 and will expire 18
months after their issue date. For a discussion of warrants which may be
issuable in connection with the HIIL Subscription Agreement, see "Selling
Shareholders--Additional Equity Commitments."
Options
The Company currently has outstanding options to purchase 1,130,000 shares
of Common Stock at $3.00 per share under the stock option plan approved by the
shareholders of the Company at the 1996 annual general meeting
14
(the "1996 Option Plan"). Such options are exercisable through March 1, 2001,
except for options for 20,000 shares of Common Stock which are exercisable
through March 17, 2002. See "Shares Eligible for Future Sale--Option Plans" for
a discussion of management and director option plans.
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
Selling Shareholders, including the number of shares of Common Stock
beneficially owned by each Selling Shareholder as of the date of this
Prospectus, the percentage of shares of voting stock outstanding held by each
and the number of shares of Common Stock offered hereby. There can be no
assurance that all or any of the shares of Common Stock offered hereby will be
sold.
Number of Shares Number of
of Common Stock Shares of Number of Shares of Percentage of
Beneficially Held Common Common Stock Shares of Common
Prior to Stock Beneficially Held Stock Outstanding
Selling Shareholder/(1)/ the Offering/(2)/ Offered After the Offering/(2)(3)/ After the Offering
- ------------------------ ----------------- --------- -------------------------- ------------------
Marshall Capital
Management, Inc./(4)(5)(6)/ 560,770 560,770 - *
CC Investments LDC/(4)(5)(7)/ 560,770 560,770 - *
Palisades Holdings,
Inc./(4)(8)(9)/ 112,154 112,154 - *
Henderson International
Investments Limited/(10)(11)/ 1,035,120 1,035,120 - *
Jay Jacobson/(12)/ 62,000 22,000 40,000 *
- -------------------
* Represents less than one percent of the outstanding shares of Common Stock.
/(1)/The persons named in the table, to the Company's knowledge, have sole
voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes hereunder.
/(2)/No holder of the Series A or Series B Class B Preference Shares or the
Warrants is entitled to convert or exercise such securities or to receive
dividends thereon in shares of Common Stock to the extent that such
conversion, exercise or payment of dividends would cause such holder to own
beneficially more than 4.9% of the Common Stock then outstanding.
Accordingly, the number of shares of Common Stock set forth herein and
which a Selling Shareholder may sell pursuant to this Prospectus may exceed
the number of shares of Common Stock such Selling Shareholder beneficially
owns as determined in accordance with Rule 13-3(d) of the Exchange Act.
/(3)/Assumes all shares of Common Stock offered hereby are sold pursuant to the
registration statement of which this Prospectus constitutes a part.
/(4)/The number of shares of Common Stock issuable upon conversion of Series A
and Series B Class B Preference Shares and in respect of stock dividends
issuable thereon will vary based upon the market value of the Company's
publicly-traded Common Stock prior to the date of conversion. For purposes
of the disclosure of Shares Beneficially Owned Prior to Offering, it has
been assumed (i) that the applicable conversion price will be $3.2038
(calculated in accordance with the applicable terms of the Series A and
Series B Class B Preference Shares as of the date of issuance of the Series
A Class B Preference Shares on December 17, 1997), (ii) that all shares of
Series A and Series B Class B Preference Shares beneficially owned by MCM,
CCI and PHI are converted into shares of Common Stock at such conversion
price in
15
accordance with the applicable terms of the Series A and Series B Class B
Preference Shares, (iii) that all Warrants beneficially owned by MCM, CCI
and PHI have been exercised for shares of Common Stock and (iv) that,
other than the dividend payable on March 30, 1998, all Common Stock
dividends accrued and payable in accordance with the terms of the Series A
and Series B Class B Preference Shares as of June 30, 1998 (the first day
such stock dividends may be issuable in accordance with the applicable
terms of the Series A and Series B Class B Preference Shares) have been
issued. For purposes of the disclosure of Shares Beneficially Owned After
the Offering, it has been assumed that the applicable Selling Shareholder
(x) has converted all shares of Series A and Series B Class B Preference
Shares beneficially owned by it into shares of Common Stock and has
received all Common Stock issuable as Common Stock dividends on such
Series A and Series B Class B Preference Shares as a result of such
conversion, (y) has exercised all Warrants beneficially owned by it and
(z) has sold all shares of Common Stock received by it upon such
conversion and exercise.
/(5)/ Consists of (i) 468,195 shares of Common Stock issuable upon conversion of
Series A Class B Preference Shares and (ii) 92,575 shares of Common Stock
issuable upon the exercise of the Warrants issued to MCM and CCI. Does not
include Series A Class B Preference Shares or Warrants which may be
issuable to MCM and CCI under certain conditions pursuant to the Private
Placement. See "--Additional Equity Commitments."
