U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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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 April 30, 1999
[ ] 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.
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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 B-200
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)
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 June 7, 1999
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Class A Common Stock, $.01 par value 5,342,117 shares
Class B Common Stock, $.01 par value 118,519 shares
Transitional Small Business Disclosure Format
Yes __ No X
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INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 1999
(unaudited) and October 31, 1998 (audited)............................................... 3
Condensed Consolidated Statements of Operations for the Three Months
and Six Months Ended April 30, 1999 and 1998 (unaudited)................................. 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended April 30, 1999 and 1998 (unaudited)................................................ 5
Notes to Condensed Consolidated Financial Statements..................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 18
Item 6. Exhibits and Reports on Form 8-K......................................................... 18
SIGNATURES........................................................................................ 20
</TABLE>
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INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
April 30, October 31,
Assets 1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,732,520 $ 27,914,551
Restricted cash 581,525 1,039,311
Short-term investment securities 7,990,056 1,762,049
Accounts receivable, net 1,281,255 1,135,342
Note receivable from related party -- 447,939
Inventories, net 1,513,298 1,005,427
Prepaid expenses 439,143 567,601
Assets held for use 522,591 699,196
Other current assets 1,042,707 379,046
------------ ------------
Total current assets 33,103,095 34,950,462
------------ ------------
Investment securities 1,674,132 1,928,555
Property and equipment, net 636,113 780,035
Notes receivable, long-term 1,050,000 --
Other assets 1,097,038 605,150
------------ ------------
Total assets $ 37,560,378 $ 38,264,202
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,051,358 $ 1,447,815
Accrued liabilities 2,299,090 4,016,473
Deferred revenue 2,158,028 453,022
Accrued product warranties 3,836,471 5,369,008
Note payable -- 125,000
------------ ------------
Total current liabilities 9,344,947 11,411,318
------------ ------------
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; 5,342,117 and 6,125,908
shares issued, respectively 53,421 61,259
Class B common stock, six votes per share, par value $0.01 per
share, 4,000,000 shares authorized; 118,519 and 1,244,445 shares
issued and outstanding respectively. 1,185 12,445
Additional paid-in capital 110,078,500 112,371,141
Accumulated other comprehensive income:
Net unrealized gains on investment securities 2,373,893 6,754
Accumulated deficit (84,097,578) (83,282,732)
Treasury stock, at cost; 78,600 and 844,667 shares, respectively (193,990) (2,315,983)
------------ ------------
Total stockholders' equity 28,215,431 26,852,884
------------ ------------
Total liabilities and stockholders' equity $ 37,560,378 $ 38,264,202
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months Six Months
Ended April 30, Ended April 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Equipment sales $ -- $ 4,569,337 $ -- $ 17,860,563
Service income 301,990 162,825 626,748 281,264
------------ ------------ ------------ ------------
301,990 4,732,162 626,748 18,141,827
------------ ------------ ------------ ------------
Costs and expenses:
Cost of equipment sales -- 3,768,459 -- 15,335,854
Reversal of warranty, maintenance
and commission accruals (1,986,972) -- (1,986,972) --
Cost of service income 187,705 7,257 374,147 12,957
Expenses associated with investments -- -- 300,000 --
Research and development expenses -- 482,389 -- 1,092,316
General and administrative expenses 1,764,202 1,271,967 3,645,151 2,878,398
------------ ------------ ------------ ------------
(35,065) 5,530,072 2,332,326 19,319,525
------------ ------------ ------------ ------------
Operating profit (loss) 337,055 (797,910) (1,705,580) (1,177,698)
Other:
Interest income 401,710 526,180 844,686 1,071,312
Interest expense (1,191) (3,234) (2,880) (6,995)
Other income 19,350 500 48,926 500
------------ ------------ ------------ ------------
Net income (loss) 756,924 (274,464) (814,846) (112,881)
============ ============ ============ ============
Basic and diluted net income (loss) per share $ 0.14 $ (0.05) $ (0.15) $ (0.02)
============ ============ ============ ============
Weighted average shares outstanding 5,493,698 5,997,656 5,427,612 6,121,234
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Six Months Ended April 30,
----------------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (814,846) $ (112,881)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for doubtful accounts 18,778 --
Depreciation and amortization 205,270 641,419
Reversal of warranty, maintenance and commission accruals 1,986,972 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (133,894) 5,109,893
Decrease (increase) in inventories (507,871) 5,003,382
Increase in prepaid expenses, other current assets,
other assets and notes receivable (1,620,701) (616,121)
Decrease in accounts payable (396,159) (3,868,360)
Decrease in notes payable (125,000) --
Decrease in accrued liabilities (863,559) (218,437)
Increase (decrease) in deferred revenue 1,705,006 (2,193,060)
Decrease in accrued severance costs -- (27,500)
Increase (decrease) in accrued product warranties (251,304) 2,245,816
------------ ------------
Net cash provided by (used in) operating activities (4,771,252) 5,964,151
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (39,686) (26,390)
Proceeds from sale of equipment 10,805 --
Purchases of investment securities (6,338,159) (1,305,593)
Maturities of investment securities 1,049,995 234,615
Proceeds from sale of investment securities 1,681,720 --
Decrease in restricted cash 457,786 --
------------ ------------
Net cash used in investing activities (3,177,539) (1,097,368)
------------ ------------
Cash flows from financing activities:
Payments on capital lease obligations (43,494) (39,371)
Purchases of treasury stock (193,990) (1,010,979)
Employee stock option purchase 4,244 --
------------ ------------
Net cash used in financing activities (233,240) (1,050,350)
------------ ------------
Increase (decrease) in cash and cash equivalents (8,182,031) 3,816,433
Cash and cash equivalents at beginning of period 27,914,551 36,890,454
============ ============
Cash and cash equivalents at end of period $ 19,732,520 $ 40,706,887
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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INTERACTIVE FLIGHT TECHNOLOGIES, INC.
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. Certain reclassifications have been made to the
amounts in the October 31, 1998 Balance Sheet to conform with the April 30, 1999
presentation.
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, 1998, included in the
Company's Annual Report on Form 10-KSB.
The results of operations for the three months and six months ended April
30, 1999 are not necessarily indicative of the results to be expected for the
entire fiscal year.
In the period ended April 30, 1999, the Company revised certain warranty,
maintenance and commission accruals that were recorded in prior fiscal years
which totaled $1,986,972. Such adjustments to prior period estimates resulted
from an evaluation of specific contractual obligations and discussions between
the new management of the Company and other parties related to such contracts.
Based on the results of the Company's findings during this quarter, such
accruals were no longer considered necessary.
(2) Stockholders' Equity
(a) Stock Repurchase Program
On October 30, 1998, the Board of Directors authorized the Company to
repurchase up to 666,667 more shares of its Class A Common Stock on the open
market. On January 11, 1999 the Company retired 844,667 shares of Class A Common
Stock which were repurchased pursuant to a previous stock repurchase program
authorized by the Board of Directors and held in treasury. As of April 30, 1999,
the Company had repurchased an additional 78,600 shares at prices ranging from
$1.49 to $2.94 per share for a total cost of $193,990.
(b) Reverse Stock Split
On October 30, 1998, the stockholders of the Company approved a
one-for-three reverse stock split of the Company's Class A common stock and
Class B common stock. One share was issued for three shares of common stock held
by stockholders of record as of the close of business on November 2, 1998.
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All references to the number of common shares, per share amounts and stock
option data elsewhere in the condensed consolidated financial statements and
these notes have been restated as appropriate to reflect the effect of the
reverse split for all periods presented.
(c) Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding during each period presented as shown in the
accompanying condensed consolidated statements of operations. Diluted earnings
(loss) per share is the same as basic earnings (loss) per share for all periods
presented due to the immaterial amount of common stock equivalents for the three
months ended April 30, 1999 and due to the antidilutive nature of such common
stock equivalents for the other periods presented.
(3) Investments
(a) U.S. Wireless Corporation
On March 4, 1999, the Company made a $3.0 million investment in U.S.
Wireless Corporation ("U.S. Wireless") (NASDAQ: USWC). U.S. Wireless provides
wireless network infrastructure add-on systems for the emerging wireless
Geo-location services marketplace. In exchange for its investment, the Company
received 30,000 shares of Series B Preferred Stock of U.S. Wireless ("Series B
Preferred"). Each share of the Series B Preferred of U.S. Wireless is
convertible into 100 shares of Common Stock of U.S. Wireless, at the option of
the Company, at any time commencing 90 days after the Closing Date; however,
should the Company voluntarily convert prior to March 2000, the Series B
converts into approximately 67 shares of Common Stock of U.S. Wireless. The
Series B Preferred Stock is also subject to mandatory conversion into Common
Stock at any time at a conversion rate of 100 shares of Common Stock of U.S.
Wireless in the event the closing price for U.S. Wireless' Common Stock as
reported on the NASDAQ is at least $5.00 per share for 30 consecutive trading
days. The Series B Preferred Stock entitles the Company to $100 per share
liquidation preference before any distributions to the holders of Common Stock
of U.S. Wireless in the event of a liquidation of U.S. Wireless. In addition,
the Company and other holders of the Series B Preferred Stock have, as a
separate class, elected one member to U.S. Wireless' Board of Directors and one
additional individual as an observer to such Board. As a condition to making the
investment, the Company also obtained certain registration rights relating to
the registration under the Securities Act of 1933 of those shares of Common
Stock of U.S. Wireless into which the Series B Preferred Stock is convertible.
The Series B Preferred is classified as a short-term investment security at its
fair market value as of April 30, 1999. Unrealized gains on this investment are
reflected as a separate component of stockholders' equity. Fair market value was
determined on an as-converted basis on April 30, 1999 into 2,000,000 shares of
USWC common stock at a per share price of $2.688, resulting in a total fair
market value of $5,376,000.
(b) Inter Lotto (UK) Ltd.
On May 5, 1999, the Company completed the acquisition of a 27.5% equity
interest in Inter Lotto (UK) Ltd. ("ILL"). ILL has a license with the exclusive
right to provide for the operation of daily lotteries in Great Britain, by way
of a management contract with an outside third party, and will be responsible
for developing, installing, marketing and operating the lottery, selecting the
game and managing the network. In exchange, the Company will receive a
percentage of the revenues generated by the sale of lottery tickets. ILL is a
company licensed, by the Gaming Board for Great Britain, to operate daily
lotteries on behalf of United Kingdom Charities.
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As of April 30, 1999 the Company has advanced ILL $428,364 to fund
operational obligations of ILL in accordance with a November 9, 1998 letter of
intent. Such advances have been classified in Other Assets. In addition, the
Company has paid ILL a standstill fee of $150,000 which was expensed in the
fiscal quarter ended January 31, 1999.
Further, the Company had deposited $487,500 into an escrow account prior to
April 30, 1999, which deposit is classified as an Other Current Asset. On May 5,
1999, $325,540 and $161,960, respectively were distributed out of escrow to
obtain the 27.5% interest in ILL from an unrelated third party and to fund a
newly formed wholly-owned subsidiary of the Company in the United Kingdom.
