U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Amendment #1
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended July 31, 1998
[ ] 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
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INTERACTIVE FLIGHT TECHNOLOGIES, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 11-3197148
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification Number)
4041 North Central Avenue
Suite 2000
Phoenix, Arizona 85012
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(Address of Principal Executive Offices)
(602) 200-8900
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(Issuer's Telephone Number, Including Area Code)
Not Applicable
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(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 August 31, 1998
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Class A Common Stock, $.01 par value 16,082,637 shares
Class B Common Stock, $.01 par value 3,733,334 shares
Transitional Small Business Disclosure Format
Yes No X
--- ---
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INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
Index
<TABLE>
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 1998 (unaudited) and October 31, 1997 (audited).................................. 3
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended July 31, 1998 and 1997 (unaudited)........................... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended July 31, 1998 and 1997 (unaudited)...................................... 5
Notes to Condensed Consolidated Financial Statements ..................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................................................16
Item 6. Exhibits and Reports on Form 8-K..........................................................16
SIGNATURES.........................................................................................17
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2
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INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
July 31, October 31,
Assets 1998 1997
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(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 36,420,771 $ 36,890,454
Short-term investment securities 3,555,428 2,137,084
Accounts receivable 758,975 5,654,118
Inventories, net of reserves of $8,149,209 and $11,179,895 1,442,064 6,110,761
Prepaid expenses 243,349 253,771
Other current assets 351,981 606,883
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Total current assets 42,772,568 51,653,071
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Investment securities 928,846 --
Goodwill, net of amortization of $1,168 541,982 --
Property and equipment, net of accumulated depreciation of $2,024,760
and $9,555,383, respectively 2,253,567 2,959,539
Deposits 623,933 166,845
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Total assets $ 47,120,896 $ 54,779,455
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,059,038 $ 5,747,833
Accrued liabilities 3,493,704 4,248,222
Deferred revenue 72,997 2,383,904
Accrued severance costs 55,000 55,000
Accrued maintenance costs 601,970 1,286,873
Accrued product warranties 6,739,164 4,610,687
Current maturities of capital lease obligations 87,015 80,753
Note payable 125,000 --
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Total current liabilities 12,233,888 18,413,272
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Accrued severance costs, noncurrent 13,750 55,000
Capital lease obligations, less current maturities 10,773 76,840
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Total liabilities 12,258,411 18,545,112
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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; 18,377,724 and 18,189,995
shares issued, respectively 183,777 181,900
Class B common stock, six votes per share, par value $0.01 per
share, 4,000,000 shares authorized; 3,733,334 shares issued and
outstanding including 3,200,000 shares held in escrow 37,334 37,334
Additional paid-in capital 112,223,734 112,037,882
Accumulated deficit (76,571,381) (76,022,773)
Treasury stock, at cost; 1,053,500 shares (1,010,979) --
------------ ------------
Total stockholders' equity 34,862,485 36,234,343
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Total liabilities and stockholders' equity $ 47,120,896 $ 54,779,455
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months Nine Months
Ended July 31, Ended July 31,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenue:
Equipment sales $ 178,056 $ 1,164,711 $ 18,038,619 $ 3,642,842
Service income 260,965 377,787 542,229 487,023
------------ ------------ ------------ ------------
439,021 1,542,498 18,580,848 4,129,865
------------ ------------ ------------ ------------
Costs and expenses:
Cost of equipment sales 187,428 2,961,451 15,523,282 11,841,364
Cost of service income 9,320 64,971 22,277 160,498
Provision for doubtful accounts -- 29,004 -- 179,319
Research and development expenses -- 1,442,066 1,092,316 6,088,427
Marketing and administrative
expenses 1,512,599 2,860,263 4,390,997 9,294,593
Unusual charges (190,000) 13,065,133 (190,000) 13,065,133
Bad debt recoveries -- -- -- (1,064,284)
------------ ------------ ------------ ------------
1,519,347 20,422,888 20,838,872 39,565,050
------------ ------------ ------------ ------------
Operating loss 1,080,326 18,880,390 2,258,024 35,435,185
Other:
Interest income 637,152 774,991 1,708,464 1,668,426
Interest expense (2,732) (3,200) (9,727) (7,643)
Other, net 10,179 (53,823) 10,679 (117,076)