/(6)/ MCM is a wholly-owned indirect subsidiary of Credit Suisse First Boston,
Inc., a Delaware holding company and a wholly-owned indirect subsidiary of
Credit Suisse First Boston Group, a Swiss financial services company, and
consequently may be deemed to have voting control and investment
discretion over securities held by MCM. Credit Suisse First Boston, Inc.
disclaims beneficial ownership of any securities owned by MCM. Its address
is 11 Madison Avenue, 3rd Floor, New York, New York 10010.
/(7)/ Castle Creek Partners, LLC is the investment manager of CCI and
consequently may have voting control and investment discretion over
securities held by CCI. Castle Creek Partners, LLC disclaims beneficial
ownership of any securities owned by CCI. The address of Castle Creek
Partners, LLC is 333 West Wacker Drive, Suite 1410, Chicago, Illinois
60606.
/(8)/ Consists of (i) 93,639 shares of Common Stock issuable upon conversion of
Series B Class B Preference Shares and (ii) 18,515 shares of Common Stock
issuable upon exercise of the Warrants issued to PHI.
/(9)/ Mr. Brad Greenspan has sole voting control and investment discretion over
securities owned by PHI. His address is 505 South Beverly Drive, Suite
305, Beverly Hills, California 90212.
/(10)/Does not include a warrant for shares of Common Stock which HIIL may
acquire from the Company under certain conditions pursuant to the HIIL
Subscription Agreement or its June 5, 1998 purchase on the same terms. See
"--Additional Equity Commitments."
/(11)/Mr. Quinten Dreesmann has sole voting control and investment discretion
over securities owned by HIIL. His address is c/o Duncan Lawrie IOM, 14-15
Mount Havelock, Douglas, Isle of Man IM1 2QG, United Kingdom.
/(12)/Includes options for 20,000 shares of Common Stock and a warrant for
20,000 shares of Common Stock, each of which are currently
exercisable.
MCM and CCI acquired the Series A Class B Preference Shares and PHI
acquired the Series B Class B Preference Shares, each which is convertible into
the shares of Common Stock offered hereby, pursuant to the Private Placement on
December 17, 1997 and February 20, 1998, respectively, directly from IEL. HIIL
acquired the shares of Common Stock pursuant to the HIIL Subscription Agreement
on October 22, 1997. Mr. Jacobson received his shares of Common Stock to be sold
hereunder pursuant to an agreement in March, 1997.
The Company and MCM, CCI and PHI have entered into Registration Rights
Agreements pursuant to which the Company has agreed, among other things, to file
a registration statement in connection with public offerings of shares of Common
Stock, including the offering contemplated by this Prospectus, by MCM, CCI and
PHI. HIIL is including its shares pursuant to its right under the HIIL
Subscription Agreement to participate in registrations on behalf of MCM and CCI.
Additional Equity Commitments
Pursuant to the Private Placement, each of MCM and CCI have agreed that, in
the event the Sky Games/TM/ system is rolled-out by SIA to all classes of
service on one its wide-body aircraft prior to June 22, 1998, the Company will
have option to cause them to purchase, in the aggregate, an additional $2
million of Series A Class B Preference Shares and Warrants for a corresponding
number of shares of Common Stock on the same terms and conditions, including
conversion prices and registration rights, as their initial purchase. Upon
agreement of the parties, this additional funding has not occurred pending the
effectiveness of the Registration Statement of which this Prospectus is a part.
HIIL had also committed pursuant to the HIIL Subscription Agreement to purchase
and the Company had committed to sell, in the event the Sky Games/TM/ system was
rolled-out by SIA to all classes of service on one its wide-body aircraft prior
to April 22, 1998, an additional $1.5 million of Common Stock on the same terms
and conditions, including purchase price and registration rights, as HIIL's
initial purchase. To address the Company's need for immediate funding, the
Company and HIIL agreed that HIIL would waive the conditions as to one-half of
its additional purchase commitment and purchase $750,000 of Common Stock by
April 21, 1998. The remaining
16
$750,000 was still conditioned upon the roll-out of the Sky Games system by SIA
to all classes of service on one its wide-body aircraft prior to April 22, 1998.
This condition was not satisfied. Subsequently, IEL and HIIL agreed to a
$750,000 purchase on the same terms. This additional investment was consummated
on June 5, 1998. In consideration of these agreements, the Company and HIIL
agreed to change the purchase price for each $750,000 purchase to $2.62125 per
share and replace the warrants otherwise issuable pursuant to the HIIL
Subscription Agreement with a warrant to purchase .85 shares of Common Stock for
each share of Common Stock actually purchased pursuant to the HIIL Subscription
Agreement or the June 5, 1998 purchase for each $750,000 purchase and held for
six months which would be exercisable at the same purchase price as the Common
Stock. Such warrant would be exercisable for 18 months from its issue date. The
amendment to the HIIL Subscription Agreement was subject to certain conditions,
including receiving the necessary approvals and waivers from MCM, CCI and PHI
as well as from the Harrah's Entities, which were all satisfied prior to
consummation of the transactions contemplated by the amendment.
