<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
--------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended July 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File No. 0-25668
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 11-3197148
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification Number)
4041 NORTH CENTRAL AVENUE
SUITE 2000
PHOENIX, ARIZONA 85012
(Address of Principal Executive Offices)
(602) 200-8900
(Issuer's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at August 31, 1997
----- ------------------------------
<S> <C>
Class A Common Stock, $.01 par value 18,076,662 shares
Class B Common Stock, $.01 par value 3,846,667 shares
</TABLE>
Transitional Small Business Disclosure Format
Yes No X
<PAGE> 2
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of July 31, 1997
(unaudited) and October 31, 1996 (audited)..................... 3
Condensed Statements of Operations for the Three Months
and Nine Months Ended July 31, 1997 and 1996 (unaudited)....... 4
Condensed Statements of Cash Flows for the Nine Months
Ended July 31, 1997 and 1996 (unaudited)....................... 5
Notes to Condensed Financial Statements ....................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 15
Item 6. Exhibits and Reports on Form 8-K............................... 16
SIGNATURES.............................................................. 17
2
<PAGE> 3
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, October 31,
ASSETS 1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 36,042,027 $ 7,736,345
Investment securities -- 6,810,275
Accounts receivable, less allowances of $314,316 at
July 31, 1997 and $1,732,377 at October 31, 1996 5,203,725 106,602
Inventories, net of reserves of $5,723,758 at July 31,
1997 and $0 at October 31, 1996 16,224,670 4,726,935
Prepaid expenses 607,418 186,871
Other assets 754,319 987,932
------------- -------------
Total current assets 58,832,159 20,554,960
Property and equipment, net 6,056,268 4,659,500
Deposits 73,404 93,030
------------- -------------
Total assets $ 64,961,831 $ 25,307,490
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,933,861 $ 4,073,940
Accrued expenses and liabilities 2,555,085 1,082,054
Due to related parties, officers, directors and employees 729 95,080
Deferred revenue 854,298 --
Accrued severance costs 55,000 567,500
Accrued maintenance costs 1,169,658 --
Accrued product warranties 4,560,804 1,671,045
Current maturities of capital lease obligations 78,116 --
------------- -------------
Total current liabilities 11,207,551 7,489,619
Accrued severance costs, noncurrent 68,750 110,000
Accrued maintenance costs, noncurrent 215,696 --
Capital lease obligations, less current maturities 104,657 --
------------- -------------
Total liabilities 11,596,654 7,599,619
------------- -------------
Stockholders' equity:
Preferred stock, par value $0.01 per share,
5,000,000 shares authorized, none issued -- --
Class A common stock, one vote per share, par
value $0.01 per share, 40,000,000 shares
authorized, 18,076,662 and 8,102,047
shares issued and outstanding, respectively 180,767 81,020
Class B common stock, six votes per share, par value $0.01 per share,
4,000,000 shares authorized, 3,846,667 and 3,960,000
shares issued and outstanding, including 3,200,000
shares placed in escrow 38,467 39,600
Additional paid-in capital 112,037,882 42,587,712
Accumulated deficit (58,891,939) (25,000,461)
------------- -------------
Total stockholders' equity 53,365,177 17,707,871
------------- -------------
Total liabilities and stockholders' equity $ 64,961,831 $ 25,307,490
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 4
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Nine Months
Ended July 31, Ended July 31,
-------------------------------- --------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenue:
<S> <C> <C> <C> <C>
Equipment sales $ 1,164,711 $ 1,200,378 $ 3,642,842 $ 2,813,754
Service and other income 377,787 52,052 487,023 107,081
------------ ------------ ------------ ------------
1,542,498 1,252,430 4,129,865 2,920,835
------------ ------------ ------------ ------------
Costs and expenses:
Cost of equipment sales 2,961,451 1,982,531 11,841,364 4,246,398
Cost of service income 64,971 153,054 160,498 295,608
Provision for doubtful accounts 29,004 -- 179,319 --
Research and development expenses 1,442,066 1,248,602 6,088,427 2,910,603
Marketing and selling expenses 286,240 740,556 1,092,725 1,995,700
General and administrative expenses 2,574,023 2,211,436 8,201,868 4,601,380
Unusual charges 13,065,133 112,500 13,065,133 112,500
Bad debt recoveries -- -- (1,064,284) --
------------ ------------ ------------ ------------
20,422,888 6,448,679 39,565,050 14,162,189
------------ ------------ ------------ ------------
Operating loss 18,880,390 5,196,249 35,435,185 11,241,354
Other:
Interest income 774,991 255,980 1,668,426 331,116
