<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 April 30, 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.
Class Outstanding at May 31, 1997
----- ---------------------------
Class A Common Stock, $.01 par value 18,076,445 shares
Class B Common Stock, $.01 par value 3,846,667 shares
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 April 30, 1997
(unaudited) and October 31, 1996 (audited)................. 3
Condensed Statements of Operations for the Three Months
and Six Months Ended April 30, 1997 and 1996 (unaudited)... 4
Condensed Statements of Cash Flows for the Six Months
Ended April 30, 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 6. Exhibits and Reports on Form 8-K........................... 14
SIGNATURES ........................................................ 15
<PAGE> 3
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, October 31,
ASSETS 1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 48,898,051 $ 7,736,345
Investment securities -- 6,810,275
Accounts receivable, less allowances of $286,266
and $1,732,377 2,406,721 106,602
Inventories 17,601,749 4,726,935
Deferred costs 125,829 48,242
Prepaid expenses 518,383 138,629
Other current assets 927,073 987,932
------------- ------------
Total current assets 70,477,806 20,554,960
Property and equipment, net 12,533,471 4,659,500
Deposits 73,091 93,030
------------- ------------
Total assets $ 83,084,368 $ 25,307,490
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,308,094 $ 4,073,940
Accrued expenses 981,302 289,983
Due to related parties -- 69,240
Due to officers, directors and employees 3,238 25,840
Accrued product warranties 1,049,586 1,166,010
Accrued severance costs 92,500 567,500
Other current liabilities 715,781 792,071
Current maturities of capital lease obligations 76,195 --
------------- ------------
Total current liabilities 10,226,696 6,984,584
Accrued severance costs, noncurrent 82,500 110,000
Accrued product warranties, noncurrent 1,123,965 505,035
Capital lease obligations, less current maturities 124,921 --
------------- ------------
Total liabilities 11,558,082 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, 18,076,445 and 8,102,047 shares
issued and outstanding, respectively 180,764 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 112,036,572 42,587,712
Accumulated deficit (40,729,517) (25,000,461)
------------- ------------
Total stockholders' equity 71,526,286 17,707,871
------------- ------------
Total liabilities and stockholders' equity $ 83,084,368 $ 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 Six Months
Ended April 30, Ended April 30,
----------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
Equipment sales $ 2,329,422 $1,613,376 $2,478,131 $1,613,376
Service income 31,940 28,847 109,236 55,029
------------ ------------ ------------ -----------
2,361,362 1,642,223 2,587,367 1,668,405
------------ ------------ ------------ -----------
Costs and expenses:
Cost of equipment sales 6,155,089 2,263,868 8,879,913 2,263,868
Cost of service income 13,828 91,576 95,527 142,553
Provision for doubtful accounts 13,725 -- 150,315 --
Research and development expenses 2,080,017 910,571 4,646,361 1,662,001
Marketing and administrative expenses 2,996,333 2,581,610 6,434,330 3,645,088
Bad debt recoveries (1,064,284) -- (1,064,284) --
------------ ------------ ------------ -----------
10,194,708 5,847,625 19,142,162 7,713,510
------------ ------------ ------------ -----------
Operating loss 7,833,346 4,205,402 16,554,795 6,045,105
Other:
Interest income 489,663 24,148 893,435 75,136
Other, net (67,696) -- (67,696) --
------------ ------------ ------------ -----------
Net loss $ 7,411,379 $4,181,254 $15,729,056 $5,969,969
============ ============ ============ ===========
Net loss per share of common stock $ (0.40) $ (1.03) $ (1.00) $ (1.48)
============ ============ ============ ===========
Weighted average shares outstanding 18,733,262 4,040,699 15,700,489 4,040,548
============ ============ ============ ===========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended April 30,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(15,729,056) $(5,969,969)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 802,154 170,227
Expense recognized upon issuance of stock
options and shares of Class A common stock 479,436 1,110,400
Provision for inventory obsolescence 800,000 --
Loss on sale of equipment 66,655 --