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from this offering. The
Company will receive the exercise price of any warrants pursuant to which
certain shares of Common Stock offered hereby will be issued, although there can
be no assurance that any such warrants will be exercised.
The shares of Common Stock offered hereby may be sold from time to time in
one or more transactions at a fixed offering price, which may be changed, or at
varying prices determined at the time of sale or at negotiated prices.
The Selling Shareholders may from time to time offer shares of Common Stock
offered hereby to or through one or more underwriters, brokers, dealers or
agents, who may receive consideration in the form of discounts and commissions;
such compensation, which may be in excess of ordinary brokerage commissions, may
be paid by the Selling Shareholders and/or the purchasers of the shares of
Common Stock offered hereby for whom such underwriters, brokers, dealers or
agents may act. Any such dealers or agents that participate in the distribution
of the shares of Common Stock offered hereby may be deemed to be "underwriters"
as defined in the Securities Act, and any profit on the sale of such shares of
Common Stock offered hereby by them and any discounts, commissions or
concessions received by any such dealers or agents might be deemed to be
underwriting discounts and commissions under the Securities Act. The aggregate
proceeds to the Selling Shareholders from sales of the Common Stock offered by
the Selling Shareholders hereby will be the purchase price of such Common Stock
less any broker's commissions and underwriter's discounts.
To the extent required by the Securities Act with respect to underwritten
offerings, the specific shares of Common Stock to be sold, the names of the
Selling Shareholders, the respective purchase prices and public offering prices,
the names of the underwriter or underwriters, and any applicable commissions or
discounts with respect to a particular offer will be set forth in an
accompanying Prospectus Supplement or, if appropriate, a post-effective
amendment to the Registration Statement of which this Prospectus is a part.
The sale of shares of Common Stock by the Selling Shareholders, or by
pledgees, donees or transferees of, or successors in interest to, the Selling
Shareholders, may also be effected from time to time by selling shares directly
to purchasers or to or through broker-dealers, which sales may include long or
short sales. In connection with any such sales, any such broker-dealer may act
as agent for the Selling Shareholders or may purchase from the Selling
Shareholders all or a portion of such shares as principal. Such sales may be
made through Nasdaq or any exchange on which the shares of Common Stock may then
be traded, in the over-the-counter market, in negotiated transactions or
otherwise at prices and at terms then prevailing or at prices related to the
then-current market prices or at prices otherwise negotiated. Shares may also be
sold in one or more of the following transactions: (i) block transactions (which
may involve crosses) in which a broker-dealer may sell all or a portion of such
shares as agent but may position and resell all or a portion of the block as
principal to facilitate the transaction; (ii) purchases by any such broker-
dealer as principal and resale by such broker-dealer for its own account
pursuant to a Prospectus Supplement; (iii) a special offering, an exchange
distribution or a secondary distribution in accordance with applicable Nasdaq
17
rules; (iv) ordinary brokerage transactions and transactions in which any such
broker-dealer solicits purchasers; (v) sales "at the market" to or through a
market maker or into an existing trading market, on an exchange or otherwise,
for such shares; (vi) transactions in options, swaps or other derivatives
(whether exchange listed or otherwise); (vii) sales in other ways not involving
market makers or established trading markets, including direct sales to
institutions or individual purchasers; and (viii) any combination of the
foregoing, or by any other legally available means. In addition, the Selling
Shareholders or their successors in interest may enter into hedging transactions
with broker-dealers who may engage in short sales of Common Stock in the course
of hedging the positions they assume with the Selling Shareholders. The Selling
Shareholders or their successors in interest may also enter into option or other
transactions with broker-dealers that require the delivery to such broker-
dealers of the shares of Common Stock, which shares of Common Stock may be
resold thereafter pursuant to this Prospectus.
In effecting sales, broker-dealers engaged by the Selling Shareholders may
arrange for other broker-dealers to participate. Broker-dealers will receive
commissions or other compensation from the Selling Shareholders in amounts to be
negotiated immediately prior to the sale that are not expected to exceed those
customary in the types of transactions involved. Broker-dealers may also receive
compensation from purchasers of the shares which is not expected to exceed that
customary in the types of transactions involved.
The Company will pay substantially all the expenses incurred by the Selling
Shareholders and the Company incident to the offering and sale of the shares of
Common Stock offered hereby to the public, but excluding any discounts,
commissions and fees of underwriters, broker-dealers or agents or legal fees
incurred by the Selling Shareholders. The Company has agreed to indemnify
certain of the Selling Shareholders against certain liabilities, including
liabilities under the Securities Act.