(4) Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" which establishes standards for the
reporting and presentation of comprehensive income and its components in
financial statements. Comprehensive income encompasses net income and "other
comprehensive income", which includes all other non-owner transactions and
events which change stockholders' equity. Other comprehensive income consists
only of net unrealized gains on investment securities for the Company and
totaled $2,370,792 and $2,367,139 for the three and six months ended April 30,
1999, respectively.
(5) Contingencies
Phillip J. Arnaldi, Individually as surviving father and in his
representative capacity as the Administrator of the Estate of Adrienne Valerie
Neuweiler, deceased v. SAIR Group, Swissair Transport Company, Ltd., SR Technics
Ltd., Delta Airlines, Inc., McDonnell Douglas Corporation, The Boeing Company
and Interactive Flight Technologies, Inc., United States District Court, Eastern
District of New York, CV 99-1265 - The family of a victim of the air crash
involving Swissair Flight No. 111 has alleged that the IFT in-flight
entertainment system aboard the involved MD-11 was improperly installed and a
cause of the crash. IFT denies all liability and has tendered the defense of
this claim to its avionics insurer who has accepted the defense and is
vigorously defending the claim.
First Lawrence Capital Corp. v. James Fox, Irwin Gross, Interactive Flight
Technologies, Inc., and John Doe Nos. 1 through 10. Supreme Court of the State
of New York, County of Westchester, No. 7196/99 - This is an unliquidated claim
by an investment banking firm that alleges its former employee, James Fox,
wrongfully brought certain corporate opportunities to IFT when he left his
employment with First Lawrence. IFT denies the allegations of the Complaint and
is vigorously defending the claim.
See Part II., Item 1. Legal Proceeding.
(6) Subsequent Events
(a) The Network Connection, Inc.
As of April 30, 1999, The Network Connection, Inc. ("TNCi") was indebted to
the Company in the approximate principal amount of $750,000. On May 10, 1999,
TNCi executed a Fourth Allonge to the Secured Promissory Note evidencing such
loan. Pursuant to such Fourth Allonge the balance due from TNCi to the Company
became convertible into shares of TNCi's Series C 8% Convertible Preferred
Stock, par value $.01 per share, $1,000 per share (the "Series C Preferred") at
a
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conversion price of $1,000 per share. The Series C Preferred, in turn, is
convertible into common stock of TNCi as described in the Series C Designations.
As additional consideration for the Note, the Company received warrants to
purchase 200,000 shares of the common stock of TNCi at an average price per
share of $3.04. The warrants expire in 2004.
On May 11, 1999, the Company acquired from a third party investor 1,500
shares of Series B 8% Convertible Preferred Stock of TNCi, par value $.01 per
share, stated value $1,000 per share (the "Series B Shares") and cash in the
amount of $1,030,000 in exchange for (a) 3,000 shares of the Company's Series A
8% Convertible Preferred Stock, par value $.01 per share, stated value $1,000
per share and (b) warrants to purchase 87,500 shares of the Company's Class A
Common Stock, $.01 par value per share, at an exercise price of $3.00 per share.
On May 17, 1999, the Company acquired 1,055,745 shares of the common stock
and 2,495,400 shares of the Series D Convertible Preferred Stock of TNCi, par
value $.01 per share, stated value $10 per share, pursuant to the terms of the
Asset Purchase and Sale Agreement (the "Agreement") by and between the Company
and TNCi dated April 29, 1999 (the "Transaction"). The consideration paid by the
Company for all of such shares consisted of certain assets relating to the
Company's Interactive Entertainment Division, including all fixed assets,
inventory, intellectual property rights and other intangibles, prepaid expenses
and other property of the Company used in such division, plus cash in the amount
of $4,250,000. The cash which comprised a portion of the assets transferred to
TNCi was taken from the Company's working capital reserves. As part of the
Transaction, TNCi also assumed certain liabilities related to the the Company
assets transferred.
The TNCi common shares acquired by the Company in the Transaction, when
combined with the number of TNCi common shares into which the shares of Series D
Convertible Preferred Stock acquired by the Company in the Transaction can be
converted, equal 60% of all of the then outstanding common stock of TNCi on a
fully diluted basis, as defined in the Agreement. However, TNCi does not
currently have a sufficient number of common shares authorized to permit such a
conversion. The common stock of TNCi trades on the NASDAQ Small Cap Market under
the symbol "TNCX."
Each share of common stock of TNCi is entitled to one vote. Each share of
Series D Convertible Preferred Stock of TNCi is entitled to six votes; however,
notwithstanding the voting rights, the shares of Series D Convertible Preferred
Stock cannot be voted if the number of voting shares which would then be held by
TNCi as a result of the Transaction would exceed 19.99% of the voting shares
then outstanding until the TNCi shareholders have approved of the Transaction or
until July 15, 1999, whichever first occurs.
TNCi develops and manufactures networked computer systems to provide
customers with interactive, video-on-demand information and entertainment
content on commercial aircraft, cruise ships, and trains. TNCi has also sold
multimedia servers and has networked customer computers to educational
institutions and to corporations to support interactive, video-based training
programs.
(b) Mexican Entertainment and Gaming Activities
On May 14, 1999, the Company loaned $1,600,000 (of which $300,000 was
advanced on February 25, 1999) to a Mexican Corporation which was formed for the
purpose of operating a gaming and entertainment center in Monterrey, Nuevo Leon,
Mexico. The loan bears interest at a rate equal to the Prime Rate plus three
percent (3%) and matures on April 30, 2001.
The Company has also issued a letter of credit in the amount of $950,000 to
secure repayment of the purchase price of certain gaming equipment to be
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acquired by the Company and leased to the Mexican Corporation. The Mexican
Corporation will lease such equipment from the Company at the rate of $37,500
per month until the earlier of (i) the waiver or release of the requirement that
the Company maintain such letter of credit or (ii) the payment in full by the
Company of the purchase price, including all finance charges, of such equipment.
Thereafter, the Mexican Corporation will pay as rent for the equipment the sum
of $25,000 per month for as long as it uses any of the machines, provided that
the Mexican Corporation's obligation to pay such $25,000 per month fee shall
continue at least (i) until such time as the Company has paid the purchase price
for the equipment, or (ii) May 14, 2001.
In consideration for making the loan and issuing the letter of credit, the
Company has been issued 24.5% of the capital stock of the Mexican Corporation
and the Company will receive 25% of all of the profits generated by the Mexican
Corporation. Furthermore, for a term of ten years following the closing of the
loan to the Mexican Corporation, Regal Gaming and Entertainment, Inc. ("Regal"),
the holder of 24.5% of the equity of the Mexican Corporation has agreed to issue
to the Company, at no cost to the Company, 24.5% of the equity interest in any
gaming venture in which Regal, it subsidiaries or affiliates is an investor and
which relates to gaming activities in Mexico.
(c) Dry Cleaning Operations
On May 14, 1999 the Company completed the sale of the assets of its dry
cleaning operations for $750,000 in cash less fees and expenses of approximately
$50,000.
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INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is
qualified in its entirety by the Condensed Consolidated Financial Statements and
Notes thereto of Interactive Flight Technologies, Inc. and subsidiary (the
"Company") appearing elsewhere herein. Historical results are not necessarily
indicative of trends in operating results for any future period.
Historical Overview
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.
Former management of the Company had determined to exit the in-flight
entertainment business in May 1998, except for continuing efforts associated
with meeting its contractual obligations with its only customer, Swissair. This
decision was based on a number of factors including industry trends, financial
resources of the Company and the Company's inability to attract new customers.
The Company has recently completed several transactions which the Company
believes will generate future earnings and cash flow. Such transactions include
an acquisition of The Network Connection, Inc., the operations of which
complement those of the Company's in-flight entertainment business, and
investments in U.S. Wireless Corporation, Inter Lotto UK, Ltd. and a Mexican
corporation focused on gaming and entertainment. See below discussion, "Outlook:
Issues and Risks" for a description of each investment. No assurances can be
made that the above investments will be successful.
Swissair
On October 29, 1998, the Company was notified by Swissair of the airline's
decision to deactivate the Entertainment Network on all Swissair aircraft.
Swissair told the Company that this precautionary action was taken in response
to technical investigations conducted by the Canadian Transportation Safety
Board following the crash of Swissair Flight No. 111 on September 2, 1998 off
the coast of Nova Scotia. However, based on investigation findings, the Company
has been informed by representatives of the Canadian Transportation Safety Board
and Swissair that its Entertainment Network has not been related, in any way, to
the cause of the crash of Swissair Flight No. 111. The Federal Aviation
Administration is conducting a review of the system's installation certification
and to date, has found no safety hazards or violations of Federal Aviation
Regulations. Until April 1999, the Company and its system
integrator/installation contractor had been working closely with Swissair to
take the necessary steps that will allow Swissair to reactivate the systems as
quickly as possible. On December 9, 1998, the Company was notified by Swissair
of its intent to reactivate the system in October 1999.
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 to Swissair and in the first and business
classes of another sixteen aircraft at an average price of $1.7 million per
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aircraft. As of October 31, 1998, the Company had completed all installations
under the initial Swissair program. The Company was responsible for maintenance
costs through September 1998 for all nineteen aircraft and specific software and
hardware upgrades to the Entertainment Network that are not yet completed. The
Swissair agreement also provided for a one-year warranty on the Entertainment
Network. The Company also received a letter of intent, dated April 1, 1998, from
Swissair for $3,975,000 to extend the warranty on the installed system for a
second and third year. Through April 30, 1999, the Company has been paid
$707,500 under this letter of intent.
On April 1, 1998, the Company also entered into a contract with Swissair
for a $4.7 million order for first and business class installations on four
Swissair MD-11 aircraft that are being added to the Swissair fleet. Though none
of the installations on the four aircraft were completed the Company's contract
allows for billing of the full contract amount if installation schedules are not
met due to no fault of the Company. Inventory on-hand at April 30, 1999 of
$1,513,298 relates primarily to the above contract with Swissair. As of February
26, 1999, Swissair has made payments of $1,450,000 on the $4.7 million order for
the four installations and continues to engage in active discussions with the
Company regarding outstanding financial matters related to current receivables,
inventory, purchase commitments and extended warranty obligations.
On May 6, 1999, the Company filed a lawsuit against Swissair in the United
States District Court for the District of Arizona seeking over $100 million in
damages for Swissair's failure to honor its obligations for payment and
reactivation of the Company's Entertainment Network. Swissair has failed to make
payments to the Company under installation and warranty contracts and has harmed
the Company's business and reputation by failing to honor its commitments to
reactivate the Entertainment Network on Swissair aircraft. Even though there has
been no evidence that the Entertainment Network contributed in any way to the
crash of Swissair Flight No. 111 on September 2, 1998, Swissair has continued to
use the unfortunate circumstances of the crash as an excuse to avoid its
obligations.