Changes in assets and liabilities:
Increase in accounts receivable (854,008) (1,605,995)
Decrease in allowance for doubtful accounts (1,446,111) --
Increase in inventories (13,674,814) (238,939)
Decrease (increase) in deferred costs (77,587) 300,000
Increase in prepaid expenses, other
current assets and deposits (298,956) (214,800)
Increase in accounts payable 3,234,154 1,641,314
Increase in accrued expenses 691,319 175,224
Increase in accrued product warranties 502,506 668,418
Decrease in due to related parties,
officers, directors and employees (91,842) --
Decrease in accrued severance costs (502,500) --
Decrease in other current liabilities (76,290) --
------------ -----------
Net cash used in operating activities (26,174,940) (3,964,120)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (8,532,103) (149,903)
Maturities of investment securities 6,810,275 --
------------ -----------
Net cash used in investing activities (1,721,828) (149,903)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 73,589,775 14,688
Registration costs (4,481,164) (206,589)
Redemption of Class B warrants (40,576) --
Payments on capital lease obligations (9,561) --
------------ -----------
Net cash provided by (used in) financing
activities 69,058,474 (191,901)
------------ -----------
Net increase (decrease) in cash and cash
equivalents 41,161,706 (4,305,924)
Cash and cash equivalents at beginning of period 7,736,345 5,036,582
------------ -----------
Cash and cash equivalents at end of period $ 48,898,051 $ 730,658
============ ===========
</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) 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 six months ended
April 30, 1997 are not necessarily indicative of the results to be expected for
the entire fiscal year.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
April 30, October 31,
1997 1996
------------ -----------
<S> <C> <C>
Leasehold improvements $ 481,209 $ 375,708
Purchased software 392,290 245,710
Furniture 591,104 214,366
Equipment 3,403,542 1,904,644
Shipsets 5,262,199 --
------------ -----------
10,130,344 2,740,428
Less accumulated depreciation (1,160,417) (451,801)
------------ -----------
8,969,927 2,288,627
Shipsets under construction 3,563,544 2,370,873
------------ -----------
Property and equipment, net $ 12,533,471 $ 4,659,500
============ ===========
</TABLE>
(3) INVENTORIES
Inventories are stated at the lower of cost (determined using the
first-in, first-out method) or market and consist of the following:
6
<PAGE> 7
<TABLE>
<CAPTION>
April 30, October 31,
1997 1996
------------ ----------
<S> <C> <C>
Raw materials $ 8,228,606 $3,554,656
Work in process 5,110,481 176,228
Finished goods 5,062,662 996,051
Allowance for inventory obsolescence (800,000) --
------------ ----------
Total inventories $ 17,601,749 $4,726,935
============ ==========
</TABLE>
(4) 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 the 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.
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. (the "Company") is engaged in
the development, manufacture, installation and operation of a computer-based
in-flight entertainment network ("the Entertainment Network" or "shipsets"),
which provides aircraft passengers the opportunity to view movies, to purchase
goods and services, to play computer games and, in certain cases where permitted
by applicable law, to gamble through an in-seat video touch screen.
The Company has announced that it was selected 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. The project is currently in the
product identification/product definition stage. A decision by Qantas whether
(and with which supplier) to install an interactive in-flight entertainment
system is not expected until later in 1997.
In April 1997, the Company signed a non-binding letter of intent
with PrivatAir for a sale, for cash, of an Entertainment Network for
installation on a Boeing 757 operated by PrivatAir. Installation of the
Entertainment Network is scheduled for approximately six months following the
execution of a definitive purchase agreement. The Company and PrivatAir are
currently negotiating a definitive agreement; however, there can be no assurance
that a definitive agreement will be reached.
The Company currently has contracts in place with three European
airlines, Swissair, Debonair and Alitalia Airlines S.p.S. ("Alitalia").