Other, net (57,023) -- (124,719) --
------------ ------------ ------------ ------------
Net loss $ 18,162,422 $ 4,940,269 $ 33,891,478 $ 10,910,238
============ ============ ============ ============
Net loss per share of common stock $ (0.97) $ (0.63) $ (2.03) $ (2.05)
============ ============ ============ ============
Weighted average shares outstanding 18,733,336 7,866,028 16,711,438 5,325,487
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Nine Months
Ended July 31,
--------------------------------
1997 1996
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(33,891,478) $(10,910,238)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 1,301,818 264,488
Expense recognized upon issuance of
stock options, warrants and shares of common stock 480,749 1,949,522
Provision for doubtful accounts 179,320 --
Provision for inventory valuation 1,979,879 --
Unusual charge 13,065,133 --
Loss on disposal of equipment 117,661 --
Changes in assets and liabilities:
Increase in accounts receivable (3,679,062) (1,825,202)
Decrease in allowance for doubtful accounts (1,597,381) --
Decrease (increase) in inventories (17,437,262) 62,782
Decrease (increase) in prepaid expenses, other
assets and deposits (224,248) 194,787
Increase (decrease) in accounts payable (2,140,079) 983,093
Increase in accrued expenses, liabilities and
maintenance costs 629,249 89,668
Decrease in due to related parties,
officers, directors and employees (94,351) --
Increase in deferred revenue 854,298 --
Increase (decrease) in accrued severance costs (553,750) 112,500
Increase in accrued product warranties 786,784 1,671,045
------------ ------------
Net cash used in operating activities (40,222,720) (7,407,555)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (7,322,002) (397,539)
Deposits -- (356,667)
Maturities of investment securities 6,810,275 --
------------ ------------
Net cash used in investing activities (511,727) (754,206)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 73,589,775 25,809,188
Registration costs (4,481,164) --
Redemption of Class B warrants (40,576) --
Payments on capital lease obligations (27,906) --
------------ ------------
Net cash provided by financing activities 69,040,129 25,809,188
------------ ------------
Net increase in cash and cash equivalents 28,305,682 17,647,427
Cash and cash equivalents at beginning of period 7,736,345 5,036,582
------------ ------------
Cash and cash equivalents at end of period $ 36,042,027 $ 22,684,009
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE> 6
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The condensed financial statements of Interactive Flight
Technologies, Inc. (the "Company") included herein have been prepared in
accordance with generally accepted accounting principles, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying condensed financial statements reflect all
adjustments (consisting of normal recurring accruals and the unusual charge)
which are necessary for a fair presentation of the results for the interim
periods presented. Certain information and footnote disclosures normally
included in financial statements have been condensed or omitted pursuant to such
rules and regulations. It is suggested that these condensed financial statements
be read in conjunction with the financial statements and notes thereto for the
fiscal year ended October 31, 1996, included in the Company's Annual Report on
Form 10-KSB and amendment No. 1 to the Annual Report on Form 10-KSB/A for the
fiscal year ended October 31, 1996.
The results of operations for the three months and nine months
ended July 31, 1997 are not necessarily indicative of the results to be expected
for the entire fiscal year.
(2) UNUSUAL CHARGES
The Company is currently operating under a Memorandum of
Understanding ("MOU") with respect to nineteen shipsets installed or to be
installed on various Swissair aircraft and is renegotiating an agreement with
Swissair airlines. Pursuant to the negotiations, the Company has agreed to
transfer title to three of the nineteen shipsets to Swissair at no charge on
November 1, 1997. The shipsets to be transferred include first, business and
economy installations on two MD-11 aircraft that have already been completed and
a complete installation on a B-747 aircraft to be completed in November 1997. In
addition to the hardware costs, the Company is also responsible for the
installation and maintenance costs for these shipsets through September 1998.
Total hardware, installation, maintenance and warranty costs incurred and
expected to be incurred for these three shipsets is estimated by management to
be $13,065,133 and has been recorded as an unusual charge for the three months
ended July 31, 1997. Regardless of whether an agreement is reached related to
the MOU with Swissair, the Company does not believe it will recover any of the
costs described above.