Results of Operations
Revenues for the quarter ended April 30, 1999 were $301,990, a decrease of
$4,430,172 or 94% compared to revenues of $4,732,162 for the corresponding
quarter of the previous fiscal year. Revenues for the six months ended April 30,
1999 were $626,748, a decrease of $17,515,079 or 97% compared to revenues of
$18,141,827 in the corresponding period of the previous fiscal year. Equipment
sales generated during the three months and six months ended April 30, 1998 were
principally from the installation of the Entertainment Network on Swissair
aircraft. Service income of $301,990 and $626,748 for the three months and six
months ended April 30, 1999 was principally generated from the Company's dry
cleaning plant acquired on July 24, 1998. Service income of $162,825 and
$281,264 for the three months and six months ended April 30, 1998, respectively,
was principally generated from services provided to Swissair pursuant to a 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.
Cost of equipment sales and service income for the quarter ended April 30,
1999 was zero, a decrease of 100% compared to cost of sales of $3,768,459 for
the corresponding quarter of the previous fiscal year. Cost of equipment sales
and service income for the six months ended April 30, 1999 was zero, a decrease
of 100% versus cost of sales of $15,335,854 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
12
<PAGE>
Network that the Company is contractually committed to providing to Swissair.
The decrease in cost of sales is primarily due to the lack of any installations
of equipment for the three months and six months ended April 30, 1999 compared
to the installation of equipment in nine Swissair aircraft during the
corresponding period of the previous fiscal year. The cost of service income for
fiscal 1999 is primarily related to the Company's dry cleaning operations.
For the three and six months ended April 30, 1999 the Company recorded
warranty, maintenance and commission accrual adjustments of $1,281,233, $402,418
and $303,321 respectively. Such adjustments to prior period estimates, which
totaled $1,986,972, resulted from an evaluation of specific contractual
obligations and discussions between the new management of the Company and other
parties related to such contracts. Based on the results of the Company's
findings during this quarter, such accruals were no longer considered necessary.
Expenses associated with investments of $300,000 for the six months ended
April 30, 1999 represent a $150,000 write-off of an investment deemed to have no
value, and a $150,000 standstill fee related to the Inter Lotto transaction.
There were no research and development expenses for the three and six
months ended April 30, 1999, compared to $482,389 and $1,092,316, respectively
for the corresponding periods 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 currently 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 has completed the development of these upgrades and does not
currently plan to develop any further upgrades to the Entertainment Network. The
costs of developing these upgrades have previously been included in the
Company's statements of operations as a cost of equipment sales. The Company
will continue any development efforts that are required to support system
reliability guarantees through the year 2003, subject to the development of a
successful reactivation plan with Swissair.
General and administrative expenses for the quarter ended April 30, 1999
were $1,764,202, an increase of $492,235 or 39% over expenses of $1,271,967 for
the corresponding quarter of the previous fiscal year. General and
administrative expenses for the six months ended April 30, 1999 were $3,645,151,
an increase of $766,753 or 27% over expenses of $2,878,398 for the corresponding
period of the previous fiscal year. Significant components of general and
administrative expenses include the costs of consulting agreements, legal and
professional fees, consulting fees related to the Inter Lotto transaction (see
"Outlook-Issues and Risks"), personnel costs, and corporate insurance costs.
Interest income of $401,710 and $844,686 for the three months and six
months ended April 30, 1999 decreased from $526,180 and $1,071,312 for the three
months and six months ended April 30, 1998, respectively. The interest arose
principally out of short-term investments of working capital. The decrease in
income is due to the lower average cash balance during the first six months of
fiscal 1999 compared to fiscal 1998.
13
<PAGE>
Interest expense was $1,191 and $2,880 for the three months and six months
ended April 30, 1999 compared to $3,234 and $6,995 for the three months and six
months ended April 30, 1998, respectively. The expense is attributable to the
Company's capital leases for furniture that expire in September 1999.
Other income of $19,350 and $48,926 for the three and six months ended
April 30, 1999 represent sublet income for the sublease of office space as well
as proceeds from the sale of office equipment and office furniture to employees.
Other income of $500 for the three months and six months ended April 30, 1998
represents the net gain on sales of equipment.
Liquidity and Capital Resources
At April 30, 1999, the Company had working capital of approximately $23.8
million. The Company's primary source of funding has been through equity
offerings. Excluding any payments to be received under the Swissair agreement to
extend the warranty, the Company's backlog consisted only of installations on
four Swissair aircraft which are currently being negotiated. Working capital may
continue to decrease as the Company continues to complete transactions which are
longer term by nature.
During the six months ended April 30, 1999, the Company used $4.8 million
of cash for operating activities, a decrease of $10.7 million from the 6.0
million of cash provided by operating activities for the corresponding period of
the previous fiscal year. The cash utilized in operations during the six months
ended April 30, 1999 resulted primarily from the period's loss and decreases in
accrued liabilities and reversal of prior period warranty, maintenance and
commission accruals, and an increase in other assets, partly offset by the
increase in deferred revenue. The cash provided by operations during the six
months ended April 30, 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 and deferred revenue.
Purchases of investment securities for the six months ended April 30, 1999
were $6.3 million compared to $1.3 million for the six months ended April 30,
1998. The increase in investment securities purchases for the first six months
of fiscal 1999 includes a $3.0 million investment in U.S. Wireless Corporation
(See "Outlook: Issues and Risks").
During the six months ended April 30, 1999, the Company's restricted cash
decreased by $457,786 for payments made under consulting and severance
agreements with three former executives of the company.
On October 30, 1998, the Board of Directors authorized the Company to
repurchase shares of its Class A common stock on the open market. As of April
30, 1999, the Company had repurchased 78,600 shares at prices ranging from $1.49
to $2.94 per share.
At April 30, 1999, the Company's material capital commitments were (i) its
obligations under the Swissair agreements, and (ii) its obligations in
connection with the closing of the TNCi transaction (as discussed elsewhere
herein).
The Company is currently using its working capital to finance recent
transactions, inventory purchases, repair and other expenses associated with the
delivery and installation of the Swissair system and general and administrative
costs. The Company believes that its current cash balances plus interest
received on such balances are sufficient to meet the Company's currently
anticipated cash requirements for at least the next twelve months.
14
<PAGE>
Outlook: Issues and Risks
The Company has established a process for identifying new investment and
operational opportunities that will capitalize on the core competencies,
experiences and contacts of the Company's new management team. The industries
that management has chosen to concentrate on include the Internet, networking
solutions, telecommunications and gaming entertainment. In assessing the
viability of a potential transaction, the Company will focus on three major
criteria - (1) the size of the market opportunity, (2) proprietary aspects of
the business which offer strong competitive advantages and potentially
sustainable competitive advantages and (3) the quality of the current management
team. If all three of these criteria are in place and the Company can complete a
transaction on favorable terms, then the Company will look to move forward with
such transaction.
On February 4, 1999, the Company signed a letter of intent to merge the
business of its Interactive Entertainment Division ("IED") with The Network
Connection, Inc. ("TNCi"). On May 17, 1999 under the terms of the transaction,
the Company merged the business of its IED plus a $4.25 million cash payment in
exchange for a fully diluted 60% interest in TNCi, as defined in the Agreement.
TNCi develops and manufactures networked computer systems to provide customers
with interactive, video-on-demand information and entertainment content on
commercial aircraft, cruise ships, and trains. TNCi has also sold multimedia
servers and networked client computers to educational institutions and to
corporations to support interactive, video-based training programs. TNCi is a
NASDAQ registrant and trades under the ticker symbol TNCX. The merged business
will operate as TNCi.
On May 5, 1999, the Company completed the acquisition of a 27.5% interest
in Inter Lotto(UK) Ltd. ("ILL"). ILL has a license with the exclusive right to
provide for the operation of daily lotteries in Great Britain, by way of a
management contract with an outside third party, and will be responsible for
developing, installing, marketing and operating the lottery, selecting the game
and managing the network. In exchange, the Company will receive a percentage of
the revenues generated by the sale of lottery tickets. ILL is a company
licensed, by the Gaming Board for Great Britain, to operate daily lotteries on
behalf of United Kingdom Charities.
As of April 30, 1999, the Company has advanced ILL $428,364 in accordance
with the letter of intent and has paid ILL a standstill fee of $150,000. The
Company has retained a third party consultant with significant experience in
lottery operations to assist the Company with the development of operations of
ILL. The Company's agreement with the consultant calls for payments of
approximately $500,000 through implementation and startup which is projected for
the last quarter of 1999, beginning with a region in the UK having a population
of about 12 million. Thereafter, a national expansion could take place over the
subsequent two-year period. The Company has paid the consultant $261,000 through
April 30, 1999 which has been included in general and administrative expenses.
On March 4, 1999, the Company made an investment in U.S. Wireless
Corporation (NASDAQ: USWC), which provides wireless network infrastructure
add-on systems for the emerging wireless Geo-location services marketplace, of
$3 million in exchange for 30,000 shares of Series B Preferred Stock. Each share
of the Series B Preferred Stock of U.S. Wireless is convertible into 100 shares
of Common Stock of U.S. Wireless, at the option of the Company, at any time
commencing 90 days after the Closing Date, subject to adjustment upon occurrence
of certain events. The Series B Preferred Stock is also subject to mandatory
conversion into Common Stock at any time at the same conversion rate in the
event the closing price for U.S. Wireless' Common Stock as reported on the
NASDAQ is at least $5.00 per share for 30 consecutive trading days. The Series B
15
<PAGE>
Preferred Stock entitles the Company to $100 per share liquidation preference
before any distributions to the holders of Common Stock of U.S. Wireless in the
event of a liquidation of U.S. Wireless. In addition, the Company and other
holders of the Series B Preferred Stock have, as a separate class, elected one
member to U.S. Wireless' Board of Directors and one additional individual as an
observer to such Board. As a condition to making the investment, the Company
also obtained certain registration rights relating to the registration under the
Securities Act of 1933 of those shares of Common Stock of U.S. Wireless into
which the Series B Preferred Stock is convertible.
On May 14, 1999 the Company invested in a newly formed Mexican joint
venture created to pursue gaming and entertainment opportunities in Mexico.
Under the terms of the agreement, the Company will receive a 24.5% equity
interest in the joint venture, in exchange for a $1.6 million loan by the
Company. The loan is structured to mature on April 30, 2001. The loan of $1.6
million, of which $300,000 was advanced on February 25, 1999, is being used to
finance equipment purchases and start-up costs. In addition, the Company has
issued a letter of credit of $950,000 to secure repayment of certain equipment
purchased.