To the extent required, the specific number of shares to be sold, the names
of the Selling Shareholder(s), the respective purchase prices and public
offering prices, the names of any agents, dealers or underwriters, and any
applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying Prospectus Supplement or in an amendment to the
registration statement of which this Prospectus is a part, as appropriate.
SHARES ELIGIBLE FOR FUTURE SALE
On July 3, 1998, IEL had outstanding 20,797,158 shares of Common Stock.
Of these shares, 11,419,281 shares of Common Stock are freely tradeable without
restriction or further registration under the Securities Act, except for shares
purchased by an existing "affiliate" of the Company which will be subject to the
volume of sale, manner of sale and notice limitations of Rule 144 under the
Securities Act. The 9,377,877 remaining shares of Common Stock are "restricted"
shares under the Securities Act. The holders of the 3,525,000 Performance Shares
have agreed pursuant to separate agreements (the Redemption Agreement and the
Redemption and Cancellation Agreement) to tender such Performance Shares for
redemption by the Company when and to the extent they are released from the
escrow pursuant to which they are held. Upon receipt of any of the Performance
Shares, the Company has agreed to cancel such shares. In addition, such holders
have agreed to grant an irrevocable proxy to a national banking association
which has agreed not to vote the Performance Shares. As a result of the
foregoing, the 3,525,000 Performance Shares should not become available for
future sale and are not included in the total number of shares outstanding.
The Company currently has outstanding convertible Preferred Stock. If all
the outstanding convertible Preferred Stock were converted into shares of Common
Stock as at July 3, 1998, and if all warrants and options outstanding were
exercised, there would be outstanding 27,447,923 shares of Common Stock. Of
these, the Company currently has registered for resale 200% of the 1,233,694
shares of Common Stock as contemplated in this Prospectus. The Company has an
agreement with B/EA pursuant to which B/EA and the Company have agreed that the
Company will redeem the Class A Preference Shares held by B/EA at their
redemption price of $1,000 per share plus accrued and unpaid dividends in
amounts equal to either $100,000 or $200,000 per month through May, 2000 which
commenced on June 30, 1998. If the Company is in compliance with its redemption
obligations, B/EA has
18
agreed not to convert any of its Class A Preference Shares. See "Risk Factors--
Shares Eligible for Future Sales; Possible Effect on Additional Equity
Financing" and "Description of Capital Stock--Class A Preference Shares."
In general, Rule 144 provides a person, including affiliates of the
Company, may sell an amount of shares which were last purchased from the issuer
or an affiliate of the issuer a minimum of one year prior to such sales, such
that, within any three-month period, such person's sales do not exceed the
greater of 1% of the then outstanding shares of the Common Stock or the average
weekly trading volume in composite trading on all exchanges during the four
calendar weeks preceding such sale. In addition, sales under Rule 144 may be
made only through unsolicited "broker's transactions" or transactions directly
with a "market maker" and are subject to various other conditions. A person who
is not deemed an affiliate is entitled to sell shares which were last purchased
from the issuer or an affiliate of the issuer a minimum of at least two years
prior to such sale under Rule 144 without regard to the volume and other
limitations described above.
The market for the Common Stock has been thinly traded and may be
inefficient. There can be no assurance that a more meaningful trading market
will develop after the sales contemplated hereunder or that the trading market
will be any more efficient. No prediction can be made as to the effect, if any,
that market sales of shares of Common Stock or the availability of such shares
of Common Stock for sale will have on the market price of the Common Stock
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market may have an adverse impact on such market
price.
Registration Rights
The Harrah's Entities. Pursuant to a Registration and Preemptive Rights
Agreement (the "Registration and Preemptive Rights Agreement"), the Harrah's
Entities have three demand registration rights to cause the Company to register
the Common Stock owned by the Harrah's Entities, provided, that, except for the
special demand described below, 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
shall be underwritten on a firm commitment basis by an underwriter chosen by the
Company. The demand rights are subject to customary restrictions such as 120 day
blockage periods for corporate developments or registered offerings by the
Company, cut-backs and etc. The Company also agreed pursuant to such agreement
that until the earlier of when the Harrah's Entities own less than 5% of the
outstanding Voting Shares of the Company on a fully-diluted basis (as defined in
the Bye-Laws), the Harrah's Entities would have customary piggy-back rights to
include their shares of Common Stock in registered offerings by the Company.