3) STOCKHOLDERS' EQUITY
Pursuant to a registration statement with respect to an
Exercise Offer on November 18, 1996, the Company offered the holders of the
Company's Class B Redeemable Stock Purchase Warrants who exercise their Class B
Warrants pursuant to the Exercise Offer, to reduce the exercise price of Class B
Warrants to $7.50 per share (from $9.75 per share) for each Class B Warrant
exercised (the "Exercise Offer").
The Company completed the Exercise Offer on December 24, 1996
and received net proceeds of approximately $68,713,000 net of the underwriter's
commissions and expenses of approximately $4,480,000.
6
<PAGE> 7
Proceeds of approximately $397,000 were received upon the
exercise of Class B Warrants at $9.75 per share following the Exercise Offer.
The Company redeemed all of its outstanding Class B Redeemable
Stock Purchase Warrants on January 7, 1997 at a price of $.05 per Warrant. There
were 811,520 Class B Warrants outstanding at the time of the call.
7
<PAGE> 8
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Interactive Flight Technologies, Inc. is engaged in the
development, manufacture, installation and operation of a computer-based
in-flight entertainment network (the "System" or "shipsets"), which provides
aircraft passengers the opportunity to view movies, purchase goods and services,
play computer games and, in certain cases where permitted by applicable law,
gamble through an in-seat video touch screen.
The Company had originally based its business plan on allowing
airlines to finance the purchase of the System out of a share of gaming revenues
without paying any money down. However, gaming revenues from the operation of
the System have proved to be significantly less than originally estimated, and
are insufficient to support the financing of the System. As a result, the
Company has determined that it will not finance the purchase of additional
Systems based on contingent future system generated revenues. Instead, the
Company has been seeking to have airlines finance the purchase and installation
of the System themselves, with the Company receiving only a limited percentage
in revenues from the System.
The decision of the Company not to finance shipset purchases
out of future contingent revenues has eliminated certain potential customers who
do not have the resources to finance the shipsets independently. Moreover, the
Company must now justify the costs of the System (both purchase and operational)
based solely on a perceived competitive need, rather than on ancillary revenue.
The perception of that need may depend on the phase of the business cycle in the
airline industry, as potential purchasers are more likely to invest in
competitive factors at times when competition for customers is intense. With
load factors at a historically high level this summer, this is a difficult phase
of the industry cycle to justify purchases. Accordingly, there is no assurance
that the customers currently considering purchase of the Systems, or indeed any
customers, will ultimately purchase the System at a purchase price at which the
Company could make a profit.
The Company had been previously selected in December 1996 by
Qantas Airways Limited ("Qantas") as the preferred in-flight entertainment
tenderer to participate in the bid alignment process for the possible supply of
an in-flight entertainment system on Qantas' long-haul fleet. On July 29, 1997,
Qantas informed the Company that it had decided to defer installation of an
interactive in-flight entertainment system and to keep its existing in-flight
system for the time being. Accordingly, the Company's status as preferred
in-flight entertainment tenderer was withdrawn. If Qantas does decide to install
an interactive in-flight entertainment system in the future, the Company would
have to seek to participate in any future bidding process.
Because of the long lead-time for aircraft installments, the
Company must schedule programs well in advance, and its success depends on its
ability to continue to obtain major orders. Following the Qantas decision, the
Company has been pursuing other major airlines to fill its pipeline following
the scheduled completion of the installation phase of the Swissair program in
early 1998. There can be no assurance that the Company will be successful in
this effort.
8
<PAGE> 9
In the absence of the System being offered as original
equipment by airplane manufacturers, the ability of the Company to convince
major airlines to purchase its System depends in large part upon the airline
having decided to initiate a major cabin upgrade, a decision over which the
Company has little or no control. Once such a decision has been reached by the
airline, the Company must compete with other vendors on the basis of such
factors as price, weight and features. The Company believes that it presently
compares favorably with other competitors in these matters; however, the Company
must find ways to overcome concerns about the Company's relatively small
financial resources compared to the hundreds of millions of dollars involved in
an in-flight entertainment purchase decision by a major airline. In addition, as
with all technically oriented purchases, the Company must contend with questions
about deferring purchase decisions pending future developments. There can be no
assurance that customers will in fact decide to buy now rather than wait, that
the Company will in fact be able to compete successfully on price, weight and
features, or that the Company can find a way to adequately address concerns
about its size.
Although the Company believes it has adequate cash and
liquidity resources to continue to operate for at least the next twelve months
and as much as two years without additional sales, if additional customers are
not forthcoming soon, the Company would have to review whether its current
backlog can prudently support its ongoing development projects and overhead.