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 a 21st century date. The
Company has performed an assessment of its Entertainment Network for year 2000
issues. The Entertainment Network is a Microsoft 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 pursing 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 customer 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 effect 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 1933, 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 contracts, failure of installed systems to perform in
16
<PAGE>
accordance with system specifications, the failure of the Company to resolve its
differences with Swissair on a favorable basis, the impact of competition and
downward pricing pressures, the effect of changing economic conditions and
conditions in the airline industry, the inability of the Company to evaluate
other businesses, the risks and uncertainties involved in the Company's other
proposed business ventures, the impact of any changes in domestic and foreign
regulatory environments or the Company's inability to obtain requisite
government approvals to conduct its regulated business (such as gaming), the
rapidity with which technology in general, and the Company's technology, in
particular, are being developed and the possible inability of the Company to
maintain its competitveness as a result, the risks involved in currency
fluctuation because of the Company's increasing investment in other countries,
and the other risks and uncertainties detailed herein and in the Company's
Annual Report on Form 10-KSB for the fiscal year ended October 31, 1998.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Phillip J. Arnaldi, Individually as surviving father and in his
representative capacity as the Administrator of the Estate of Adrienne Valerie
Neuweiler, deceased v. SAIR Group, Swissair Transport Company, Ltd., SR Technics
Ltd., Delta Airlines, Inc., McDonnell Douglas Corporation, The Boeing Company
and Interactive Flight Technologies, Inc., United States District Court, Eastern
District of New York, CV 99-1265 - The family of a victim of the air crash
involving Swissair Flight No. 111 has alleged that the IFT in-flight
entertainment system aboard the involved MD-11 was improperly installed and a
cause of the crash. IFT denies all liability and has tendered the defense of
this claim to its avionics insurer who has accepted the defense and is
vigorously defending the claim.
First Lawrence Capital Corp. v. James Fox, Irwin Gross, Interactive Flight
Technologies, Inc., and John Doe Nos. 1 through 10. Supreme Court of the State
of New York, County of Westchester, No. 7196/99 - This is an unliquidated claim
by an investment banking firm that alleges its former employee, James Fox,
wrongfully brought certain corporate opportunities to IFT when he left his
employment with First Lawrence. IFT denies the allegations of the Complaint and
is vigorously defending the claim.
Item 6: Exhibits and Reports on Form 8-K
Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
2.1 Asset Purchase and Sale Agreement dated as of *
April 29, 1999 by and between Interactive
Flight Technologies, Inc. and The Network Connection, Inc.
2.2 First Amendment to Asset Purchase and Sale Agreement dated *
as of May 14, 1999 by and between Interactive Flight
Technologies, Inc. and The Network Connection, Inc.
3.3 Certificate of Amendment of Amended and Restated *
Certificate of Incorporation of Registrant
3.4 By-law of the Registrant *
3.5 Certificate of Amendment to Amended and Restated 24
Certificate of Incorporation of Registrant dated November
2, 1998
3.6 Certificate of Designations, Preferences, and Rights of **
Series A Convertible Preferred Stock of Interactive
Flight Technologies, Inc.
3.7 Certificate of Designations, Preferences, and Rights of **
Series B Convertible Preferred Stock of Interactive
Flight Technologies, Inc.
4.5 Form of Underwriter's Unit Purchase Option *
4.6 Specimen of Class A Common Stock Certificate *
4.7 Specimen of Class B Common Stock Certificate *
4.10 Specimen of Class D Warrant Certificate *
4.11 Stock Purchase Warrant, dated as of November 7, 1996, *
issued to FortuNet, Inc.
4.12 Stock Purchase Warrant, dated as of November 12, 1996, *
issued to Houlihan Lokey Howard & Zukin
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
4.13 Certificate of Designations, Preferences and Rights of 27
Series A Convertible Preferred Stock of Interactive Flight
Technologies, Inc.
4.14 Certificate of Designations, Preferences and Rights of 52
Series B Convertible Preferred Stock of Interactive Flight
Technologies, Inc.
10.21 Lease Termination Agreement, dated as of May 27, 1998 *
10.22 Lease Surrender Agreement, dated as of May 12, 1998 *
10.23 Securities Purchase Agreement dated as of May 6, 1999 by 80
and between Interactive Flight Technologies, Inc. and The
Shaar Fund, Ltd.
27 Financial Data Schedule 108
99.1 Certificate of Designations of Series B Convertible *
Preferred Stock of TNC dated October 23, 1998
99.2 Amendment dated as of April 29, 1999 to Certificate of *
Designations of Series B Convertible Preferred Stock of TNC
99.3 Certificate of Designation of Series C Convertible *
Preferred Stock of TNC dated as of April 30, 1999
99.4 Certificate of Designations of Series D Convertible *
Preferred Stock of TNC dated as of May 5, 1999
99.5 Secured Promissory Note Dated January 26, 1999 made by TNC *
and payable to the order of the Company
99.6 Allonge to Secured Promissory Note Dated January 29, 1999 *
99.7 Second Allonge to Secured Promissory Note Dated March 19, *
1999
99.8 Third Allonge to Secured Promissory Note Dated March 24, *
1999
99.9 Fourth Allonge to Secured Promissory Note Dated May 10, 1999 *
</TABLE>
- ---------
* Incorporated by reference from Registrant's Annual Report on Form 10-KSB for
the fiscal year ended October 31, 1998 and Current Report on Form 8-K dated
May 17, 1999 filed with the Securities and Exchange Commission.
** See Exhibits 4.13 and 4.14.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
April 30, 1999.
19
<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: June 14, 1999 INTERACTIVE FLIGHT TECHNOLOGIES, INC.
By: /s/ Irwin L. Gross
------------------
Irwin L. Gross
Chief Executive Officer
By: /s/ Morris C. Aaron
-------------------
Morris C. Aaron
Chief Financial Officer
20
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
2.1 Asset Purchase and Sale Agreement dated as of *
April 29, 1999 by and between Interactive
Flight Technologies, Inc. and The Network Connection, Inc.
2.2 First Amendment to Asset Purchase and Sale Agreement dated *
as of May 14, 1999 by and between Interactive Flight
Technologies, Inc. and The Network Connection, Inc.
3.3 Certificate of Amendment of Amended and Restated *
Certificate of Incorporation of Registrant
3.4 By-law of the Registrant *
3.5 Certificate of Amendment to Amended and Restated 24
Certificate of Incorporation of Registrant dated November
2, 1998
3.6 Certificate of Designations, Preferences, and Rights of **
Series A Convertible Preferred Stock of Interactive
Flight Technologies, Inc.
3.7 Certificate of Designations, Preferences, and Rights of **
Series B Convertible Preferred Stock of Interactive
Flight Technologies, Inc.
4.5 Form of Underwriter's Unit Purchase Option *
4.6 Specimen of Class A Common Stock Certificate *
4.7 Specimen of Class B Common Stock Certificate *
4.10 Specimen of Class D Warrant Certificate *
4.11 Stock Purchase Warrant, dated as of November 7, 1996, *
issued to FortuNet, Inc.
4.12 Stock Purchase Warrant, dated as of November 12, 1996, *
issued to Houlihan Lokey Howard & Zukin
4.13 Certificate of Designations, Preferences and Rights of 27
Series A Convertible Preferred Stock of Interactive Flight
Technologies, Inc.
4.14 Certificate of Designations, Preferences and Rights of 52
Series B Convertible Preferred Stock of Interactive Flight
Technologies, Inc.
10.21 Lease Termination Agreement, dated as of May 27, 1998 *
10.22 Lease Surrender Agreement, dated as of May 12, 1998 *
10.23 Securities Purchase Agreement dated as of May 6, 1999 by 80
and between Interactive Flight Technologies, Inc. and The
Shaar Fund, Ltd.
27 Financial Data Schedule 108
99.1 Certificate of Designations of Series B Convertible *
Preferred Stock of TNC dated October 23, 1998
99.2 Amendment dated as of April 29, 1999 to Certificate of *
Designations of Series B Convertible Preferred Stock of TNC
99.3 Certificate of Designation of Series C Convertible *
Preferred Stock of TNC dated as of April 30, 1999
99.4 Certificate of Designations of Series D Convertible *
Preferred Stock of TNC dated as of May 5, 1999
99.5 Secured Promissory Note Dated January 26, 1999 made by TNC *
and payable to the order of the Company
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C>
99.6 Allonge to Secured Promissory Note Dated January 29, 1999 *
99.7 Second Allonge to Secured Promissory Note Dated March 19, *
1999
99.8 Third Allonge to Secured Promissory Note Dated March 24, *
1999
99.9 Fourth Allonge to Secured Promissory Note Dated May 10, 1999 *
</TABLE>
- ---------------
* Incorporated by reference from Registrant's Annual Report on Form 10-KSB for
the fiscal year ended October 31, 1998 and Current Report on Form 8-K dated
May 17, 1999 filed with the Securities and Exchange Commission.
** See Exhibits 4.13 and 4.14.
22
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
*************************
INTERACTIVE FLIGHT TECHNOLOGIES, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
1. That Paragraph 4.1 of ARTICLE FOUR of this Corporation's Amended and
Restated Certificate of Incorporation, as amended, be amended in its entirety to
read, as follows:
"4.1 Authorized Shares. The total number of shares of all classes of stock
which the corporation shall have authority to issue is Forty-Nine Million
(49,000,000), consisting of three (3) classes of capital stock:
(a) Forty Million (40,000,000) shares of Class A Common Stock, par value
$.01 per share (the "Class A Shares");
(b) Four Million (4,000,000) shares of Class B Common Stock, par value $0.1
per share (the "Class B Shares"), and
(c) Five Million (5,000,000) shares of Preferred Stock, par value $.01 per
share (the "Preferred Shares")
Upon effectiveness of this Amendment to the Amended and Restated
Certificate of Incorporation, each three (3) Class A Shares issued and
outstanding immediately prior thereto shall be automatically combined into one
(1) Class A Share and each three (3) Class B Shares issued and outstanding
immediately prior thereto shall be automatically combined into one (1) Class B
Share. No fractional shares shall be issued to stockholders in connection with
such reverse stock split, but in lieu thereof the Corporation shall pay in cash
the fair value of fractions of a share, if any, as of the effective date of this
Amendment to the Amended and Restated Certificate of Incorporation."
<PAGE>
2. That ARTICLE NINE of this Corporation's Amended and Restated Certificate
of Incorporation, as amended, be deleted in its entirety and the following
provisions substituted in lieu thereof.
"ARTICLE NINE
CLASSIFIED BOARD OF DIRECTORS
9.1 The Board of Directors shall consist of five (5) members. Such set
number of Directors may be changed from time to time by resolutions of the Board
of Directors, except as otherwise provided by law or the Amended and Restated
Certificate of Incorporation. Any Director may resign at any time upon written
notice to the Corporation. Directors need not be stockholders.
9.2 The Board of Directors shall be divided into three (3) classes, as
nearly equal in numbers as the then total number of Directors constituting the
entire Board permits with the term of office of one (1) class expiring each
year. At the 1998 Annual Meeting of Stockholders, Directors of the first class
shall be elected to hold office for a term expiring at the next succeeding
Annual Meeting, Directors of the second class shall be elected to hold office
for a term expiring at the second succeeding Annual Meeting and Directors of the
third class shall be elected to hold office for a term expiring at the third
succeeding Annual Meeting. Subject to the foregoing, at each Annual Meeting of
Stockholders the successors to the class of Directors whose term shall then
expire shall be elected to hold office for a term expiring at the third
succeeding Annual Meeting."