The Swissair agreement requires the Company to manufacture,
assemble, deliver, install, certify, operate and maintain a second generation
version of the Entertainment Network (the "IFEN-2") on Swissair's entire
long-haul fleet, which consists of sixteen MD-11 aircraft and five B-747
aircraft. Under the agreement, the Company agreed to finance the purchase price
(approximately $72 million plus certain costs of installation and upgrades) of
the twenty-one IFEN-2 shipsets out of revenues from passenger use of the
systems. This arrangement was based on certain assumptions about gaming revenue,
and the parties agreed to renegotiate the contract if these assumptions were not
met. Although the experience of the Company to date with operation of the system
has been limited, revenue from gaming generated to date has been significantly
less than assumed and is insufficient to support the purchase of the system by
Swissair out of revenues. These results are not necessarily indicative of future
results, and the Company and Swissair have begun to implement certain changes in
the gaming features on the system and marketing plans associated with the
system. Due to the insufficient revenues being generated by gaming, the Company
and Swissair have been renegotiating the original agreement. As a result, the
two parties signed a Memorandum of Understanding ("MOU") which the parties are
operating under until June 23, 1997 or a renegotiated agreement is reached.
8
<PAGE> 9
If agreement is reached under the Swissair MOU, the Company would be
responsible for all costs including shipset components, installation and twelve
months of maintenance costs for two MD-11 and one 747 aircraft installation in
the first, business and economy class sections of the aircrafts. For the
remaining eighteen aircraft, only first and business class would be installed
and Swissair would purchase the shipsets (regardless of gaming revenues) for an
average of $1.7 million per aircraft. The Company would be responsible for the
installation costs and twelve months of maintenance costs for the eighteen
aircraft. The split of revenues generated from gaming and passenger use of the
system for all twenty-one aircraft would be determined in the renegotiated
agreement. In the renegotiation process, the Company and Swissair have
discussed the possibility of transferring title to the Entertainment Networks
installed in the first, business and economy sections of three aircraft from
the Company to Swissair. Should the Company and Swissair agree to the title
transfer in the renegotiated agreement, the Company would probably receive no
immediate sales proceeds for the Entertainment Networks other than the
Company's share of gaming revenues as anticipated in the original contract and
incur a loss for the estimated hardware, installation, maintenance and warranty
costs incurred and expected to be incurred for the shipsets. The Company's best
estimate of these costs at this time is approximately $11 million. However,
there can be no assurance that the title transfer will occur or that a
renegotiated agreement will be reached on terms acceptable to both parties. If
the parties cannot reach an agreement, either party could cancel the MOU, in
which case the Swissair Agreement would likely be terminated. In the event the
agreement is terminated, an evaluation of the recoverability of the shipsets
would be based upon a revised estimate of future gaming reserves.
The Company has successfully completed the installation of the
IFEN-2 shipsets in the economy, business and first class sections of two
Swissair MD-11 aircraft and has commenced full installation on one 747 aircraft.
The Company has also completed the installation of the IFEN-2 shipsets in the
business class section of three Swissair MD-11 aircraft, with the most recent
installation being completed in May 1997. While the installations to date have
been successful, 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 requires the Company to manufacture,
assemble, deliver, install, operate and maintain the IFEN-2 system on six
Debonair aircraft. So long as Debonair utilizes the casino gaming features of
the Entertainment Networks, payment of the purchase price of these systems will
be made solely through a revenue-sharing agreement. The Company will evaluate
this arrangement after the first system is installed and in operation, which is
expected to occur later in fiscal year 1997.
Pursuant to the contract with Alitalia, the Company delivered five
first generation Entertainment Networks for installation on Alitalia aircraft
during fiscal 1996. Future performance under the Alitalia agreement requires the
Company to operate and maintain the installed Entertainment Networks on Alitalia
aircraft.
Based on its experience to date, the Company does not plan to
finance the purchase of additional shipset systems whereby the payment for such
systems is based upon contingent future revenues. Indeed, the contracts
currently being negotiated by the Company call for the airlines to finance the
purchase and installation of the system, with the Company having the possibility
of receiving a limited percentage in future revenues from the system. Although
this approach
9
<PAGE> 10
is acceptable to certain airlines, the decision of the Company not to finance
shipset purchases out of future revenues will eliminate certain potential
customers. In addition, 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.