Because of the multi-year cyclical nature of the airline business and the long
lead-time for major airline contracts, there can be no assurance that
continuation of the current course would be appropriate without such customer
response. If the Company were to conclude that the expenditures required to
sustain the in-flight entertainment business could not be justified by
additional customer sales in the near term, the Company might chose to pursue
other alternatives.
As previously announced, based on some of these issues, the
Company has engaged the investment-banking firm of Merrill Lynch to provide the
Company with various advisory services, including corporate strategic planning.
Pending the outcome of that effort, the Company has continued to focus its sales
and marketing efforts on those airlines that operate long haul, wide body
aircraft on international routes. Additionally, development efforts have focused
on establishing the System as offerable as original equipment on new wide body
aircraft. However, there can be no assurance that these efforts will be
successful, or that the Company will conclude that the projected level of
business can support continuing them.
EXISTING INSTALLATIONS
The Company has installed shipsets on aircraft operated by
three European airlines: Swissair, Debonair and Alitalia Airlines S.p.S.
("Alitalia").
The Swissair agreement originally required the Company to
manufacture, assemble, deliver, install, certify, operate and maintain the
System on Swissair's long-haul fleet. Under the agreement, the Company agreed to
finance the purchase price (approximately $72 Million plus certain costs of
installation and upgrades) out of revenues from passenger use of the Systems.
Under a provision allowing renegotiations based on insufficient gaming revenues,
the parties have signed and are operating under a Memorandum of Understanding
("MOU"). The MOU has been extended several times and currently expires on
September 30, 1997.
9
<PAGE> 10
The terms of the Swissair MOU provide for the Company to be
responsible for all costs including shipset components, installation and
maintenance through September 1998 for the installation of the System in the
first, business and economy class sections of two MD-11 and one B-747 aircraft.
Title to these three shipsets would be transferred to Swissair on November 1,
1997 at no charge. For another sixteen aircraft, Swissair would purchase
shipsets covering only first and business class (regardless of gaming revenues)
for an average of $1.7 million per aircraft. The Company would be responsible
for the installation and maintenance costs through September 1998 for the
sixteen aircraft. Any split of revenues generated from gaming and passenger use
of the System for all nineteen aircraft will be determined in the definitive
agreement. There can be no assurance that the parties will reach a definitive
agreement under the MOU.
The Company has completed the installation of shipsets in the
economy, business and first class sections of two Swissair MD-11 aircraft and
has commenced full installation on one B-747 aircraft. The Company has also
completed the installation of shipsets in the business class section of five
Swissair MD-11 aircraft, with the most recent installation being completed in
August 1997. The remaining eight aircraft are scheduled for installation through
February 1998. The Company is working to further improve the reliability of the
System through software revisions and through design improvements. The Company
believes that the reliability goals for the System can be met; however, there
can be no assurance that technical obstacles may not prove more difficult than
anticipated or that as yet undetermined issues will not appear.
The Debonair agreement originally required the Company to
manufacture, assemble, deliver, install, operate and maintain the System on six
Debonair aircraft. As long as Debonair utilized the casino gaming features of
the Systems, payment of the purchase price of these Systems was to be made
solely through a revenue-sharing agreement. The Company completed the first
installation of a Debonair aircraft in August 1997 and plans to evaluate the
revenue-sharing arrangement after the aircraft has been operational for a
reasonable period. In the event that the revenue-sharing arrangement does not
provide sufficient revenue to justify the cost of installing the System on the
five additional Debonair aircraft, the Company does not plan to proceed with
additional installations on Debonair. The impact that such a decision would have
is unclear.
Pursuant to the contract with Alitalia, the Company delivered
five first generation Systems for installation on Alitalia aircraft during
fiscal 1996. However, Alitalia installed only four of the five shipsets and did
not purchase sufficient spare parts to support continued operation of the
Systems. Alitalia has notified the Company that it does not intend to continue
operation of the Systems, and the Company has indicated that it will not support
the Systems because of the actions of Alitalia. The final outcome of this matter
is unclear.
In April 1997, the Company signed a non-binding letter of
intent with PrivatAir for a cash sale of at least one System for installation on
a Boeing 757 operated by PrivatAir. Installation of the System would be
scheduled for approximately six months following the execution of a definitive
purchase agreement. The Company and PrivatAir have been negotiating a definitive
agreement; however, there can be no assurance that a definitive agreement will
be reached.