3. That a new Article, ARTICLE ELEVEN, is to be included in this
Corporation's Amended and Restated Certificate of Incorporation, as amended, as
follows:
"ARTICLE ELEVEN
AMENDMENTS
The Corporation reserves the right to amend or repeal any provisions
contained in the Amended and Restated Certificate of Incorporation at any time
in the manner now or hereafter prescribed in the Amended and Restated
Certificate of Incorporation and by the laws of the State of Delaware, and all
rights herein conferred upon stockholders are granted subject to such
reservation."
<PAGE>
4. The foregoing amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware, and by approval at a meeting held October 30, 1998, of the Board of
Directors and the affirmative vote of the holders of at least a majority of the
outstanding stock of the Corporation entitled to vote.
IN WITNESS WHEREOF, said INTERACTIVE FLIGHT TECHNOLOGIES, INC. has caused
this Certificate of Amendment to be executed by a duly authorized officer this
2nd day of November, 1998.
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
By: __________________________
Name: Irwin Gross
Title: President
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
---------------
Pursuant to Section 151 of
the General Corporation Law of the State of Delaware
---------------
Interactive Flight Technologies, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation on April 29, 1999 pursuant to authority of the
Board of Directors as required by Section 151 of the General Corporation Law of
the State of Delaware:
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Corporation (the "Board of Directors" or the "Board") in
accordance with the provisions of its Certificate of Incorporation, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $0.01 per share (the "Preferred Stock"), and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof as follows:
Series A 8% Convertible Preferred Stock:
<PAGE>
ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions. The terms defined in this Article whenever used in
this Certificate of Designations have the following respective meanings:
(a) "Affiliate" has the meaning ascribed to such term in Rule 12b-2
under the Securities Exchange Act of 1934, as amended.
(b) "Business Day" means a day other than Saturday, Sunday or any day
on which banks located in the State of New York are authorized or obligated
to close.
(c) "Closing Date" means May 10, 1999.
(d) "Common Shares" or "Common Stock" means shares of Class A common
stock, $.01 par value, of the Corporation.
(e) "Common Stock Issued at Conversion" when used with reference to
the securities issuable upon conversion of the Series A Preferred Stock,
means all Common Shares now or hereafter Outstanding and securities of any
other class or series into which the Series A Preferred Stock hereafter
shall have been changed or substituted, whether now or hereafter created
and however designated.
(f) "Conversion Date" means any day on which all or any portion of
shares of the Series A Preferred Stock is converted in accordance with the
provisions hereof.
(g) "Conversion Notice" has the meaning set forth in Section 6.2.
2
<PAGE>
(h) "Conversion Price" means on any date of determination the
applicable price for the conversion of shares of Series A Preferred Stock
into Common Shares on such day as set forth in Section 6.1.
(i) "Corporation" means Interactive Flight Technologies, Inc., a
Delaware corporation, and any successor or resulting corporation by way of
merger, consolidation, sale or exchange of all or substantially all of the
Corporation's assets, or otherwise.
(j) "Holder" means The Shaar Fund Ltd., any successor thereto, or any
Person to whom the Series A Preferred Stock is subsequently transferred in
accordance with the provisions hereof.
(k) "Outstanding" when used with reference to Common Shares (the
"Shares"), means, on any date of determination, all issued and outstanding
Shares, and includes all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
provided, however, that any such Shares directly or indirectly owned or
held by or for the account of the Corporation or any Subsidiary of the
Corporation shall not be deemed "Outstanding" for purposes hereof.
(l) "Person" means an individual, a corporation, a partnership, an
association, a limited liability company, a unincorporated business
organization, a trust or other entity or organization, and any government
or political subdivision or any agency or instrumentality thereof.
(m) "SEC" means the United States Securities and Exchange Commission.
(n) "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations of the SEC thereunder, all as in effect at the
time.
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(o) "Securities Purchase Agreement" means that certain Securities
Purchase Agreement dated as of May 6, 1999 between the Corporation and The
Shaar Fund Ltd.
(p) "Series A Preferred Stock" means the Series A 8% Convertible
Preferred Stock of the Corporation or such other convertible Preferred
Stock exchanged therefor as provided in Section 2.1.
(q) "Stated Value" has the meaning set forth in Article 2.
(r) "Subsidiary" means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Corporation.
All references to "cash" or "$" herein means currency of the United
States of America.
ARTICLE 2
DESIGNATION AND AMOUNT
SECTION 2.1
The designation of this series, which consists of 3,000 shares of
Preferred Stock, is Series A 8% Convertible Preferred Stock (the "Series A
Preferred Stock") and the stated value shall be One Thousand Dollars
($1,000) per share (the "Stated Value").
ARTICLE 3
RANK
SECTION 3.1
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The Series A Preferred Stock shall rank (i) prior to the Common Stock
and the Company's Class B Common Stock; (ii) prior to any class or series
of capital stock of the Corporation hereafter created other than "Pari
Passu Securities" (collectively, with the Common Stock and the Class B
Common Stock, "Junior Securities") and (iii) pari passu with any class or
series of capital stock of the Corporation hereafter or contemporaneously
created specifically ranking on parity with the Series A Preferred Stock
("Pari Passu Securities").
ARTICLE 4
DIVIDENDS
SECTION 4.1
(a) (i) The Holder shall be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available for the
payment of dividends, dividends (subject to Sections 4.1 (a)(ii) hereof) at
the rate of 8% per annum (computed on the basis of a 360-day year) (the
"Dividend Rate") on the Stated Value of each share of Series A Preferred
Stock on and as of the most recent Dividend Payment Due Date (as defined
below) with respect to each Dividend Period (as defined below). Dividends
on the Series A Preferred Stock shall be cumulative from the date of issue,
whether or not declared for any reason, including if such declaration is
prohibited under any outstanding indebtedness or borrowings of the
Corporation or any of its Subsidiaries, or any other contractual provision
binding on the Corporation or any of its Subsidiaries, and whether or not
there shall be funds legally available for the payment thereof.
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(ii) Each dividend shall be payable in equal quarterly amounts on
each March 31, June 30, September 30 and December 31 of each year (each, a
"Dividend Payment Due Date"), commencing June 30, 1999, to the holders of
record of shares of the Series A Preferred Stock, as they appear on the
stock records of the Corporation at the close of business on any record
date, not more than sixty (60) days or less than ten (10) days preceding
the payment dates thereof, as shall be fixed by the Board of Directors. For
the purposes hereof, "Dividend Period" means the quarterly period
commencing on and including the day after the immediately preceding
Dividend Payment Date and ending on and including the immediately
subsequent Dividend Payment Date. Accrued and unpaid dividends for any past
Dividend Period may be declared and paid at any time, without reference to
any Dividend Payment Due Date, to holders of record on such date, not more
than fifteen (15) days preceding the payment date thereof, as may be fixed
by the Board of Directors.
(b) The Holder shall not be entitled to any dividends in excess of the
cumulative dividends, as herein provided, on the Series A Preferred Stock.
Except as provided in this Article 4, no interest, or sum of money in lieu
of interest, shall be payable in respect of any dividend payment or
payments on the Series A Preferred Stock that may be in arrears.
(c) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends, except as described in the next succeeding
sentence, shall be declared or paid or set apart for payment on Pari Passu
Securities for any period unless full cumulative dividends required to be
paid in cash have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such
payment on the Series A Preferred Stock for all Dividend Periods
terminating on or prior to the date of payment of the dividend on such
class or series of Pari Passu Securities. When dividends are not paid in
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full or a sum sufficient for such payment is not set apart, as aforesaid,
all dividends declared upon shares of the Series A Preferred Stock and all
dividends declared upon any other class or series of Pari Passu Securities
shall be declared ratably in proportion to the respective amounts of
dividends accumulated and unpaid on the Series A Preferred Stock and
accumulated and unpaid on such Pari Passu Securities.
(d) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends shall be declared or paid or set apart for
payment or other distribution declared or made upon Junior Securities, nor
shall any Junior Securities be redeemed, purchased or otherwise acquired
(other than a redemption, purchase or other acquisition of shares of Common
Stock made for purposes of an employee incentive or benefit plan (including
a stock option plan) of the Corporation or any subsidiary, (all such
dividends, distributions, redemptions or purchases being hereinafter
referred to as a "Junior Securities Distribution") for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such stock) by the Corporation, directly or
indirectly, unless in each case (i) the full cumulative dividends required
to be paid in cash on all outstanding shares of the Series A Preferred
Stock and any other Pari Passu Securities shall have been paid or set apart
for payment for all past Dividend Periods with respect to the Series A
Preferred Stock and all past dividend periods with respect to such Pari
Passu Securities, and (ii) sufficient funds shall have been paid or set
apart for the payment of the dividend for the current Dividend Period with
respect to the Series A Preferred Stock and the current dividend period
with respect to such Pari Passu Securities.
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ARTICLE 5
LIQUIDATION PREFERENCE
SECTION 5.1
(a) If the Corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or State
bankruptcy, insolvency or similar law, or consent to the entry of an order
for relief in an involuntary case under any law or to the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its
property, or make an assignment for the benefit of its creditors, or admit
in writing its inability to pay its debts generally as they become due, or
if a decree or order for relief in respect of the Corporation shall be
entered by a court having jurisdiction in the premises in an involuntary
case under the Federal bankruptcy laws or any other applicable Federal or
state bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or
other similar official) of the Corporation or of any substantial part of
its property, or ordering the winding up or liquidation of its affairs, and
any such decree or order shall be unstayed and in effect for a period of
thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation
shall otherwise liquidate, dissolve or wind up (each such event being
considered a "Liquidation Event"), no distribution shall be made to the
holders of any shares of capital stock of the Corporation upon liquidation,
dissolution or winding up unless prior thereto, the holders of shares of
Series A Preferred Stock shall have received the Liquidation Preference (as
defined in Article 5(c)) with respect to each share. If upon the occurrence
of a Liquidation Event, the assets and funds available for distribution
among the holders of the Series A Preferred Stock and holders of Pari Passu
Securities shall be insufficient to permit the payment to such holders of
the preferential amounts payable thereon, then the entire assets and funds
of the Corporation legally available for distribution to the Series A
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Preferred Stock and the Pari Passu Securities shall be distributed ratably
among such shares in proportion to the ratio that the Liquidation
Preference payable on each such share bears to the aggregate Liquidation
Preferences payable on all such shares.