RESULTS OF OPERATIONS
Revenues for the quarter ended April 30, 1997 were $2,361,362, an
increase of $719,139 (or 44%) over revenues of $1,642,223 for the corresponding
quarter of the previous fiscal year. Revenues for the six months ended April 30,
1997 were $2,587,367, an increase of $918,962 (or 55%) over revenues of
$1,668,405 in the corresponding period of the previous fiscal year. Revenues
generated during the three months and six months ended April 30, 1997 were
principally from the installation of the Entertainment Network in the business
class section of two MD-11 aircraft under the Swissair MOU. Revenue generated
during the three months and six months ended April 30, 1996 resulted principally
from the installation of the Entertainment Network on two aircraft under the
Alitalia Agreement.
Cost of equipment sales and service income for the quarter ended
April 30, 1997 were $6,168,917, an increase of $3,813,473 (or 162%) over cost of
sales of $2,355,444 for the corresponding quarter of the previous fiscal year.
Cost of equipment sales and service income for the six months ended April 30,
1997 were $8,975,440, an increase of $6,569,019 (or 273%) over cost of sales of
$2,406,421 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 Entertainment Network on the Swissair
aircraft and maintenance costs of the Entertainment Network for a twelve-month
period after installation. Under the Alitalia Agreement, all installation and
maintenance costs were the responsibility of Alitalia. The increase in cost of
sales for the three-month and six-month periods ended April 30, 1997 as compared
to the three month and six-month periods ended April 30, 1996 is also due to
inventory adjustments. Provisions for inventory obsolescence of $800,000 and
scrapped inventory and rework adjustments of $3,462,684 were recorded during the
six months ended April 30, 1997. The scrapped inventory primarily resulted from
the Company's re-design of the tray table utilized in the Entertainment Network
for the economy section of an aircraft. Estimated warranty costs for the
Entertainment Network 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 goods sold as a percentage of sales for
future periods, these percentages are likely to remain high as the Company
provides for the costs of installation and maintenance under the Swissair MOU.
Provisions for doubtful accounts were $13,725 and $150,315 for the
three-month and six-month periods ended April 30, 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.
Bad debt recoveries of $1,064,284 during the three months and six
months ended April 30, 1997 resulted from the recovery of accounts receivable
under the Alitalia agreement which were reserved for during the Company's fourth
quarter of its fiscal year ended October 31, 1996.
10
<PAGE> 11
Research and development expenses for the quarter ended April 30,
1997 were $2,080,017, an increase of $1,169,446 (or 128%) over expenses of
$910,571 for the corresponding quarter of the previous fiscal year. Research and
development expenses for the six months ended April 30, 1997 were $4,646,361, an
increase of $2,984,360 (or 180%) over expenses of $1,662,001 in the
corresponding period of the previous fiscal year. The increase reflects the
Company's use of proceeds from the exercise of Class B Warrants to fund the
continuing development of the Entertainment Network. The Company will continue
to invest in research and development in the future.
Marketing and administrative expenses for the quarter ended April
30, 1997 were $2,996,333, an increase of $414,723 (or 16%) over expenses of
$2,581,610 for the corresponding quarter of the previous fiscal year. Marketing
and administrative expenses for the six months ended April 30, 1997 were
$6,434,330, an increase of $2,789,242 (or 77%) over expenses of $3,645,088 in
the corresponding period of the previous fiscal year. The increase was primarily
due to increased marketing activities, increases in administrative and
operations staff, and additional executive officers.
Interest income of $489,663 and $893,435 for the three months and
six months ended April 30, 1997, respectively, increased from $24,148 and
$75,136 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 $67,696 for the three months and six months ended
April 30, 1997 resulted principally from the disposal of property and equipment.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997 the Company had working capital of approximately
$60.3 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 and/or equity offerings, working capital is expected to
decrease over the next few quarters.