The Harrah's Entities have one additional demand registration right, which
may be exercised by written demand given to the Company at any time during the
180-day period beginning on the 61st day after the "Inaugural Date" (i.e., the
date on which actual gaming takes place on the first aircraft installed with the
Sky Games system on SIA). The Company has also agreed that it shall not file a
registration statement within such 60-day period to register sales on its own
behalf. In the event the demand is not exercised within the 180-day period, the
right shall automatically expire. The Harrah's Entities may specify that all or
any part of their holdings (but in no event less than the number of shares which
would reduce HIIC's holdings to 19.9% on an issued and outstanding basis) be
registered pursuant to such demand. The restrictions on demand registrations
contained in Section 2(d) of the Registration and Preemptive Rights Agreement
will not be applicable to such demand registration. Upon receipt of notice from
the Harrah's Entities, the Company will, at Harrah's Entities' election, use its
best efforts either to (i) arrange a firmly underwritten offering for the shares
in the demand, at a price acceptable to the Harrah's Entities, in their sole
discretion, in satisfaction of the demand right; or (ii) locate a buyer, in a
private sale at a price acceptable to the Harrah's Entities in their sole
discretion for not less than all of the Harrah's Entities' holdings in the
Company. The Harrah's Entities may also locate a buyer for such amount of
shares, and the Company will offer, in either instance, to such potential buyers
in a private sale, Board representation and registration rights substantially
similar to those
19
the Harrah's Entities have with respect to the Company in such a manner that
does not require the approval of the shareholders of the Company. In the event
of an underwritten offering, the Harrah's Entities shall select the underwriter,
which underwriter shall be reasonably acceptable to the Company. Upon the
consummation of any sale of shares of the Company owned by the Harrah's
Entities, either pursuant to a public sale or to a private buyer, the Harrah's
Entities shall cause all or such number of their designees on the Board of
Directors to resign so that it will only have such number of designees as they
would then be entitled to elect pursuant to the bye-laws of the Company given
its share holdings of the Company after such transaction. This special demand
right was granted to the Harrah's Entities in consideration for their agreement
not to exercise their existing right under the Registration and Preemptive
Rights Agreement to include their shares of IEL Common Stock for sale pursuant
to the registration statement of which this Prospectus is a part.
The Harrah's Entities shall bear the costs of their legal counsel and any
underwriting discounts, commissions or allowances in connection with all sales
pursuant to the foregoing, and the Company shall bear all other fees and
expenses of such registrations.
The Harrah's Entities have the right to purchase securities offered by the
Company for as long as the Harrah's Entities own 20% or more of the outstanding
Common Stock on a fully-diluted basis (as defined in the Bye-Laws) at the same
price and terms such securities are otherwise being offered. The Harrah's
Entities also have the right for as long as the Harrah's Entities own 20% or
more of the outstanding Voting Shares on a fully-diluted basis (as defined in
the Bye-Laws) to participate on a proportionate basis in any non-pro rata stock
repurchases or redemptions conducted by the Company. At any time that the
Harrah's Entities own less than 10% of the outstanding Voting Shares, on a
fully-diluted basis (as defined in the Bye-Laws), the Company has the right to
cause the Harrah's Entities to sell their Voting Shares pursuant to a registered
sale and the Harrah's Entities have the right to cause the Company to file a
registration statement to sell their Voting Shares in the event (i) of any
change in or conduct of the business or proposed business of the Company or any
of its subsidiaries or any other action or inaction of the Company or any of its
subsidiaries which would constitute a Disqualifying Action or (ii the Company
does not redeem a "Disqualified Holder" (as defined in the Bye-Laws) pursuant to
the Bye-Laws, in each case at the Company's expense without being subject to the
limitations on demand rights set forth above. Upon any conversion of any Class A
Preference Shares issued to B/EA as part of the B/E Conversion, the Company
shall issue to the Harrah's Entities a number of shares of Common Stock upon
payment of the par value thereof by the Harrah's Entities such that such number
of shares plus the shares previously issued to the Harrah's Entities constitutes
the same percentage of the outstanding Common Stock on a fully-diluted basis (as
defined in the Bye-Laws) as the number of shares issued to the Harrah's Entities
constituted of the outstanding Common Stock on a fully-diluted basis (as defined
in the Bye-Laws) prior to such issuance.
B/EA. B/EA has, subject to certain conditions, one demand registration
right with respect to not less than $2 million of the shares of Common Stock
received pursuant to a conversion of the Class A Preference Shares and the right
to include its shares of Common Stock received upon conversion of the Class A
Preference Shares in registered offerings by the Company.
MCM, CCI and PHI. In addition to their right to require the Company to file
the registration statement of which this Prospectus is a part and to include
shares of Common Stock acquired pursuant to their additional equity commitment,
MCM, CCI and PHI have the right to include shares obtained by them pursuant to
the Private Placement, including any shares acquired as part of their additional
equity commitment, in any subsequent registration statement filed by the Company
while the Company was required to be keep the registration statement of which
this Prospectus is a part effective but MCM, CCI or PHI were unable to sell
pursuant to such registration statement. See "Selling Shareholders--Additional
Equity Commitments."