(b) At the option of each Holder, the sale, conveyance of disposition
of all or substantially all of the assets of the Corporation, the
effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation
is disposed of, or the consolidation, merger or other business combination
of the Corporation with or into any other Person (as defined below) or
Persons when the Corporation is not the survivor shall be deemed to be a
liquidation, dissolution or winding up of the Corporation pursuant to which
the Corporation shall be required to distribute, upon consummation of and
as a condition to, such transaction an amount equal to 120% of the
Liquidation Preference with respect to each outstanding share of Series A
Preferred Stock in accordance with and subject to the terms of this Article
5; provided, that all holders of Series A Preferred Stock shall be deemed
to elect the option set forth above if at least a majority in interest of
such holders elect such option. "Person" shall mean any individual,
corporation, limited liability company, partnership, association, trust or
other entity or organization.
(c) For purposes hereof, the "Liquidation Preference" with respect to
a share of the Series A Preferred Stock shall mean an amount equal to the
sum of (i) the Stated Value thereof, plus (ii) the aggregate of all accrued
and unpaid dividends on such share of Series A Preferred Stock until the
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most recent Dividend Payment Date; provided that, in the event of an actual
liquidation, dissolution or winding up of the Corporation, the amount
referred to in clause (ii) above shall be calculated by including accrued
and unpaid dividends to the actual date of such liquidation, dissolution or
winding up, rather than the Dividend Payment Due Date referred to above.
ARTICLE 6
CONVERSION OF PREFERRED STOCK
SECTION 6.1 Conversion; Conversion Price. At the option of the Holder, the
shares of Series A Preferred Stock may be converted, either in whole or in part,
into Common Shares (calculated as to each such conversion to the nearest 1/100th
of a share), at any time, and from time to time following the date one hundred
and eighty (180) days after the date of issuance of the Series A Preferred Stock
(the "Issue Date") at a Conversion Price equal to $3.00 per share.
Notwithstanding the previous sentence, in no event shall the Holder have the
right to convert that portion of the Series A Preferred Stock to the extent that
the issuance of Common Shares upon the conversion of such Series A Preferred
Stock, when combined with shares of Common Stock received upon other conversions
of Series A Preferred Stock by such Holder and any other holders of Series A
Preferred Stock, would exceed 19.99% of the Common Stock outstanding on the
Closing Date. Within ten (10) Business Days after the receipt of the Conversion
Notice which upon conversion would, when combined with shares of Common Stock
received upon other conversions of Series A Preferred Stock by such Holder and
any other holders of Series A Preferred Stock, exceed 19.99% of the Common Stock
outstanding on the Closing Date, the Corporation shall redeem all remaining
(i.e. after conversion of such number of shares as would result in the issuance
of 19.99% of the Common Stock) outstanding shares of Series A Preferred Stock at
one hundred thirty percent (135%) of the Stated Value thereof, together with all
accrued and unpaid dividends thereon, in cash, to the date of redemption.
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The number of shares of Common Stock due upon conversion of Series A
Preferred Stock shall be (i) the number of shares of Series A Preferred
Stock to be converted, multiplied by (ii) the Stated Value and divided by
(iii) the applicable Conversion Price.
SECTION 6.2 Exercise of Conversion Privilege. (a) Conversion of the Series
A Preferred Stock may be exercised, in whole or in part, by the Holder by
telecopying an executed and completed notice of conversion in the form annexed
hereto as Annex I (the "Conversion Notice") to the Corporation. Each date on
which a Conversion Notice is telecopied to and received by the Corporation in
accordance with the provisions of this Section 6.2 shall constitute a Conversion
Date. The Corporation shall convert the Preferred Stock and issue the Common
Stock Issued at Conversion effective as of the Conversion Date. The Conversion
Notice also shall state the name or names (with addresses) of the persons who
are to become the holders of the Common Stock Issued at Conversion in connection
with such conversion. The Holder shall deliver the shares of Series A Preferred
Stock to the Corporation by express courier within fifteen (15) days following
the date on which the telecopied Conversion Notice has been transmitted to the
Corporation. Upon surrender for conversion, the Preferred Stock shall be
accompanied by a proper assignment hereof to the Corporation or be endorsed in
blank. Such endorsement shall be signature guaranteed by a member of the Stock
Transfer Agents Medallion Program. As promptly as practicable after the later of
(i) the receipt of the Conversion Notice as aforesaid or (ii) the receipt of the
Series A Preferred Stock tendered for conversion, but in any event not more than
five (5) Business Days after the later of such events, the Corporation shall (i)
issue the Common Stock issued at Conversion in accordance with the provisions of
this Article 6, and (ii) cause to be mailed for delivery by overnight courier to
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the Holder (X) a certificate or certificate(s) representing the number of Common
Shares to which the Holder is entitled by virtue of such conversion, (Y) cash,
as provided in Section 6.3, in respect of any fraction of a Share issuable upon
such conversion and (Z) cash in the amount of accrued and unpaid dividends as of
the Conversion Date. Such conversion shall be deemed to have been effected at
the time at which the Conversion Notice indicates so long as the Preferred Stock
shall have been surrendered as aforesaid at such time, and at such time the
rights of the Holder of the Preferred Stock, as such, shall cease and the Person
and Persons in whose name or names the Common Stock Issued at Conversion shall
be issuable shall be deemed to have become the holder or holders of record of
the Common Shares represented thereby. The Conversion Notice shall constitute a
contract between the Holder and the Corporation, whereby the Holder shall be
deemed to subscribe for the number of Common Shares which it will be entitled to
receive upon such conversion and, in payment and satisfaction of such
subscription (and for any cash adjustment to which it is entitled pursuant to
Section 6.4), to surrender the Preferred Stock and to release the Corporation
from all liability thereon. No cash payment aggregating less than $1.50 shall be
required to be given unless specifically requested by the Holder.
(b) If, at any time (i) the Corporation challenges, disputes or denies
the right of the Holder hereof to effect the conversion of the Preferred
Stock into Common Shares or otherwise dishonors or rejects any Conversion
Notice delivered in accordance with this Section 6.2 or (ii) any third
party who is not and has never been an Affiliate of the Holder commences
any lawsuit or proceeding or otherwise asserts any claim before any court
or public or governmental authority which seeks to challenge, deny, enjoin,
limit, modify, delay or dispute the right of the Holder hereof to effect
the conversion of the Preferred Stock into Common Shares, then the Holder
shall have the right, by written notice to the Corporation, to require the
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Corporation to promptly redeem the Series A Preferred Stock for cash at a
redemption price equal to one hundred and twenty-five percent (125%) of the
Stated Value thereof together with all accrued and unpaid dividends thereon
(the "Mandatory Purchase Amount"). Under any of the circumstances set forth
above, the Corporation shall be responsible for the payment of all costs
and expenses of the Holder, including reasonable legal fees and expenses,
as and when incurred in disputing any such action or pursuing its rights
hereunder (in addition to any other rights of the Holder).
(c) The Holder shall be entitled to exercise its conversion privilege
notwithstanding the commencement of any case under 11 U.S.C. ss.101 et seq.
(the "Bankruptcy Code"). In the event the Corporation is a debtor under the
Bankruptcy Code, the Corporation hereby waives to the fullest extent
permitted any rights to relief it may have under 11 U.S.C. ss.362 in
respect of the holder's conversion privilege. The Corporation hereby waives
to the fullest extent permitted any rights to relief it may have under 11
U.S.C. ss.362 in respect of the conversion of the Series A Preferred Stock.
The Corporation agrees, without cost or expense the Holder, to take or
consent to any and all action necessary to effectuate relief under 11
U.S.C. ss.362.
SECTION 6.3 Fractional Shares. No fractional Common Shares or scrip
representing fractional Common Shares shall be issued upon conversion of the
Series A Preferred Stock. Instead of any fractional Common Shares which
otherwise would be issuable upon conversion of the Series A Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction. No cash payment of less than $1.50 shall be required
to be given unless specifically requested by the Holder.
SECTION 6.4 Reclassification, Consolidation, Merger or Mandatory Share
Exchange. At any time while the Series A Preferred Stock remains outstanding and
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any shares thereof have not been converted, in case of any reclassification or
change of Outstanding Common Shares issuable upon conversion of the Series A
Preferred Stock (other than a change in par value, or from par value to no par
value per share, or from no par value per share to par value or as a result of a
subdivision or combination of outstanding securities issuable upon conversion of
the Series A Preferred Stock) or in case of any consolidation, merger or
mandatory share exchange of the Corporation with or into another corporation
(other than a merger or mandatory share exchange with another corporation in
which the Corporation is a continuing corporation and which does not result in
any reclassification or change, other than a change in par value, or from par
value to no par value per share, or from no par value per share to par value, or
as a result of a subdivision or combination of Outstanding Common Shares upon
conversion of the Series A Preferred Stock), or in the case of any sale or
transfer to another corporation of the property of the Corporation as an
entirety or substantially as an entirety, the Corporation, or such successor,
resulting or purchasing corporation, as the case may be, shall, without payment
of any additional consideration therefor, execute such documents as may be
reasonably required to confirm that the Holder shall have the right to convert
its Series A Preferred Stock (upon terms and conditions not less favorable to
the Holder than those in effect pursuant to the Series A Preferred Stock) and to
receive upon such exercise, in lieu of each Common Share theretofore issuable
upon conversion of the Series A Preferred Stock, the kind and amount of shares
of stock, other securities, money or property receivable upon such
reclassification, change, consolidation, merger, mandatory share exchange, sale
or transfer by the holder of one Common Share issuable upon conversion of the
Series A Preferred Stock had the Series A Preferred Stock been converted
immediately prior to such reclassification, change, consolidation, merger,
mandatory share exchange or sale or transfer. The provisions of this Section 6.4
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shall similarly apply to successive reclassifications, changes, consolidations,
mergers, mandatory share exchanges and sales and transfers. The Conversion Price
and the number of shares of Common Stock into which the Series B Preferred Stock
is convertible shall be adjusted for stock splits, combinations or other similar
events.
SECTION 6.5 Intentionally omitted.
SECTION 6.6 Optional Redemption and Conversion. (a) At any time after the
date one hundred and eighty (180) days after the Issue Date, (i) the Corporation
shall have the right, which may be exercised in whole or in part, to call for
redemption shares of the Series A Preferred Stock at a price equal to the
Applicable Percentage (as hereinafter defined) of the Stated Value per share,
together with all accrued and unpaid dividends thereon calculated to the date of
such redemption (the "Optional Redemption Price") and (ii) the Holder, upon
notice delivered to the Corporation, may require the Corporation to redeem the
Series A Preferred Stock, at the Optional Redemption Price. The Applicable
Percentage is the sum of one hundred five percent (105%) plus the product of
twenty percent (20%) multiplied by a fraction the numerator of which is the
number of days since the Issue Date (but not more than 365) and the denominator
of which is 365.
(b) If the Series A Preferred Stock is not redeemed by the Corporation
pursuant to subsection 6.6(a), the Holder, upon notice delivered to the
Corporation, may convert the Series A Preferred Stock that the Holder then
owns into shares of Series B Preferred Stock, with each share of Series A
Preferred Stock (including any accrued and unpaid dividends thereon)
converting into 1.19 shares of Series B Preferred Stock.