------------ ------------ ------------ ------------
Net loss 435,727 $ 18,162,422 $ 548,608 $ 33,891,478
============ ============ ============ ============
Basic and diluted net loss per share $ (0.02) $ (0.97) $ (0.03) $ (2.03)
============ ============ ============ ============
Weighted average shares outstanding 17,867,758 18,733,336 18,203,334 16,701,238
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended July 31,
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1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (548,608) $(33,891,478)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Provision for doubtful accounts -- 179,320
Provision for inventory valuation -- 1,979,879
Loss on disposal of equipment -- 117,661
Unusual charge -- 13,065,133
Depreciation and amortization 966,975 1,301,818
Expense recognized upon issuance of stock options,
warrants and shares of common stock -- 480,749
Changes in assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable 4,960,143 (3,679,062)
Decrease in allowance for doubtful accounts -- (1,597,381)
Decrease (increase) in inventories 4,668,697 (17,437,262)
Increase in prepaid expenses, other current assets and
deposits (179,678) (224,248)
Decrease in accounts payable (4,688,795) (2,140,079)
Increase (decrease) in accrued liabilities
and maintenance (1,251,687) 534,898
Increase (decrease) in deferred revenue (2,310,907) 854,298
Decrease in accrued severance costs (41,250) (553,750)
Increase in accrued product warranties 2,128,477 786,784
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Net cash provided by (used in) operating activities 3,703,367 (40,222,720)
------------ ------------
Cash flows from investing activities:
Purchases of investment securities (2,808,549) --
Maturities of investment securities 461,356 6,810,275
Purchase of Johnny Valet, Inc. (688,736) --
Purchases of property and equipment (66,337) (7,322,002)
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Net cash used in investing activities (3,102,266) (511,727)
------------ ------------
Cash flows from financing activities:
Payments on capital lease obligations (59,805) (27,906)
Purchases of treasury stock (1,010,979) --
Redemption of Class B warrants -- (40,576)
Proceeds from issuance of common stock -- 73,589,775
Registration costs -- (4,481,164)
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Net cash provided by (used in) financing activities (1,070,784) 69,040,129
------------ ------------
Increase (decrease) in cash and cash equivalents (469,683) 28,305,682
Cash and cash equivalents at beginning of period 36,890,454 7,736,345
------------ ------------
Cash and cash equivalents at end of period $ 36,420,771 $ 36,042,027
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(1) Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of Interactive Flight Technologies, Inc. and its wholly owned
subsidiary (the "Company"). All intercompany balances and transactions have been
eliminated in consolidation.
The accompanying condensed consolidated financial statements 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 consolidated 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 consolidated
financial statements be read in conjunction with the financial statements and
notes thereto for the fiscal year ended October 31, 1997, 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, 1997.
The results of operations for the three months and nine months ended
July 31, 1998 are not necessarily indicative of the results to be expected for
the entire fiscal year.
(2) Acquisition and Supplemental Disclosure of Non-Cash Investing Activities
On July 24, 1998, the Company purchased the assets and business of
Johnny Valet, Inc., a retail dry cleaning plant in San Diego, California. The
Company paid $688,736 in cash and signed a note payable of $125,000. The
non-interest-bearing note is due on January 10, 1999. The acquisition was
accounted for utilizing the purchase method of accounting and the results of
operations of Johnny Valet, Inc. have been included in the accompanying
financial statements beginning July 24, 1998. The excess of the purchase price
over the fair value of assets acquired of $543,150 was recorded as goodwill and
is being amortized over ten years.
(3) Stock Repurchase Program
On December 17, 1997, the Board of Directors authorized the Company to
repurchase shares of its Class A Common Stock on the open market. As of July 31,
1998, the Company had repurchased 1,053,500 shares at prices ranging from $0.75
to $1.00 per share.
(4) Commitments
As of August 31, 1998, the Company has entered into various Letters of
Intent to acquire the assets and businesses of retail dry cleaning plants
located in San Diego, California and Phoenix, Arizona. The purchases are
conditioned upon successful assignment of facility leases, satisfactory
completion of Phase I and Phase II environmental studies and completion of other
financial due diligence.
(5) Contingencies
6
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On March 6, 1998, the Company was named as a nominal defendant in a
derivative action filed in the Supreme Court of the State of New York by
Barington Capital Group. The lawsuit names ten current and former officers and
directors of the Company and alleges various breaches of fiduciary duty. The
complaint seeks at least $50,000,000 in damages and an injunction against the
defendants taking any action to manage the Company. The plaintiffs have filed an
amended complaint, seeking the same relief, to which the defendants have
responded. The defendants intend to defend the actions vigorously.