10
<PAGE> 11
RESULTS OF OPERATIONS
Revenues for the quarter ended July 31, 1997 were $1,542,498,
an increase of $290,068 (or 23%) over revenues of $1,252,430 for the
corresponding quarter of the previous fiscal year. Revenues for the nine months
ended July 31, 1997 were $4,129,865, an increase of $1,209,030 (or 41%) over
revenues of $2,920,835 in the corresponding period of the previous fiscal year.
Equipment sales generated during the three months and nine months ended July 31,
1997 were principally from the installation of the Systems in the business class
sections of MD-11 aircraft under the Swissair MOU. Service and other income for
the three months and nine months ended July 31, 1997 was principally generated
from a Product Identification/Product Development (PI/PD) Agreement with Qantas
which was terminated as of July 31, 1997. Equipment sales generated during the
three months and nine months ended July 31, 1996 resulted principally from the
installation of the Systems on aircraft under the Alitalia Agreement.
Cost of equipment sales and service income for the quarter
ended July 31, 1997 were $3,026,422, an increase of $890,837 (or 42%) over cost
of sales of $2,135,585 for the corresponding quarter of the previous fiscal
year. Cost of equipment sales and service income for the nine months ended July
31, 1997 were $12,001,862, an increase of $7,459,856 (or 164%) over cost of
sales of $4,542,006 in the corresponding period of the previous fiscal year. The
increase in cost of sales is partly due to the installation and maintenance
costs of aircraft under the Swissair Agreement and the Swissair MOU. Pursuant to
the Swissair Agreement and the Swissair MOU, the Company is responsible for all
costs related to the installation of the Systems on the Swissair aircraft and
maintenance costs of the Systems until September 1998. Under the Alitalia
Agreement, all installation and maintenance costs were the responsibility of
Alitalia. The increase in cost of sales for the three months and nine months
ended July 31, 1997 as compared to the three months and nine months ended July
31, 1996 is also due to inventory adjustments. Provisions for inventory
obsolescence, unuseable inventory and rework adjustments of $5,861,339 were
recorded during the nine months ended July 31, 1997. The unuseable inventory
primarily resulted from the Company's re-design of the tray table utilized in
the System for the economy section of an aircraft. Estimated warranty costs for
the System are also included in cost of sales. The Company is currently
investigating its warranty claims with sub-contractors in order to decrease this
expense in the future. However, there can be no assurance that the Company will
be successful in pursuing these warranty claims. Although the Company hopes to
reduce the cost of equipment sold as a percentage of sales for future periods,
these percentages are likely to remain high as the Company includes the costs of
installation and maintenance under the Swissair MOU in cost of equipment sales.
Provisions for doubtful accounts were $29,004 and $179,319 for
the three months and nine months ended July 31, 1997, compared to none for each
of these periods in the prior fiscal year. The increase was due to provisions
for video service fees under the Alitalia agreement.
Research and development expenses for the quarter ended July
31, 1997 were $1,442,066, an increase of $193,464 (or 15%) over expenses of
$1,248,602 for the corresponding quarter of the previous fiscal year. Research
and development expenses for the nine months ended July 31, 1997 were
$6,088,427, an increase of $3,177,824 (or 109%) over expenses of $2,910,603 in
the corresponding period of the previous fiscal year. The increase reflects the
Company's continuing development of the System.
11
<PAGE> 12
Marketing and selling expenses for the quarter ended July 31,
1997 were $286,240, a decrease of $454,316 (or 61%) over expenses of $740,556
for the corresponding quarter of the previous fiscal year. Marketing and selling
expenses for the nine months ended July 31, 1997 were $1,092,725, a decrease of
$902,975 (or 45%) over expenses of $1,995,700 in the corresponding period of the
previous fiscal year. The decrease was primarily due to commissions to outside
sales representatives which were payable on Alitalia sales in the prior fiscal
year.
General and administrative expenses for the quarter ended July
31, 1997 were $2,574,023, an increase of $362,587 (or 16%) over expenses of
$2,211,436 for the corresponding quarter of the previous fiscal year. General
and administrative expenses for the nine months ended July 31, 1997 were
$8,201,868, an increase of $3,600,488 (or 78%) over expenses of $4,601,380 in
the corresponding period of the previous fiscal year. The increase was primarily
due to increases in administrative, production and program management staff and
additional executive officers.