(c) Any shares of Series A Preferred Stock outstanding on the date
three hundred and sixty-one (361) days after the Issue Date shall
automatically be converted into shares of Series B Preferred Stock, with
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each share of Series A Preferred Stock converting into 1.25 shares of
Series B Preferred Stock.
(d) Notwithstanding anything contained in this Certificate of
Designations to the contrary, if the Corporation shall receive on or prior
to 360 days after the Issue Date a Conversion Notice pursuant to Section
6.1 or 6.2, or a notice of conversion pursuant to Section 6.6(b), the
Corporation shall nonetheless have the right, by notice sent to the
exercising Holder within seven (7) days of the Corporation's receipt of
such Conversion Notice or notice of conversion pursuant to Section 6.6(b),
as the case may be, to redeem the shares which are the subject of each such
notice at the then applicable Optional Redemption Price. On the date of
mailing of the notice of redemption pursuant to the preceding sentence, the
shares called for redemption shall, for all purposes, be deemed to have
been redeemed and shall have no further rights except for the right to
receive the payment of the redemption price, and the Conversion Notice or
notice of conversion pursuant to Section 6.6(b), as the case may be, shall
be null and void ab initio, and of no force or effect. The Corporation
shall thereafter transmit the redemption price to the respective holders
thereof in accordance with the terms of Section 6.7.
SECTION 6.7 Surrender of Preferred Stock. Upon any redemption of the Series
A Preferred Stock pursuant to Section 6.6, the Holder shall either deliver the
Series A Preferred Stock by hand to the Corporation at its principal executive
offices or surrender the same to the Corporation at such address by express
courier. Payment of the Optional Redemption Price specified in Section 6.6 shall
be made by the Corporation to the Holder against receipt of the Series A
Preferred Stock (as provided in this Section 6.7) by wire transfer of
immediately available funds to such account(s) as the Holder shall specify to
the Corporation. If payment of such redemption price is not made in full by the
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Redemption Date, the Holder shall again have the right to convert the Series A
Preferred Stock as provided in Article 6 hereof.
SECTION 6.8 Redemption of Preferred Stock. Notice of redemption pursuant to
Section 6.6(a)(i) shall be given by publication at least once in a newspaper of
general circulation printed in the English language and customarily published on
each business day in the City of New York, New York. Notice of such redemption
shall also be mailed to the holders of Series A Preferred Stock of record so to
be redeemed at their respective addresses as the same shall appear on the books
of the Corporation, but no failure to mail any such notice, nor any defects
therein nor in the mailing thereof shall affect the validity of the redemption
of any such shares so to be redeemed. In case of the redemption of fewer than
all of the outstanding Shares of Series A Preferred Stock, the shares to be
redeemed shall be selected in such reasonable manner as may be prescribed by the
Board of Directors of the Corporation. Following the mailing of the notice of
redemption as provided in this Section 6.8, the holders of the Series A
Preferred Stock shall no longer be entitled to convert their Series A Preferred
Stock into Common Stock or into Series B Preferred Stock nor shall they be
entitled to receive any dividends (other than as set forth in Section 6.6). On
the date of mailing of the notice of redemption, the shares called for
redemption shall, for all purposes, be deemed to have been redeemed and shall
have no further rights except for the right to receive the payment of the
redemption price. The Corporation shall thereafter transmit the redemption price
to the respective holders thereof in accordance with the terms of Section 6.7.
ARTICLE 7
VOTING RIGHTS
The holders of Series A Preferred Stock shall be entitled to notice of
all stockholders meetings in accordance with the Corporation's bylaws and
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the Delaware General Corporation Law (the "DGCL"). Except as otherwise
required by law, the holders of the Series A Preferred Stock shall be
entitled to vote on all matters submitted to the stockholders for a vote,
voting together with the holders of the Common Stock as a single class,
with each share of Common Stock entitled to one vote per share and each
share of Series A Preferred Stock entitled to one vote for each share of
Common Stock issuable upon conversion of the Series A Preferred Stock as of
the record date for such vote or, if no record date is specified, as of the
date of such vote.
To the extent that under the DGCL the vote of the holders of the
Series A Preferred Stock, voting separately as a class or series as
applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the
shares of the Series A Preferred Stock represented at a duly held meeting
at which a quorum is present or by written consent of a majority of the
shares of Series A Preferred Stock (except as otherwise may be required
under the DGCL) shall constitute the approval of such action by the class.
ARTICLE 8
PROTECTIVE PROVISIONS
So long as shares of Series A Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the DGCL) of the holders of at least a majority of the
then outstanding shares of Series A Preferred Stock as one class:
(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock or amend this Certificate of Designations;
(b) increase the authorized number of shares of Series A Preferred
Stock;
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(c) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series A Preferred Stock under Section 305 of the Internal
Revenue Code of 1986, as amended (or any comparable provision of the
Internal Revenue Code as hereafter from time to time amended); or
(d) make any change in the foregoing amendment provisions.
In the event holders of at least a majority of the then outstanding shares
of Series A Preferred Stock agree to allow the Corporation to alter or change
the rights, preferences or privileges of the shares of Series A Preferred Stock,
pursuant to subsection (a) above, so as to affect the Series A Preferred Stock,
then the Corporation will deliver notice of such approved change to the holders
of the Series A Preferred Stock that did not agree to such alteration or change
(the "Dissenting Holders") and Dissenting Holders shall have the right for a
period of thirty (30) days to convert their shares of Series A Preferred Stock
to Common Stock or, if the time period set forth in Section 6.6(b) has been
satisfied (unless extended by agreement pursuant to Section 6.6(c)), to Series B
Preferred Stock pursuant to the terms of this Certificate of Designation as they
exist prior to such alteration or change or continue to hold their shares of
Series A Preferred Stock.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 Loss, Theft, Destruction of Preferred Stock. Upon receipt of
evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of shares of Series A Preferred Stock and, in the case of any such
loss, theft or destruction, upon receipt of indemnity or security reasonably
satisfactory to the Corporation, or, in the case of any such mutilation, upon
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surrender and cancellation of the Series A Preferred Stock, the Corporation
shall make, issue and deliver, in lieu of such lost, stolen, destroyed or
mutilated shares of Series A Preferred Stock, new shares of Series A Preferred
Stock of like tenor. The Series A Preferred Stock shall be held and owned upon
the express condition that the provisions of this Section 9.1 are exclusive with
respect to the replacement of mutilated, destroyed, lost or stolen shares of
Series A Preferred Stock and shall preclude any and all other rights and
remedies notwithstanding any law or statute existing or hereafter enacted to the
contrary with respect to the replacement of negotiable instruments or other
securities without the surrender thereof.
SECTION 9.2 Who Deemed Absolute Owner. The Corporation may deem the Person
in whose name the Series A Preferred Stock shall be registered upon the registry
books of the Corporation to be, and may treat it as, the absolute owner of the
Series A Preferred Stock for the purpose of receiving payment of dividends on
the Series A Preferred Stock, for the conversion of the Series A Preferred Stock
and for all other purposes, and the Corporation shall not be affected by any
notice to the contrary. All such payments and such conversion shall be valid and
effectual to satisfy and discharge the liability upon the Series A Preferred
Stock to the extent of the sum or sums so paid or the conversion so made.
SECTION 9.3 Notice of Certain Events. In the case of the occurrence of any
event described in Sections 6.1 or 6.6 of this Certificate of Designations, the
Corporation shall cause to be mailed to the Holder of the Series A Preferred
Stock at its last address as it appears in the Corporation's security registry,
at least twenty (20) days prior to the applicable record, effective or
expiration date hereinafter specified (or, if such twenty (20) days notice is
not possible, at the earliest possible date prior to any such record, effective
or expiration date), a notice stating (x) the date on which a record is to be
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taken for the purpose of such dividend, distribution, issuance or granting of
rights, options or warrants, or if a record is not to be taken, the date as of
which the holders of record of Series A Preferred Stock to be entitled to such
dividend, distribution, issuance or granting of rights, options or warrants are
to be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of record
of Series A Preferred Stock will be entitled to exchange their shares for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale transfer, dissolution, liquidation or winding-up.
SECTION 9.4 Register. The Corporation shall keep at its principal office a
register in which the Corporation shall provide for the registration of the
Series A Preferred Stock. Upon any transfer of the Series A Preferred Stock in
accordance with the provisions hereof, the Corporation shall register such
transfer on the Series A Preferred Stock register.
The Corporation may deem the Person in whose name the Series A
Preferred Stock shall be registered upon the registry books of the
Corporation to be, and may treat it as, the absolute owner of the Series A
Preferred Stock for the purpose of receiving payment of dividends on the
Series A Preferred Stock, for the conversion of the Series A Preferred
Stock and for all other purposes, and the Corporation shall not be affected
by any notice to the contrary. All such payments and such conversions shall
be valid and effective to satisfy and discharge the liability upon the
Series A Preferred Stock to the extent of the sum or sums so paid or the
conversion or conversions so made.
SECTION 9.5 Withholding. To the extent required by applicable law, the
Corporation may withhold amounts for or on account of any taxes imposed or
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levied by or on behalf of any taxing authority in the United States having
jurisdiction over the Corporation from any payments made pursuant to the Series
A Preferred Stock.
SECTION 9.6 Headings. The headings of the Articles and Sections of this
Certificate of Designations are inserted for convenience only and do not
constitute a part of this Certificate of Designations.
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations, Preferences and Rights to be signed by its duly authorized
officers on this 6th day of May, 1999.
INTERACTIVE FLIGHT TECHNOLOGIES,
INC.
By: ___________________________
Name:
Title:
By: ____________________________
Name:
Title:
INITIAL
HOLDER
THE SHAAR FUND LTD.
By: _________________________
Name:
Title:
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ANNEX I
[FORM OF CONVERSION NOTICE]
TO: _________________________________
_________________________________
_________________________________
The undersigned owner of this Series A 8% Convertible Preferred Stock (the
"Series A Preferred Stock") issued by Interactive Flight Technologies, Inc. (the
"Corporation") hereby irrevocably exercises its option to convert __________
shares of the Series A Preferred Stock into shares of the common stock, $.01 par
value, of the Corporation ("Common Stock"), in accordance with the terms of the
Certificate of Designations. The undersigned hereby instructs the Corporation to
convert the number of shares of the Series A Preferred Stock specified above
into Shares of Common Stock Issued at Conversion in accordance with the
provisions of Article 6 of the Certificate of Designations. The undersigned
directs that the Common Stock issuable and certificates therefor deliverable
upon conversion, the Series A Preferred Stock recertificated, if any, not being
surrendered for conversion hereby, together with any check in payment for
fractional Common Stock, be issued in the name of and delivered to the
undersigned unless a different name has been indicated below. All capitalized
terms used and not defined herein have the respective meanings assigned to them
in the Certificate of Designations.