On August 25, 1998 Ocean Castle Partners, LLC ("OCP") filed preliminary
consent solicitation material with the Securities and Exchange Commission
requesting other shareholders to join with OCP to remove the Company's existing
board and elect a slate of directors proposed by OCP. OCP and its affiliates
claim to own about 34% of the Company's voting rights. On August 31, 1998, the
Company filed suit in the Delaware Chancery Court alleging that OCP had engaged
in illegal vote buying and improper disclosure. On September 2, 1998, OCP filed
preliminary consent solicitation/proxy material with the Securities and Exchange
Commission. The preliminary consent solicitation/proxy material indicates OCP
intends to oppose the proposed 5 to 1 reverse split of the common stock. The
Company has been informed by the Nasdaq that its Class A Common Stock is to be
delisted from the Nasdaq National Market System because it has been trading
below $1.00 per share. The Company had filed an appeal with the Nasdaq based on
the anticipated impact of reverse stock split. On September 15, 1998, the proxy
contest for control of the Board of Directors for the Company was settled and
the nominees of OCP were elected to all the seats on the board and the former
members of the board resigned. As a result, the current board is comprised of
Irwin L. Gross, Chairman, Charles T. Condy, Stephen Schachman, M. Moshe Porat
and James W. Fox. The Company has engaged three of its former executives,
Messrs. Michail Itkis, Thomas Metzler and John Alderfer, as consultants in
connection with its Swissair agreements. New management met with the Nasdaq
Qualifications Hearing Panel on September 17, 1998 for the purpose of
delaying the delisting of the Company's Class A Common Stock. There is no
assurance that such delisting will be delayed.
The Company manufactured and installed the in-flight entertainment system
in the first and business class cabins of Swissair Airlines flight 111 that, on
September 2, 1998, en route from New York to Geneva Switzerland, crashed off the
coast of Nova Scotia. Any crash of a commercial passenger aircraft results in an
extensive investigation of the cause by the FAA and other relevant agencies of
the United States and other governments. Unless the cause of a crash is
immediately apparent, such an investigation may take as long as two years to
complete. During an investigation, suppliers such as the Company are required to
cooperate in providing extensive data and assistance. At the present time the
Company has no reason to believe that its in-flight entertainment system was in
any way responsible for the crash.
On September 9, 1998, the Company was named as a nominal defendant in
another derivative action filed in the Superior Court of Arizona, Maricopa
County, by the Berington Capital Group. The lawsuit again named ten former
officers and directors of the Company, as well as OCP, and alleges the same
various breaches of fiduciary duty as well as illegal vote buying and seeks an
injunction against the defendants to, among other things, delay the Annual
Meeting of Stockholders. On September 16, 1998, the Court in Arizona issued a
Temporary Restraining Order and Order To Show Cause delaying the Annual Meeting
pursuant to an ex parte order. A hearing is scheduled for September 23, 1998,
and the defendants intend to defend the actions vigorously.
INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
Management's Discussion and Analysis
of Financial Condition and Results of Operations
7
<PAGE>
General
Interactive Flight Technologies, Inc. and Subsidiary ("the Company")
has been engaged in the development, manufacture, installation and operation of
a computer-based in-flight entertainment network ("Entertainment Network" or
"system"), 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 proven to be insufficient to support the financing of the system. As a
result, the Company sought to have airlines finance the purchase and
installation of the system themselves, with the Company receiving only a limited
percentage of revenues from the Entertainment Networks.
The decision of the Company not to finance system purchases out of
future contingent revenues eliminated certain potential customers who do not
have the resources to finance the systems independently. Moreover, the Company
has had to attempt to justify the costs of the Entertainment Networks (both
purchase and operational) based solely on a perceived competitive need, rather
than on ancillary revenue. The perception of that need depends on the phase of
the business cycle in the airline industry, as airlines 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 is a difficult
phase of the industry cycle for airlines to justify purchases of the
Entertainment Network.