During the six months ended April 30, 1997, the Company utilized
$26.2 million of cash in operating activities, an increase of $22.2 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, offset by an increase in accounts payable.
Purchases of property and equipment for the six months ended April
30, 1997 were $8.5 million compared to $0.1 million for the six months ended
April 30, 1996. Capital expenditures for the first six months of fiscal year
1997 were primarily related to the manufacture of the Entertainment Network
under the Debonair agreement, the manufacture and installation of the
Entertainment Network on two of the aircraft under the Swissair Agreement, and
research and development equipment.
11
<PAGE> 12
During the quarter ended April 30, 1997, the Company assigned its
rights, title and interests in a tenant lease for space located in New York, New
York. The Company also entered into two capital leases for furniture. The leases
require monthly payments of $3,149 and $4,590 through October 1999 and September
1999, respectively.
At April 30, 1997, the Company's material capital commitments were
(i) purchase orders of approximately $9.5 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, and are anticipated to
be generated in the future, from sales, installation and servicing of the
Entertainment Network aboard commercial and charter aircraft. The contracts the
Company has executed to date generally provide for the Company to install the
Entertainment Network on an aircraft and to be paid for the equipment and for
its installation and maintenance out of revenue generated by passenger use of
the installed network on the aircraft. As a result, the Company must expend
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
Entertainment Network on each aircraft. However under these existing contracts,
revenue as payment for the system will typically be received, if at all, only as
a result of the use of the system over a potentially significant period of time.
The Company is currently renegotiating one of these contracts to require payment
for the system upon installation as opposed to payment upon passenger use of the
system. There can be no assurance, however, that the Company will be successful
in renegotiating this contract. Moreover, the Company may also enter into
commitments to purchase equipment necessary for additional installations, even
in the absence of a purchase commitment from an airline, if such action is
determined to be necessary or desirable to pursue business opportunities. The
Company also expects its cash requirements to increase in future periods due to
higher expenses associated with increased sales and marketing activities and
financing of inventory purchases, installations and accounts receivable.
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 Entertainment Networks, as well as for
payment of continued marketing and research and development expenses. The
Company plans to continue to use a substantial portion of its cash resources to
fund its future operations. 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 the Entertainment Network (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 of the
Entertainment Network and for financing the Entertainment Network if required.
The Company may also in the future elect to explore 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.
12
<PAGE> 13
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 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 Entertainment Network to generate sufficient revenues, 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
Qantas and PrivatAir) on favorable terms or at all, cost overruns in connection
with the Company's current contracts, failure of installed Entertainment
Networks 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 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.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<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
April 30, 1997.
14
<PAGE> 15
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: June 13, 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
15
<PAGE> 16
INDEX OF EXHIBITS
Exhibit No. Description Page No.
----------- ----------- --------
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 17
- ---------------------------
* 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
16
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<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1997
<PERIOD-START> NOV-01-1996 FEB-01-1997
<PERIOD-END> APR-30-1997 APR-30-1997
<CASH> 48,898,051 48,898,051
<SECURITIES> 0 0
<RECEIVABLES> 2,692,987 2,692,987
<ALLOWANCES> 286,266 286,266
<INVENTORY> 17,601,749 17,601,749
<CURRENT-ASSETS> 70,477,806 70,477,806
<PP&E> 13,693,888 13,696,888
<DEPRECIATION> 1,160,417 1,160,417
<TOTAL-ASSETS> 83,084,368 83,084,368
<CURRENT-LIABILITIES> 10,226,696 10,226,696
<BONDS> 0 0
0 0
0 0
<COMMON> 219,231 219,231
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<TOTAL-LIABILITY-AND-EQUITY> 83,084,368 83,084,368
<SALES> 2,478,131 2,329,422
<TOTAL-REVENUES> 2,587,367 2,361,362
<CGS> 8,879,913 6,155,089
<TOTAL-COSTS> 19,142,162 10,194,708
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (15,729,056) (7,411,379)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (15,729,056) (7,411,379)
<EPS-PRIMARY> (1.00) (0.40)
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