HIIL. HIIL has the right to require the Company to include its shares
acquired pursuant to the HIIL Subscription Agreement, including any shares
acquired as part of its additional equity commitment, in the registration
statement of which this Prospectus is a part and is including the 1,035,120
shares of Common Stock offered by this Prospectus pursuant to such right. HIIL
also has the right to include shares of Common Stock acquired pursuant to
20
the HIIL Subscription Agreement in any subsequent registration statement filed
by the Company on behalf of MCM and CCI pursuant to the Private Placement. See
"Selling Shareholders--Additional Equity Commitments."
Other. As part of terminating the Company's relationship with its prior
financial relations firm, Corporate and Financial Relations, the Company agreed
that under certain circumstances it will include in registrations by the Company
under the Securities Act shares of Common Stock owned by Jay Jacobson. Mr.
Jacobson owns 22,000 shares of Common Stock which are being offered by this
Prospectus pursuant to an exercise of such right and warrants and options for
the purchase of an additional 40,000 shares of Common Stock as to which he does
not have such registration rights.
The Redemption Agreement provides piggyback registration rights for the
shares of Common Stock issued under such agreement.
Option Plans
The Board of Directors of the Company has adopted a Management Incentive
Stock Option Plan (the "MIP") and a Directors Option Plan, in order to be able
to attract and motivate qualified management and directors. The MIP provides for
the allocation of options for up to 4,070,105 shares of Common Stock to be
issued to the management of the Company. Options for 3,027,300 shares of Common
Stock were issued as of July 3, 1998 and 288,675 were exercisable. The Director
Option Plan (the "DOP") provides for an allocation of options for up to 500,000
shares of Common Stock to be issued as an automatic grant of options for 10,000
shares of Common Stock to all directors holding office on the date of each
annual meeting of shareholders at the trading price on such day. As of July 3,
1998, options for 240,000 shares of Common Stock were outstanding under the DOP.
In addition, options for 1,130,000 shares of Common Stock are outstanding under
the 1996 Option Plan. See "Description of Capital Stock--Options."
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company by Appleby, Spurling & Kempe, Bermuda legal counsel
of the Company.
EXPERTS
The consolidated financial statements and schedule of the Company at
December 31, 1997 and for the 10-month period then ended included in the
Company's Annual Report on Form 10-K/A for the 10 months ended December 31, 1997
have been audited by Ernst & Young LLP, and at February 27, 1997 and for each of
the two years in the period ended February 28, 1997 also included in the
Company's Annual Report on Form 10-K/A for the 10 months ended December 31, 1997
have been audited by Buckley Dodds, Chartered Accountants, as set forth in their
respective reports thereon included therein and incorporated herein by
reference. Such consolidated financial statements and schedule are incorporated
herein by reference in reliance upon such reports given upon the authority of
such firms as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy and information statements
and other information with the Commission. Reports, proxy and information
statements and other information filed with the Commission can be inspected and
copied during normal business hours at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its regional offices at 7 World Trade
Center, 13th Floor, New York, New York 10048; and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission maintains a website at
http://www.sec.gov containing reports, proxy and
21
information statements, and other information concerning the Company can also be
inspected at the offices of the Nasdaq Stock Market, Inc., 1735 K Street, N.W.,
Washington, D.C. 30006-4300.
This Prospectus constitutes a part of a Registration Statement filed by
Company with the Commission under the Securities Act. This Prospectus omits
certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement and to the exhibits
relating thereto for further information with respect to the Company and the
Common Stock. Any statements contained herein concerning the provisions of any
document are not necessarily complete, and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.
22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Set forth below is an estimate (except for the Securities and Exchange
Commission Registration Fee) of the fees and expenses anticipated to be payable
by the Company, in connection with the registration and distribution of the
Common Stock being registered:
Securities and Exchange Commission Registration Fee... $ 2,550
Blue Sky Fees and Expenses............................ 2,000
Legal Fees............................................ 55,000
Accounting Fees....................................... 40,000
Printing and Miscellaneous............................ 20,450
--------
Total....................................... $120,000
========
Item 15. Indemnification of Directors and Officers.
Members of IEL's Board of Directors, IEL's officers and members of
committees appointed by IEL's Board of Directors are entitled to indemnification
in defending any proceedings, whether civil or criminal, in which judgment is
given in such person's favor, or in which such person is acquitted, or in
connection with any application under the Companies Act 1981 (the "Companies
Act") in which relief from liability is granted to such person by a court
regarding all civil liabilities, losses, damages or expenses (including but not
limited to liabilities under contract, tort and statute or any applicable
foreign law or regulation and all reasonable legal and other costs and expenses
properly payable) incurred or suffered by such Director, officer or committee
member. Indemnity is extended to any person acting as a Director, officer or
committee member in the reasonable belief that he has been so appointed or
elected notwithstanding any defect in such appointment or election provided that
such indemnity contained does not extend to any matter which would render it
void pursuant to the Companies Act.