The Company's continuation in the in-flight entertainment business
has been dependent upon its ability to obtain future major orders. As of July
31, 1998, the only order for the Company's Entertainment Network consists of a
letter of intent from Swissair for $3,970,000, which is for first and business
class installations on three Swissair MD-11 aircraft that are scheduled to be
added to the Swissair fleet in November 1998. The Company has also received a
letter of intent from Swissair for $3,975,000 to extend the warranty on all
installed systems for a second and third year. The Company has had no success in
pursuing other major airlines to fill its pipeline following the completion of
the installation phase of the initial Swissair program in March 1998. Because of
the lack of prospects for success in obtaining additional orders, and in order
to reduce its expenses further, the Company terminated almost all sales and
marketing efforts as of May 29, 1998. Although the Company may respond to any
requests for proposals it receives from airlines, the decision not to continue
to invest resources in sales and marketing reflects the fact that the Company
has no significant prospects for additional revenue from in-flight entertainment
other than those related to the two letters of intent from Swissair. Moreover,
the Company's prior decision not to expend money on developing the next
generation of the Entertainment Network means that any technological leads it
had in this area can be expected to dissipate quickly. As a consequence, the
Company may well not be able to compete in the in-flight entertainment business
even if market conditions were to improve.
The Company believes that it has cash and liquidity resources in excess
of that required to fulfill its current contractual commitments, although this
will depend in large part on the ability of the Company to fulfill those
obligations in an efficient manner. Because of the difficulties in obtaining new
in-flight entertainment customers, the Company has elected to re-deploy its
capital, which consists primarily of cash and tax net operating carry forwards.
The Company intends to acquire and develop dry cleaning businesses in large
population centers in the United States. The
8
<PAGE>
dry cleaning business has traditionally been a highly fragmented industry, with
the vast majority of the locations owned by individuals. The Company believes
the dry cleaning industry is ready for consolidation and many individual owners
will increasingly turn to public consolidators as their exit strategy. The
Company intends to implement standard operating procedures, effective cash
controls, uniform site and location criteria, as well as customer service
programs and brand name marketing designed to result in greater efficiency,
appeal, and customer service resulting in greater profits and cash flow. There
can be no assurance that the Company will find acceptable opportunities for
business development or acquisition, or that the Company will be successful in
entering and operating in the dry cleaning industry. In addition, the Company
has used in the past, and may continue to use, a portion of its cash to
repurchase its own shares.
On July 24, 1998, the Company implemented its strategy to start or
acquire a significant number of dry cleaning businesses across the United
States. The Company acquired the assets and business of Johnny Valet, Inc., a
retail dry cleaning plant in San Diego, California, for $813,736. The
acquisition represents the Company's initial foray into the dry cleaning
business and what the Company believes will be the first of many acquisitions in
the industry.
Swissair Installations
The Company's main agreement with Swissair required the Company to
install and maintain the Entertainment Network in the first, business and
economy class sections of three aircraft at no cost and in only the first and
business class of another sixteen aircraft at an average price of $1.7 million
per aircraft. As of July 31, 1998, the Company had completed all installations
under the initial Swissair program. The Company is responsible for maintenance
costs through September 1998 for all nineteen aircraft. The Swissair agreement
also provides a one-year warranty (which would be extended to three years under
the recent letter of intent) on all of the Entertainment Networks and requires
specific software and hardware upgrades to the Entertainment Networks.
Development of these upgrades is not complete. If the upgrades are not completed
by specified deadlines, the Company will face significant penalties.
The Company must also meet operational reliability criteria for the
Entertainment Networks. 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 Company is subject to certain penalties, which could be
substantial, if the Entertainment Networks do not meet these operational
reliability criteria through the year 2003. Avoiding these penalties may require
the Company to continue to maintain a presence in the in-flight entertainment
business even though it has entered the dry cleaning industry.
In conjunction with the Swissair agreement, the Company has an
agreement with Interkantonale Landeslotterie ("ILL"), a Swiss non-profit
organization that organizes lotteries in Switzerland. Pursuant to the
agreements, any net gaming profits generated from the Swissair Entertainment
Networks are to be divided between the three parties with 4% being paid to the
ILL and the remaining 96% being divided between the Company and Swissair based
on a priority of expenses.
Pursuant to a separate Media Programming Services Agreement with
Swissair, the Company may bill Swissair for costs incurred related to the supply
of program material and other entertainment programming costs. Swissair receives
all entertainment programming revenues generated by the Entertainment Networks.
