<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, 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
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, 1998
----- ------------------------------
<S> <C>
Class A Common Stock, $.01 par value 16,082,637 shares
Class B Common Stock, $.01 par value 3,733,334 shares
</TABLE>
Transitional Small Business Disclosure Format
Yes [ ] No [X]
<PAGE> 2
INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
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INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
ASSETS 1998 1997
------------- -------------
(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
------------- -------------
Total current assets 42,772,568 51,653,071
------------- -------------
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
------------- -------------
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 --
------------- -------------
Total current liabilities 12,233,888 18,413,272
------------- -------------
Accrued severance costs, noncurrent 13,750 55,000
Capital lease obligations, less current maturities 10,773 76,840
------------- -------------
Total liabilities 12,258,411 18,545,112
------------- -------------
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
------------- -------------
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,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<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,
--------------------------------
1998 1997
------------ ------------
<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
------------ ------------
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)
------------ ------------
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)
------------ ------------
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.
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(5) CONTINGENCIES
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. 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.
7
<PAGE> 8
INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
8
<PAGE> 9
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 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.
9
<PAGE> 10
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.
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
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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 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
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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 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.
12
<PAGE> 13
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.
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.
13
<PAGE> 14
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
14
<PAGE> 15
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.
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.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
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.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(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
- --------------------------
* 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> 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, 1998 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 *
4.5(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, 19
dated as of August 28, 1998
10.21 Second Amendment to Employment Agreement, 20
dated as of August 28, 1998
10.22 Second Amendment to Employment Agreement, 21
dated as of August 28, 1998
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
<PAGE> 1
EXHIBIT 10.20
AMENDMENT TO SEVERANCE COMPENSATION AGREEMENT
This Amendment to Severance Compensation Agreement (the "Amendment") is
made and entered into as of August 28, 1998, by and between Interactive Flight
Technologies, Inc., a Delaware corporation (the "Company"), and Michail Itkis
(the "Executive"), with reference to the following facts:
A. The Company and Executive are parties to that certain Severance
Compensation Agreement dated as of September 12, 1997 (the "Severance
Compensation Agreement").
B. The parties wish to amend the Severance Compensation Agreement as set
forth herein.
NOW THEREFORE, based on the mutual covenants contained herein, the parties
agree as follows:
1.3 Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined by KPMG Peat Marwick, LLP that any payment by the
Company to or for the benefit of the Executive (whether paid or payable pursuant
to the terms of this Agreement or otherwise, but determined without regard to
any additional payments required under this Section 1.3) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986, as amended, (the "Code") or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall, at the same time that the payment
giving rise to the excise tax is made, receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by the Executive of all
taxes (including any interest or penalties imposed with respect to such taxes)
and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments.
5.10 GRANTOR TRUST. The Company shall establish a grantor trust to
assist it in meeting its obligations hereunder.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
INTERACTIVE FLIGHT TECHNOLOGIES, INC. EXECUTIVE
/s/ JOHN W. ALDERFER /s/ MICHAIL ITKIS
- ---------------------- --------------------
name: John W. Alderfer Michail Itkis
title: Treasurer
<PAGE> 1
Exhibit 10.21
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (the "Amendment") is made
and entered into as of August 28, 1998, by and between Interactive Flight
Technologies, Inc., a Delaware corporation (the "Company"), and John Alderfer
(the "Executive"), with reference to the following facts:
A. The Company and Executive are parties to that certain Employment
Agreement dated as of October 2, 1996 (the "Employment Agreement").
B. The parties wish to amend the Employment Agreement as set forth
herein.
NOW THEREFORE, based on the mutual covenants contained herein, the parties
agree as follows:
5.2.3 Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined by KPMG Peat Marwick, LLP that any payment
by the Company to or for the benefit of the Executive (whether paid or payable
pursuant to the terms of this Agreement or otherwise, but determined without
regard to any additional payments required under this Section 5.2.3) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended, (the "Code") or any interest or
penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall, at the
same time that the payment giving rise to the excise tax is made, receive an
additional payment (a "Gross-Up Payment") in an amount such that after payment
by the Executive of all taxes (including any interest or penalties imposed with
respect to such taxes) and Excise Tax imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
5.8 GRANTOR TRUST. The Company shall establish a grantor trust
to assist it in meeting its obligations hereunder.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
INTERACTIVE FLIGHT TECHNOLOGIES, INC. EXECUTIVE
/s/ MICHAIL ITKIS /s/ JOHN ALDERFER
- ------------------------------------- --------------------------
name: Michail Itkis John Alderfer
title: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.22
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (the "Amendment") is made
and entered into as of August 28, 1998, by and between Interactive Flight
Technologies, Inc., a Delaware corporation (the "Company"), and Thomas Metzler
(the "Executive"), with reference to the following facts:
A. The Company and Executive are parties to that certain Employment
Agreement dated as of November 18, 1996 (the "Employment Agreement").
B. The parties wish to amend the Employment Agreement as set forth
herein.
NOW THEREFORE, based on the mutual covenants contained herein, the parties
agree as follows:
6.2.3 Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined by KPMG Peat
Marwick, LLP that any payment by the Company to or for the benefit of the
Executive (whether paid or payable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 6.2.3) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the
"Code") or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall, at the same time that the payment giving rise to the
excise tax is made, receive an additional payment (a "Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes) and Excise Tax
imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
Notwithstanding the foregoing provisions of this Section 6.2.3, if it shall be
determined by KPMG Peat Marwick, LLP that the Executive is entitled to a
Gross-Up Payment, but that imposition of the Excise Tax could be eliminated by
reducing an amount of a cash Payment otherwise due to the Executive by an
amount equal to $40,000 or less, the Executive's cash Payments shall be so
reduced by the least amount necessary to eliminate the Excise Tax.
6.8 GRANTOR TRUST. The Company shall establish a grantor trust to
assist it in meeting its obligations hereunder.
<PAGE> 2
2
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
INTERACTIVE FLIGHT TECHNOLOGIES, INC. EXECUTIVE
/s/ Michail Itkis /s/ Thomas Metzler
- ------------------------------ ------------------------------
name: Michail Itkis Thomas Metzler
title: Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<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>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1998
<PERIOD-START> NOV-01-1997 MAY-01-1998
<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 12,223,888
<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>