Every Director, officer and member of a committee duly constituted by IEL
shall be indemnified out of the funds of IEL against all liabilities incurred by
such Director, officer or committee member.
To the extent that any Director, officer or member of a committee is
entitled to claim an indemnity pursuant to IEL's Bye-Laws in respect of amounts
paid or discharged by him, the relative indemnity shall take effect as an
obligation of IEL to reimburse the person making such payment or effecting such
discharge.
The Companies Act 1981 (the "Companies Act") permits indemnification
pursuant to a company's bye-laws or in any contract or arrangement between the
company and any officer, or any person employed by the company as auditor,
regarding any loss arising or liability attaching to such person by virtue of
any rule of law in respect of any negligence, default, breach of duty or breach
of trust of which the officer or person may be guilty in relation to the company
or any subsidiary thereof.
The Companies Act provides further that any provision for indemnification,
whether contained in bye-laws of a company or in any contract or arrangement
between the company and any officer, or any person employed by the company as
auditor, exempting such officer or person from, or indemnifying him against any
liability which by virtue of any rule of law would otherwise attach to him in
respect of any fraud or dishonesty of which he may be guilty in relation to the
company shall be void, provided that nothing shall operate to deprive any person
of any exemption or right to be indemnified in respect of anything done or
omitted to be done by such person while any such provision was in force; and
notwithstanding the foregoing a company may, in pursuance of any such provision
as
II-1
aforesaid indemnify any such officer or auditor against any liability incurred
by him in defending any proceedings, whether civil or criminal in which judgment
is given in his favour or in which he is acquitted or when relief is granted to
him by a court pursuant to the Companies Act.
A company may purchase and maintain insurance for the benefit of any
officer of the company against any liability incurred by him pursuant to such
persons noncompliance with the Companies Act, regulations or in his capacity as
an officer of the company or indemnifying such an officer in respect of any loss
arising or liability attaching to him by virtue of any rule of law in respect of
any negligence, default, breach of duty or breach of trust of which the officer
may be guilty in relation to the company or any subsidiary thereof and nothing
in the Companies Act shall make void or voidable any such policy. IEL maintains
Directors and Officers insurance.
The Company has individual indemnification agreements with each of its
directors and officers pursuant to which it is obligated to indemnify them for
actions in their roles as directors and officers of the Company.
Item 16. Exhibits
Exhibit Number Description
- -------------- -----------
5* Opinion of Appleby, Spurling & Kempe, Bermuda legal counsel
of the Company, regarding the legality of the shares of
Common Stock.
23 Consents of Experts and Counsel:
(a) The consent of Buckley Dodds, Chartered Accountants;
(b) The consent of Appleby, Spurling & Kempe is included in
their opinion filed as Exhibit 5; and
(c) Ernst & Young LLP.
24 Power of Attorney for Mr. Geller, Mr. Stevenson, Mr. Lamm,
Mr. Irwin, Mr. Burke, Mr. Clements, Mr. Atwood, Mr. Boushy,
Mr. Deeson and Ms. Wormser were included on page II-6 of the
registration statement filed on March 26, 1998.
99.1 Resolution of Board of Directors of the Company designating
and setting forth the rights and preferences of the Class A
Preference Shares dated June 17, 1997. (Incorporated by
reference to Exhibit 4(c) to the Registrant's Form 8-K filed
June 27, 1997).
99.2 Resolutions of the Board of Directors of the Company
designating and setting forth the rights and preferences of
the Series A Class B Preference Shares dated as of December
9, 1997. (Incorporated by reference to Exhibit 4(a) to the
Registrant's Form 8-K dated December 17, 1997).
99.3* Resolutions of Board of Directors of the Company designating
and setting forth the rights and preferences of the Series B
Class B Preference Shares, dated February 16, 1998.
99.4 Form of Warrant issued to each of Proprietary Convertible
Investment Group, Inc. and CC Investments, LDC.
(Incorporated by reference to Exhibit 4(b) to the
Registrant's Form 8-K dated December 17, 1997).
II-2
99.5 Form of Registration Rights Agreement between the Company
and each of Proprietary Convertible Investment Group, Inc.
and CC Investments, LDC dated December 17, 1997.
(Incorporated by reference to Exhibit 4(c) to the
Registrant's Form 8-K dated December 17, 1997).