9
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As previously noted, the Company has recently entered into two letters
of intent with Swissair. The first relates to a $3,970,000 order for first and
business class installations on three Swissair MD-11 aircraft that are being
added to the Swissair fleet in November 1998. The Company has also received a
letter of intent from Swissair for $3,975,000 to extend the warranty on all
installed systems for a second and third year. No assurance can be given that
these letters of intent will actually become signed contracts.
Other Installations
With regard to other airlines, the Company had an agreement with
Debonair to manufacture, assemble, deliver, install, operate and maintain the
Entertainment Network on six aircraft. In February 1998, the Company and
Debonair signed a Termination Agreement under which Debonair removed the
Entertainment Network from the one aircraft on which it had been installed and
the Company paid $134,235 in settlement of its obligations to Debonair. Pursuant
to a contract with Alitalia Airlines, the Company delivered five first
generation systems for installation on Alitalia aircraft during fiscal 1996.
However, Alitalia installed only four of these five Entertainment Networks and
did not purchase sufficient spare parts to support continued operation of the
systems. Alitalia has ceased operation of the systems, and the Company has
ceased supporting the systems. To date, no contractual resolution has been
sought by either party.
Results of Operations
Revenues for the quarter ended July 31, 1998 were $439,021, a decrease
of $1,103,477 (or 72%) over revenues of $1,542,498 for the corresponding quarter
of the previous fiscal year. Revenues for the nine months ended July 31, 1998
were $18,580,848, an increase of $14,450,983 (or 350%) over revenues of
$4,129,865 in the corresponding period of the previous fiscal year. Revenues in
each period consist of equipment sales (principally from the installation of the
Entertainment Networks on Swissair aircraft) and service income. During the nine
months ended July 31, 1998 and 1997, the Company completed installations under
the initial Swissair program on ten and five aircraft, respectively, while
revenues from equipment sales rose 395% from $3.6 million to $18.0 million,
since three of the installations in fiscal 1997 were not revenue producing.
Revenues from equipment sales declined by 85% to $178,056 in the third quarter
of 1998 from $1,164,711 in the prior year third quarter as a result of the
substantial completion of the initial Swissair installation program. Service
income of $260,965 and $542,229 for the three months and nine months ended July
31, 1998, respectively, was principally generated from services provided to
Swissair pursuant to the Media Programming Services Agreement, the Company's
share of gaming profits generated by the Swissair systems and revenue earned
under the Swissair Letter of Intent to extend the warranty. Also included in
service income for the three months and nine months ended July 31, 1998 is
$24,273 of sales from the Company's initial dry cleaning plant acquired on July
24, 1998. Service income of $377,787 and $487,023 for the three months and nine
months ended July 31, 1997, respectively, was primarily derived from a Product
Identification/Product Development Agreement with Qantas Airways and
entertainment programming services provided to Alitalia and another air carrier.
Cost of equipment sales and service income for the quarter ended July
31, 1998 was $196,748, a decrease of $2,829,674 (or 93%) over the comparable
figure of $3,026,422 for the corresponding quarter of the previous fiscal year.
Cost of equipment sales and service income for the nine months ended July 31,
1998 was $15,545,559, an increase of $3,543,697 (or 30%) over cost of sales of
$12,001,862 in the corresponding period of the previous fiscal year. Cost of
equipment sales includes materials, installation and maintenance costs, as well
as estimated warranty costs and
10
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costs of upgrades to the Swissair Entertainment Networks that the Company is
contractually committed to providing to Swissair. The increase in the cost of
equipment sales is primarily due to the installations on ten Swissair aircraft
during the first nine months of fiscal 1998 compared to five aircraft during the
first nine months of fiscal 1997. As a percentage of revenue, cost of equipment
sales and service income declined to 84% in the first nine months of 1998 from
291% in the first nine months of 1997, and declined to 45% in the third quarter
of 1998 from 196% in the third quarter of 1997. The improvement in the gross
margin percentage for the nine-month period and the third quarter stems partly
from a reduction in estimated warranty costs for completed systems and the
inclusion in the nine months ended July 31, 1997 of provisions for inventory
obsolescence, unusable inventory and rework adjustments of $5,861,339.
There was no provision for doubtful accounts during the three months
and nine months ended July 31, 1998, compared to $29,004 and $179,319 for the
three months and nine months ended July 31, 1997, respectively. Fiscal 1997
provisions resulted from entertainment programming services provided under the
Alitalia agreement.