Unusual charges for the three months and nine months ended
July 31, 1997 represent the estimated costs of the shipsets to be transferred to
Swissair at no charge under the terms of the Swissair MOU. The shipsets to be
transferred include first, business and economy installations on two MD-11
aircraft that have already been completed and a complete installation of a B-747
aircraft scheduled to be completed in November 1997. In addition to the hardware
costs, the Company is also responsible for the installation and maintenance
costs for these shipsets through September 1998. Total hardware, installation,
maintenance and warranty costs incurred and expected to be incurred for these
three shipsets are estimated by management to be $13,065,133. Unusual charges
for the three months and nine months ended July 31, 1996 resulted from severance
agreements executed with former officers.
Bad debt recoveries of $1,064,284 during the nine months ended
July 31, 1997 resulted from the recovery of accounts receivable under the
Alitalia Agreement which were reserved for during the Company's fiscal year
ended October 31, 1996.
Interest income of $774,991 and $1,668,426 for the three
months and nine months ended July 31, 1997, respectively, increased from
$255,980 and $331,116 for the corresponding periods of the previous fiscal year.
The interest arose principally out of short-term investments of working capital.
The increases are attributable to increased funds available for such investments
as a consequence of the exercise of Class B Warrants during December 1996.
Other expense of $57,023 and $124,719 for the three months and
nine months ended July 31, 1997 resulted principally from the losses on
disposals of property and equipment.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997 the Company had working capital of
approximately $47.6 million. The Company's primary source of funding has been
through equity offerings. The Company increased its working capital in December
1996 from Class B Warrant exercises (prompted by the reduction in the exercise
price to $7.50 and the Company's notice of redemption of the remaining Class B
Warrants) from which the Company received proceeds (net of expenses of $4.5
million) of approximately $69.1 million. The Company expects that losses will
continue for the foreseeable future and, as a result, unless funds are received
from additional financings, working capital is expected to continue to decrease.
12
<PAGE> 13
During the nine months ended July 31, 1997, the Company
utilized $40.2 million of cash in operating activities, an increase of $32.8
million from the corresponding period of the previous fiscal year. The increase
in cash utilized in operations is primarily a result of an increase in the net
loss and an increase in inventories, accounts receivable, and accounts payable
offset by provisions for inventory and unusual charges.
Purchases of property and equipment for the nine months ended
July 31, 1997 were $7.3 million compared to $0.4 million for the nine months
ended July 31, 1996. Capital expenditures for the first nine months of fiscal
year 1997 were primarily related to the manufacture of the System under the
Debonair agreement, the installation of System on the first two aircraft under
the Swissair Agreement, and research and development equipment.
At August 31, 1997, the Company's material capital commitments
were (i) purchase orders of approximately $5.4 million relating primarily to
inventory purchases and (ii) its obligations under the Swissair Agreement and
the Debonair Agreement.
The Company's revenues have been generated from sales,
installation and servicing of the System aboard commercial and charter aircraft.
The contracts the Company executed in the past generally provide for the Company
to install the System on an aircraft and to be paid for the equipment and
related installation and maintenance out of revenue generated by passenger use
of the installed shipset on the aircraft. As a result, the Company expended
significant capital amounts for the test installations (which require the
assembly and installation of approximately 30 to 280 in-seat video terminals,
cabin file servers, cluster controllers, video-on-demand servers and seat
electronic boxes and cabling the first, business and/or economy class sections
of the aircraft) and subsequent assembly, installation and maintenance of the
System on each aircraft.
The Company is currently using its working capital to finance
its current expenses, including installations, equipment purchases, product
development, inventory and other expenses associated with the delivery and
installation of the Swissair and Debonair Systems, as well as for payment of
continued marketing and research and development expenses. The Company believes
that its current cash balances will be sufficient to meet the Company's
currently anticipated cash requirements for at least the next twelve months.
However, in the event the Company obtains additional orders for shipsets (as to
which there can be no assurance), the Company may require significant additional
financing for manufacture, assembly and installation of any such future orders.
The Company may also in the future elect to explore business opportunities,
including additional applications for its technologies other than in-flight
entertainment. To do so, the Company would require significant additional
capital for research and development and, if such development efforts are
successful, for marketing, manufacturing and installing its new products.
Alternatively, the Company is considering seeking opportunities to acquire or
develop other business in which to deploy its cash resources. No assurance can
be given that any such alternative opportunities could be located, or if
located, could be successfully acquired and operated profitably.