99.6 Form of Securities Purchase Agreement between the Company
and each of Proprietary Convertible Investment Group, Inc.
and CC Investments, LDC dated December 17, 1997, without
exhibits. (Incorporated by reference to Exhibit 99 to the
Registrant's Form 8-K dated December 17, 1997).
99.7* Warrant issued to Palisades Holding, Inc.
99.8* Registration Rights Agreement between the Company and
Palisades Holding, Inc. dated February 20, 1998.
99.9* Securities Purchase Agreement between the Company and
Palisades Holding, Inc. dated February 20, 1998.
99.10* Agreement dated March 17, 1997 between Jay Jacobson and the
Company.
99.11 Redemption Agreement, dated as of February 25, 1997, between
the Company and Anthony Clements and Rex Fortescue.
(Incorporated by reference to Exhibit 3.12 to the
Registrant's Form 20-F filed September 12, 1997).
99.12 Redemption and Cancellation Agreement, dated as of April 30,
1997, between the Company and Sky Games International, Inc.
(Incorporated by reference to Exhibit 3.13 to the
Registrant's Form 20-F filed September 12, 1997).
99.13 Consulting Agreement dated as of April 30, 1997, between the
Company and James P. Grymyr. (Incorporated by reference to
Exhibit 3.14 to the Registrant's Form 20-F filed September
12, 1997).
99.14 Shareholder Rights Agreement, dated June 17, 1997, between
the Company and Harrah's Interactive Investment Company.
(Incorporated by reference to Exhibit 3.15 to the
Registrant's Form 20-F filed September 12, 1997).
99.15 Continuing Services Agreement, dated June 17, 1997, between
the Company and Harrah's Interactive Entertainment Company.
(Incorporated by reference to Exhibit 3.17 to the
Registrant's Form 20-F filed September 12, 1997).
99.16 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.
(Incorporated by reference to Exhibit 2 to the Registrant's
Form 8-K filed June 27, 1997).
99.17 Registration and Preemptive Rights Agreement, dated June 17,
1997, between the Company and Harrah's Interactive
Investment Company. (Incorporated by reference to Exhibit
4(a) to the Registrant's Form 8-K filed June 27, 1997).
99.18 Registration Rights Agreement, dated June 17, 1997, between
the Company and B/E Aerospace, Inc. (Incorporated by
reference to Exhibit 4(b) to the Registrant's Form 8-K filed
June 27, 1997).
II-3
99.19 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. (Incorporated by
reference to Exhibit 3.21 to the Registrant's Form 20-F
filed September 12, 1997).
99.20 Subscription Agreement, dated as of October 22, 1997,
between the Company and Henderson International Investments
Limited. (Incorporated by reference to Exhibit 3.22 to the
Registrant's Form 10-Q dated November 19, 1997).
99.21 Subscription Agreement, dated as of October 22, 1997,
between the Company and Michael A. Irwin. (Incorporated by
reference to Exhibit 3.23 to the Registrant's Form 10-Q
dated November 19, 1997).
99.22* First Amendment to Registration and Preemptive Rights
Agreement dated March 18, 1998 between the Company and
Harrah's Interactive Investment Company.
99.23* First Amendment to Subscription Agreement between the
Company and Henderson International Investments Limited
dated April 2, 1998.
99.24* Securities Agreement between the Company and B/E Aerospace,
Inc dated June 25, 1998. (Incorporated by reference to
Exhibit 99.1 to the Registrant's Form 8-K filed July 2,
1998.)
*Previously filed.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(2) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(3) to include any material information with respect to the plan of
distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement;
(4) for the purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof;
(5) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering;
II-4
(6) for purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(7) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective; and
(8) for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Memphis, State of Tennessee, on the 15th day of July,
1998.
INTERACTIVE ENTERTAINMENT LIMITED
By:/s/ David B. Lamm
------------------------------------
David B. Lamm
Chief Financial Officer,
Treasurer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on July 15, 1998.
Signature Capacity
--------- --------
Laurence S. Geller* Chairman of the Board and a Director
Gordon Stevenson* President, Chief Executive Officer and a
Director (Principal Executive Officer)
/s/ David B. Lamm Chief Financial Officer, Treasurer and
- ------------------------------ Secretary (Principal Financial Officer)
David B. Lamm
Michael A. Irwin* Director of Finance and Administration
(Principal Accounting Officer)
Anthony P. Clements* Director
Charles L. Atwood* Director
John M. Boushy* Director
Brian Deeson* Director
- ------------------------------ Director
Amnon Shiboleth
Judy Wormser* Director
- ------------------------------ Director
Phillip Gordon
- ------------------------------ Director
Quinten B.L.M. Dreesmann
*By: /s/ David B. Lamm
-------------------------
David B. Lamm,
Attorney-In-Fact
II-6