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 fourth quarter of its
fiscal year ended October 31, 1996.
Research and development expenses for the three months ended July 31,
1998 were $0, a decrease of $1,442,066 (or 100%) over expenses of $1,442,066 for
the corresponding quarter of the previous fiscal year. Research and development
expenses for the nine months ended July 31, 1998 were $1,092,316, a decrease of
$4,996,111 (or 82%) over expenses of $6,088,427 in the corresponding period of
the previous fiscal year. The decrease in expenses reflects the Company's
decision not to develop the next generation of the Entertainment Network and the
resulting reduction in staff and professional fees. The Company does not plan to
continue its research and development beyond those efforts that are required
contractually by the Swissair agreement. The Swissair agreement requires the
Company to provide specific upgrades to the Entertainment Network currently
installed on Swissair aircraft. The Company expects to complete the development
and implementation of these upgrades by December 1998 and does not plan to
develop any further upgrades to the Entertainment Network. The anticipated costs
of developing these upgrades were included in the Company's statements of
operations as a cost of equipment sales upon installations of the systems. The
Company expects to continue any development efforts that are required to support
the Swissair system reliability guarantees through the year 2003.
Marketing and administrative expenses for the quarter ended July 31,
1998 were $1,512,599, a decrease of $1,347,664 (or 47%) over expenses of
$2,860,263 for the corresponding quarter of the previous fiscal year. Marketing
and administrative expenses for the nine months ended July 31, 1998 were
$4,390,997, a decrease of $4,903,596 (or 53%) over expenses of $9,294,593 for
the corresponding period of the previous fiscal year. The decrease in expenses
reflects the Company's reduction in staff in administrative areas, including
production, marketing and program management departments. As of May 29, 1998,
the Company terminated almost all sales and marketing efforts related to the
Entertainment Network.
Recoveries of unusual charges for the three months and nine months
ended July 31, 1998 of $190,000 are a result of a decline in the number of
Entertainment Networks requiring maintenance. The estimated maintenance costs of
Entertainment Networks installed in the economy cabin of Swissair aircraft were
recognized as an unusual charge in fiscal 1997. Unusual charges for the three
11
<PAGE>
months and nine months ended July 31, 1997 represent the costs of Entertainment
Networks on three aircraft transferred to Swissair at no charge. In addition to
the hardware costs, the Company is also responsible for the installation and
maintenance costs for these systems through September 1998. Total hardware,
installation, maintenance and warranty costs incurred and expected to be
incurred for these three systems were estimated by management to be $13,065,133.
Interest income was $637,152 and $1,708,464 for the three months and
nine months ended July 31, 1998 compared to $774,991 and $1,668,426 for the
three months and nine months ended July 31, 1997, respectively. The interest
arose principally out of short-term investments of working capital. The increase
in income is due to the higher average cash balance during the first nine months
of fiscal 1998 compared to fiscal 1997.
Interest expense was $2,732 and $9,727 for the three months and nine
months ended July 31, 1998 compared to $3,200 and $7,643 for the three months
and nine months ended July 31, 1997, respectively. The increase in expense is
due to capital lease agreements that the Company entered into during the second
quarter of fiscal 1997. The leases expire in September 1999.
Other income of $10,179 and $10,679 for the three months and nine
months ended July 31, 1998 and other expense of $53,823 and $117,076 for the
three months and nine months ended July 31, 1997, respectively, represents the
net loss or gain on sales of equipment and scrapped inventory.
Liquidity and Capital Resources
At July 31, 1998, the Company had working capital of approximately
$30.5 million. The Company's primary source of funding has been through equity
offerings. Excluding any payments to be received under the Swissair Letter of
Intent to extend the warranty, the Company's backlog consists only of
installations on three Swissair aircraft. Therefore, the Company does not expect
any significant profit from its in-flight entertainment business for the
foreseeable future. As a result, working capital may continue to decrease.
During the nine months ended July 31, 1998, the Company generated $3.7
million of cash from operating activities, an increase of $43.9 million from the
corresponding period of the previous fiscal year. The cash provided by
operations during the nine months ended July 31, 1998 is primarily a result of
decreases in accounts receivable and inventories and an increase in accrued
product warranties, partly offset by decreases in accounts payable, accrued
liabilities and deferred revenue.