FORWARD-LOOKING INFORMATION
Except for historical information contained herein, the
matters discussed in this Quarterly Report on Form 10-QSB are forward-looking
statements (within the meaning of Section
13
<PAGE> 14
27A of the Securities Act of 1993, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended) that are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
set forth in such forward-looking statements. Such risks and uncertainties
include, but are not limited to, the failure of passenger use of the Systems to
generate sufficient revenues, the inability of the Company to convince customers
to purchase its Systems, the failure to reach a definitive agreement with
Swissair reflecting the terms of the MOU, the failure to execute definitive
agreements with additional airlines (including PrivatAir) on favorable terms or
at all, cost overruns in connection with the Company's current contracts,
failure of installed Systems to perform in accordance with System
specifications, the failure of the Company to receive sufficient financing to
perform under any new airline contracts or to perform sufficient future research
and development, the impact of competition and downward pricing pressures, the
effect of changing economic conditions and conditions in the airline industry,
the inability of the Company to evaluate other businesses, the impact of any
changes in domestic and foreign regulatory environments or the Company's
inability to obtain requisite government approvals, risks in technology
development, the risks involved in currency fluctuations, and the other risks
and uncertainties detailed in the Company's Registration Statement on Form S-3
dated November 18, 1996 and the Company's Annual Report on Form 10-KSB and
amendment No. 1 to the Annual Report on Form 10-KSB/A for the fiscal year ended
October 31, 1996.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Stockholders of the Company was held on June
4, 1997.
(b) At the Annual Meeting, Michail Itkis, Adam Aron, Brian Barents, General
Alexander M. Haig, Jr., Yuri Itkis, Thomas M. Metzler, John Pritzker
and James H. Zukin were elected to the Board of Directors. These
individuals represent all of the members of the Board of Directors.
(c) The following matters were voted on by the stockholders of the Company
by votes submitted through proxy or in person at the Annual Meeting:
(1) Election of Directors for one year terms to hold office until
the next annual meeting of stockholders and until their
respective successors are elected and qualified. Results were
as follows:
<TABLE>
<CAPTION>
Votes
Nominee Votes For Votes Against Abstaining
------- --------- ------------- ----------
<S> <C> <C> <C>
Michail Itkis 38,924,707 -0- 279,658
Adam Aron 38,926,207 -0- 278,158
Brian Barents 38,925,057 -0- 279,308
Gen. Alexander M. Haig, Jr. 38,922,664 -0- 281,701
Yuri Itkis 38,924,953 -0- 279,412
Thomas M. Metzler 38,926,207 -0- 278,158
John Pritzker 38,926,207 -0- 278,158
James H. Zukin 38,926,207 -0- 278,158
</TABLE>
(2) Approval of the Company's 1997 Stock Option Plan that provides
for the issuance of up to 1,500,000 shares of Class A Common
Stock upon exercise of options granted under the 1997 Plan.
Votes cast were 25,305,047 for approval, 860,609 against
approval, 70,776 abstaining and 12,967,933 unvoted.
(3) Approval to amend the Company's Certificate of Incorporation
so as to grant the Company's Board of Directors the authority
to adopt, amend and repeal the Company's Bylaws. Votes cast
were 25,259,791 for approval, 895,353 against approval, 81,288
abstaining and 12,967,933 unvoted.
(4) Approval of the Board of Directors' selection of KPMG Peat
Marwick LLP to serve as the independent public accountants to
examine the financial statements of the Company for the year
ending October 31, 1997. Votes cast were 38,993,033 for
approval, 155,850 against approval, and 55,482 abstaining.
There were a total of 21,923,125 shares of the Company's Common Stock
eligible to vote at the Annual Meeting.
(d) Not Applicable.
15
<PAGE> 16
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) EXHIBITS
<S> <C>
3.1(1)* - Certificate of Ownership and Merger
3.2(1)* - Amended and Restated Certificate of Incorporation of the
Registrant
3.3(1)* - Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Registrant
3.4(1)* - By-laws of the Registrant
4.1(1)* - Warrant Agreement, dated as of March 7, 1995, by and among the
Registrant, D.H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company
4.2(6)* - Form of Amendment to March 7, 1995 Warrant Agreement, to be
entered into by and among the Registrant, D.H. Blair Investment
Banking Corp., and American Stock Transfer & Trust Company
4.3(6)* - Warrant Agreement, dated as of October 24, 1996, by and among
the Registrant, D.H. Blair Investment Banking Corp., and American
Stock Transfer & Trust Company
4.4(6)* - Form of Amendment to October 24, 1996 Warrant Agreement, to
be entered into by and among the Registrant, D.H. Blair Investment
Banking Corp., and American Stock Transfer & Trust Company
4.5(1)* - Form of Underwriter's Unit Purchase Option
4.6(1)* - Specimen of Class A Common Stock Certificate
4.7(1)* - Specimen of Class B Common Stock Certificate
4.8(6)* - Specimen of Class B Warrant Certificate
4.9(3)* - Specimen of Class C Warrant Certificate
4.10(3)* - Specimen of Class D Warrant Certificate
4.11(6)* - Stock Purchase Warrant, dated as of November 7, 1996, issued to
FortuNet, Inc.