Purchases of property and equipment for the nine months ended July 31,
1998 were $66,337 compared to $7.3 million for the nine months ended July 31,
1997. Capital expenditures for the first nine months of fiscal 1997 were
primarily related to the manufacture of the system under the Debonair agreement,
the installation of systems on three aircraft under the Swissair Agreement, and
research and development equipment.
On July 24, 1998, the Company acquired the assets and business of
Johnny Valet, Inc., a retail dry cleaning plant in San Diego, California. The
Company paid $688,736 in cash and signed a non-interest-bearing note for
$125,000. The note is due January 10, 1999. The Company also entered into a
facility lease requiring monthly payments of $4,897 through August 31, 2000.
12
<PAGE>
On December 17, 1997, the Board of Directors authorized the Company to
repurchase shares of its Class A Common Stock on the open market. As of July 31,
1998, the Company had repurchased 1,053,500 shares at prices ranging from $0.75
to $1.00 per share.
At July 31, 1998, the Company's material capital commitments were
purchase orders of approximately $2.3 million relating primarily to inventory
purchases for its obligations under the Swissair Agreements. As of August 31,
1998, the Company has entered into various Letters of Intent to acquire the
assets and businesses of retail dry cleaning plants in San Diego, California and
Phoenix, Arizona.
The Company is currently using its working capital to finance its
current expenses, including installations, product development, inventory
purchases, repairs and other expenses associated with the delivery and
installation of the Swissair systems. 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 were to obtain additional orders for systems (which the Company does not
consider likely), the Company may require significant additional financing for
manufacture, assembly and installation of any such future orders. Additionally,
the Company has implemented a strategy to start or acquire a significant number
of dry cleaning businesses in large population centers of the United States. The
acquisition of these businesses and integration into the Company's operating
plan will require working capital.
Risks Associated With Year 2000
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the year, thus rendering them
incapable of properly managing and manipulating data that includes 21st century
dates. The Company has performed an assessment of its Entertainment Network for
year 2000 issues. The Entertainment Network is a Microsoft Windows NT 4.0 based
network system that uses a four-digit year identifier and is therefore year 2000
compliant. The Company believes that its products have no inherent date
sensitive features. The Company has also reviewed its existing software systems
utilized in the planning, purchasing, manufacturing, product development and
accounting areas and believes these systems are all year 2000 compliant. The
Company does not believe the year 2000 issue will pose significant operational
problems for the Company.
The Company continues to evaluate the estimated costs associated with its year
2000 compliance efforts and does not expect the future costs to be material.
However, no assurance can be given that the Company will not incur additional
expenses pursuing year 2000 compliance. Furthermore, even if the Company's
systems are year 2000 compliant, there can be no assurance that the Company will
not be adversely affected by the failure of others to become year 2000
compliant. For example, the Company may be adversely affected by, among other
things, warranty and other claims made by the Company's customers related to
product failures caused by the year 2000 problem, the disruption or inaccuracy
of data provided to the Company by non-year 2000 compliant third parties, and
the failure of the Company's service providers to become year 2000 compliant.
The Company will continue to monitor the progress of its material vendors and
customers and formulate a contingency plan at that point in time when the
Company does not believe a material vendor or customer will be compliant.
Despite the Company's efforts to date, there can be no assurance that the year
2000 problem will not have a material adverse affect on the Company in the
future.
13
<PAGE>
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, cost overruns in connection
with the Company's current and future contracts, failure of installed systems to
perform in accordance with system specifications, the failure to execute
definitive agreements relating to the letters of intent with Swissair, the
inability of the Company to locate, evaluate, purchase and operate other
businesses, the inability of the Company to convince airlines to purchase its
systems, the failure of the Company to receive sufficient financing to perform
under any new airline contracts, the impact of competition and downward pricing
pressures, the effect of changing economic conditions and conditions in the
airline and other industries, year 2000 issues, the impact of any changes in
domestic and foreign regulatory environments, the Company's inability to obtain
requisite government approvals, technology changes, currency fluctuations, and
the other risks and uncertainties detailed 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, 1997.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
14
<PAGE>
On March 6, 1998, the Company was named as a nominal defendant in a
derivative action filed in the Supreme Court of the State of New York, County of
New York, entitled Barington Capital Group, L.P. et al. v. Yuri Itkis et al.
(no. 98103878). The lawsuit names ten current and former officers and directors
of the Company and alleges various breaches of fiduciary duty. The complaint
seeks at least $50,000,000 in damages and an injunction against the defendants
taking any action to manage the Company. The plaintiffs have filed an amended
complaint, seeking the same relief, to which the defendants have responded. The
defendants have moved to dismiss the action with prejudice for lack of subject
matter jurisdiction, and intend to defend the action vigorously.
On September 9, 1998, the Company was named as a nominal defendant in
another derivative action filed in the Superior Court of Arizona, Maricopa
County, by the Berington Capital Group, L.P. The lawsuit again named ten former
officers and directors of the Company, as well as OCP, and alleges the same
various breaches of fiduciary duty as well as illegal vote buying and seeks an
injunction against the defendants to, among other things, delay the Annual
Meeting of Stockholders. On September 16, 1998, the Court in Arizona issued a
Temporary Restraining Order and Order To Show Cause delaying the Annual Meeting
pursuant to an ex parte order. A hearing is scheduled for September 23, 1998,
and the defendants intend to defend the actions vigorously.
Item 6: Exhibits and Reports on Form 8-K
<TABLE>
<S> <C> <C> <C>
(a) Exhibits
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
4.5(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
4.10(2)* - Specimen of Class D Warrant Certificate
4.11(4)* - Stock Purchase Warrant, dated as of November 7, 1996, issued to
FortuNet, Inc.
4.12(4)* - Stock Purchase Warrant, dated as of November 12, 1996, issued to
Houlihan Lokey Howard & Zukin
10.20 - Amendment to Severance Compensation Agreement, dated as of
August 28, 1998
10.21 - Second Amendment to Employment Agreement, dated as of August
28, 1998
10.22 - Second Amendment to Employment Agreement, dated as of August
28, 1998
27 - Financial Data Schedule
</TABLE>
- --------------------------
* Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the fiscal year ended October 31, 1997 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, 1998.
16
<PAGE>
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 19, 1998 INTERACTIVE FLIGHT TECHNOLOGIES, INC.
By: /s/ Irwin L. Gross
---------------------------------------
Irwin L. Gross
Chief Executive Officer
17
<PAGE>
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 *
4.5(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 *
4.10(2) Specimen of Class D Warrant Certificate *
4.11(4) Stock Purchase Warrant, dated as of November 7, 1996, issued to
FortuNet, Inc. *
4.12(4) Stock Purchase Warrant, dated as of November 12, 1996, issued to
Houlihan Lokey Howard & Zukin *
10.20 Amendment to Severance Compensation Agreement, dated as of August
28, 1998 19
10.21 Second Amendment to Employment Agreement, dated as of August 28,
1998 20
10.22 Second Amendment to Employment Agreement, dated as of August
28, 1998 21
27 Financial Data Schedule 22
</TABLE>
- ---------------------------
* Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the fiscal year ended October 31, 1997 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
<LEGEND>
LEGEND: THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND IN THE
COMPANY'S 10-QSB FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1998
<PERIOD-START> NOV-1-1997 MAY-1-1998
<PERIOD-END> JUL-31-1998 JUL-31-1998
<CASH> 36,420,771 36,420,771
<SECURITIES> 4,484,274 4,484,274
<RECEIVABLES> 758,975 758,975
<ALLOWANCES> 0 0
<INVENTORY> 1,442,064 1,442,064
<CURRENT-ASSETS> 42,772,568 42,772,568
<PP&E> 4,278,327 4,278,327
<DEPRECIATION> 2,024,760 2,024,760
<TOTAL-ASSETS> 47,120,896 47,120,896
<CURRENT-LIABILITIES> 12,233,888 12,233,888
<BONDS> 0 0
0 0
0 0
<COMMON> 221,111 221,111
<OTHER-SE> 34,641,374 34,641,374
<TOTAL-LIABILITY-AND-EQUITY> 47,120,896 47,120,896
<SALES> 18,038,619 178,056
<TOTAL-REVENUES> 18,580,848 439,021
<CGS> 15,523,282 187,428
<TOTAL-COSTS> 15,545,559 196,748
<OTHER-EXPENSES> 5,293,313 1,322,599
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 9,727 2,732
<INCOME-PRETAX> (548,608) (435,727)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (548,608) (435,727)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (548,608) (435,727)
<EPS-PRIMARY> (0.03) (0.02)
<EPS-DILUTED> (0.03) (0.02)
</TABLE>