4.12(6)* - Stock Purchase Warrant, dated as of November 12, 1996, issued
to Houlihan Lokey Howard & Zukin
27 - Financial Data Schedules
</TABLE>
- --------------------------
* Incorporated by reference from the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended October 31, 1996 and Amendment No. 1 to the Annual
Report on Form 10-KSB/A filed with the Securities and Exchange Commission
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter
ended July 31, 1997.
16
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: September 15, 1997 INTERACTIVE FLIGHT TECHNOLOGIES, INC.
By: /s/ Michail Itkis
---------------------
Michail Itkis
Chief Executive Officer
By: /s/ John W. Alderfer
------------------------
John W. Alderfer
Chief Financial Officer
17
<PAGE> 18
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
3.1(1) Certificate of Ownership and Merger *
3.2(1) Amended and Restated Certificate of Incorporation of the Registrant *
3.3(1) Certificate of Amendment of Amended and Restated Certificate of *
Incorporation of Registrant
3.4(1) By-laws of the Registrant *
4.1(1) Warrant Agreement, dated as of March 7, 1995, by and among the *
Registrant, D.H. Blair Investment Banking Corp. and American Stock
Transfer & Trust Company
4.2(6) Form of Amendment to March 7, 1995 Warrant Agreement, to be *
entered into by and among the Registrant, D.H. Blair Investment
Banking Corp., and American Stock Transfer & Trust Company
4.3(6) Warrant Agreement, dated as of October 24, 1996, by and among the *
Registrant, D.H. Blair Investment Banking Corp., and American
Stock Transfer & Trust Company
4.4(6) Form of Amendment to October 24, 1996 Warrant Agreement, to be *
entered into by and among the Registrant, D.H. Blair Investment
Banking Corp., and American Stock Transfer & Trust Company
4.5(1) Form of Underwriter's Unit Purchase Option *
4.6(1) Specimen of Class A Common Stock Certificate *
4.7(1) Specimen of Class B Common Stock Certificate *
4.8(6) Specimen of Class B Warrant Certificate *
4.9(3) Specimen of Class C Warrant Certificate *
4.10(3) Specimen of Class D Warrant Certificate *
4.11(6) Stock Purchase Warrant, dated as of November 7, 1996, issued to *
FortuNet, Inc.
4.12(6) Stock Purchase Warrant, dated as of November 12, 1996, issued to *
Houlihan Lokey Howard & Zukin
27 Financial Data Schedules 19
</TABLE>
- ---------------------------
* Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the fiscal year ended October 31, 1996 and Amendment No. 1
to the Annual Report on Form 10-KSB/A filed with the Securities and
Exchange Commission
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1997
<PERIOD-START> NOV-01-1996 MAY-01-1997
<PERIOD-END> JUL-31-1997 JUL-31-1997
<CASH> 36,042,027 36,042,027
<SECURITIES> 0 0
<RECEIVABLES> 5,518,041 5,518,041
<ALLOWANCES> 314,316 314,316
<INVENTORY> 16,224,670 16,224,670
<CURRENT-ASSETS> 58,832,159 58,832,159
<PP&E> 12,412,299 12,412,299
<DEPRECIATION> 6,356,031 6,356,031
<TOTAL-ASSETS> 64,961,831 64,961,831
<CURRENT-LIABILITIES> 11,207,551 11,207,551
<BONDS> 0 0
0 0
0 0
<COMMON> 219,234 219,234
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 64,961,831 64,961,831
<SALES> 3,642,842 1,164,711
<TOTAL-REVENUES> 4,129,865 1,542,498
<CGS> 11,841,364 2,961,451
<TOTAL-COSTS> 39,565,050 20,422,888
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (33,891,478) (18,162,422)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (33,891,478) (18,162,422)
<EPS-PRIMARY> (2.03) (0.97)
<EPS-DILUTED> (2.03) (0.97)
</TABLE>