Dated: ___________________________
__________________________________
Signature
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Fill in for registration of Series A Preferred Stock:
Please print name and address (including zip code number):
____________________________________________________________________
____________________________________________________________________
25
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
---------------
Pursuant to Section 151 of
the General Corporation Law of the State of Delaware
---------------
Interactive Flight Technologies, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation on April 29, 1999 pursuant to authority of the
Board of Directors as required by Section 151 of the General Corporation Law of
the State of Delaware:
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Corporation (the "Board of Directors" or the "Board") in
accordance with the provisions of its Certificate of Incorporation, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $0.01 per share (the "Preferred Stock"), and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof as follows:
<PAGE>
Series B 8% Convertible Preferred Stock:
ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions. The terms defined in this Article whenever used in
this Certificate of Designations have the following respective meanings:
(a) "Additional Capital Shares" has the meaning set forth in Section
6.1(c).
(b) "Affiliate" has the meaning ascribed to such term in Rule 12b-2
under the Securities Exchange Act of 1934, as amended.
(c) "Business Day" means a day other than Saturday, Sunday or any day
on which banks located in the State of New York are authorized or obligated
to close.
(d) "Capital Shares" means the Common Shares and any other shares of
any other class or series of common stock, whether now or hereafter
authorized and however designated, which have the right to participate in
the distribution of earnings and assets (upon dissolution, liquidation or
winding-up) of the Corporation.
(e) "Closing Date" means May 10, 1999.
(f) "Common Shares" or "Common Stock" means shares of Class A common
stock, $.01 par value, of the Corporation.
(g) "Common Stock Issued at Conversion" when used with reference to
the securities issuable upon conversion of the Series B Preferred Stock,
means all Common Shares now or hereafter Outstanding and securities of any
other class or series into which the Series B Preferred Stock hereafter
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shall have been changed or substituted, whether now or hereafter created
and however designated.
(h) "Conversion Date" means any day on which all or any portion of
shares of the Series B Preferred Stock is converted in accordance with the
provisions hereof.
(i) "Conversion Notice" has the meaning set forth in Section 6.2.
(j) "Conversion Price" means on any date of determination the
applicable price for the conversion of shares of Series B Preferred Stock
into Common Shares on such day as set forth in Section 6.1.
(k) "Corporation" means Interactive Flight Technologies, Inc., a
Delaware corporation, and any successor or resulting corporation by way of
merger, consolidation, sale or exchange of all or substantially all of the
Corporation's assets, or otherwise.
(l) "Current Market Price" on any date of determination means the
closing bid price of a Common Share on such day as reported on the Nasdaq
National Market ("NASDAQ").
(m) "Holder" means The Shaar Fund Ltd., any successor thereto, or any
Person to whom the Series B Preferred Stock is subsequently transferred in
accordance with the provisions hereof.
(n) "Market Disruption Event" means any event that results in a
material suspension or limitation of trading of Common Shares on the
NASDAQ.
(o) "Market Price" per Common Share means the average of the closing
bid prices of the Common Shares as reported on the NASDAQ for the five (5)
Trading Days in any Valuation Period.
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(p) "Outstanding" when used with reference to Common Shares or Capital
Shares (collectively, "Shares"), means, on any date of determination, all
issued and outstanding Shares, and includes all such Shares issuable in
respect of outstanding scrip or any certificates representing fractional
interests in such Shares; provided, however, that any such Shares directly
or indirectly owned or held by or for the account of the Corporation or any
Subsidiary of the Corporation shall not be deemed "Outstanding" for
purposes hereof.
(q) "Person" means an individual, a corporation, a partnership, an
association, a limited liability company, a unincorporated business
organization, a trust or other entity or organization, and any government
or political subdivision or any agency or instrumentality thereof.
(r) "SEC" means the United States Securities and Exchange Commission.
(s) "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations of the SEC thereunder, all as in effect at the
time.
(t) "Securities Purchase Agreement" means that certain Securities
Purchase Agreement dated as of May 6, 1999 between the Corporation and The
Shaar Fund Ltd.
(u) "Series B Preferred Stock" means the Series B 8% Convertible
Preferred Stock of the Corporation or such other convertible Preferred
Stock exchanged therefor as provided in Section 2.1.
(aa) "Stated Value" has the meaning set forth in Article 2.
(bb) "Subsidiary" means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
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<PAGE>
board of directors or other persons performing similar functions are owned
directly or indirectly by the Corporation.
(cc) "Trading Day" means any day on which purchases and sales of
securities authorized for quotation on the NASDAQ are reported thereon and
on which no Market Disruption Event has occurred.
(dd) "Valuation Event" has the meaning set forth in Section 6.1.
(ee) "Valuation Period" means the five (5) Trading Day period
immediately preceding a Conversion Date or a Divided Payment Due Date, as
the case may be.
All references to "cash" or "$" herein means currency of the United
States of America.
ARTICLE 2
DESIGNATION AND AMOUNT
SECTION 2.1
The designation of this series, which consists of 3,000 shares of
Preferred Stock, is Series B 8% Convertible Preferred Stock (the "Series B
Preferred Stock") and the stated value shall be One Thousand Dollars
($1,000) per share (the "Stated Value").
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<PAGE>
ARTICLE 3
RANK
SECTION 3.1
The Series B Preferred Stock shall rank (i) prior to the Common Stock
and the Company's Class B common stock; (ii) prior to any class or series
of capital stock of the Corporation hereafter created other than "Pari
Passu Securities" (collectively, with the Common Stock and the Company's
Class B common stock, "Junior Securities"); (iii) pari passu with the
Company's Series A Preferred Stock and (iv) pari passu with any class or
series of capital stock of the Corporation hereafter created specifically
ranking on parity with the Series B Preferred Stock (collectively with the
Series A Preferred Stock, "Pari Passu Securities").
ARTICLE 4
DIVIDENDS
SECTION 4.1
(a) (i) The Holder shall be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available for the
payment of dividends, dividends (subject to Sections 4.1(a)(ii) hereof) at
the rate of 8% per annum (computed on the basis of a 360-day year) (the
"Dividend Rate") on the Stated Value of each share of Series B Preferred
Stock on and as of the most recent Dividend Payment Due Date (as defined
below) with respect to each Dividend Period (as defined below). Dividends
on the Series B Preferred Stock shall be cumulative from the date of issue,
whether or not declared for any reason, including if such declaration is
prohibited under any outstanding indebtedness or borrowings of the
Corporation or any of its Subsidiaries, or any other contractual provision
6
<PAGE>
binding on the Corporation or any of its Subsidiaries, and whether or not
there shall be funds legally available for the payment thereof.
(ii) Each dividend shall be payable on each March 31, June 30,
September 30 and December 31 of each year (each, a "Dividend Payment Due
Date"), commencing June 30, 1999, to the holders of record of shares of the
Series B Preferred Stock, as they appear on the stock records of the
Corporation at the close of business on any record date, not more than
sixty (60) days or less than ten (10) days preceding the payment dates
thereof, as shall be fixed by the Board of Directors. For the purposes
hereof, "Dividend Period" means the quarterly period commencing on and
including the day after the immediately preceding Dividend Payment Date and
ending on and including the immediately subsequent Dividend Payment Date.
Accrued and unpaid dividends for any past Dividend Period may be declared
and paid at any time, without reference to any Dividend Payment Due Date,
to holders of record on such date, not more than fifteen (15) days
preceding the payment date thereof, as may be fixed by the Board of
Directors.
(b) The Holder shall not be entitled to any dividends in excess of the
cumulative dividends, as herein provided, on the Series B Preferred Stock.
Except as provided in this Article 4, no interest, or sum of money in lieu
of interest, shall be payable in respect of any dividend payment or
payments on the Series B Preferred Stock that may be in arrears.
(c) So long as any shares of the Series B Preferred Stock are
outstanding, no dividends, except as described in the next succeeding
sentence, shall be declared or paid or set apart for payment on Pari Passu
Securities for any period unless full cumulative dividends required to be
paid in cash have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such
payment on the Series B Preferred Stock for all Dividend Periods
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<PAGE>
terminating on or prior to the date of payment of the dividend on such
class or series of Pari Passu Securities. When dividends are not paid in
full or a sum sufficient for such payment is not set apart, as aforesaid,
all dividends declared upon shares of the Series B Preferred Stock and all
dividends declared upon any other class or series of Pari Passu Securities
shall be declared ratably in proportion to the respective amounts of
dividends accumulated and unpaid on the Series B Preferred Stock and
accumulated and unpaid on such Pari Passu Securities.
(d) So long as any shares of the Series B Preferred Stock are
outstanding, no dividends shall be declared or paid or set apart for
payment or other distribution declared or made upon Junior Securities, nor
shall any Junior Securities be redeemed, purchased or otherwise acquired
(other than a redemption, purchase or other acquisition of shares of Common
Stock made for purposes of an employee incentive or benefit plan (including
a stock option plan) of the Corporation or any subsidiary, (all such
dividends, distributions, redemptions or purchases being hereinafter
referred to as a "Junior Securities Distribution") for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such stock) by the Corporation, directly or
indirectly, unless in each case (i) the full cumulative dividends required
to be paid in cash on all outstanding shares of the Series B Preferred
Stock and any other Pari Passu Securities shall have been paid or set apart
for payment for all past Dividend Periods with respect to the Series B
Preferred Stock and all past dividend periods with respect to such Pari
Passu Securities, and (ii) sufficient funds shall have been paid or set
apart for the payment of the dividend for the current Dividend Period with
respect to the Series B Preferred Stock and the current dividend period
with respect to such Pari Passu Securities.
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ARTICLE 5
LIQUIDATION PREFERENCE
SECTION 5.1
(a) If the Corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or State
bankruptcy, insolvency or similar law, or consent to the entry of an order
for relief in an involuntary case under any law or to the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its
property, or make an assignment for the benefit of its creditors, or admit
in writing its inability to pay its debts generally as they become due, or
if a decree or order for relief in respect of the Corporation shall be
entered by a court having jurisdiction in the premises in an involuntary
case under the Federal bankruptcy laws or any other applicable Federal or
state bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or
other similar official) of the Corporation or of any substantial part of
its property, or ordering the winding up or liquidation of its affairs, and
any such decree or order shall be unstayed and in effect for a period of
thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation
shall otherwise liquidate, dissolve or wind up (each such event being
considered a "Liquidation Event"), no distribution shall be made to the
holders of any shares of capital stock of the Corporation upon liquidation,
dissolution or winding up unless prior thereto, the holders of shares of
Series B Preferred Stock shall have received the Liquidation Preference (as
defined in Article 5(c)) with respect to each share. If upon the occurrence
of a Liquidation Event, the assets and funds available for distribution
among the holders of the Series B Preferred Stock and holders of Pari Passu
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<PAGE>
Securities shall be insufficient to permit the payment to such holders of
the preferential amounts payable thereon, then the entire assets and funds
of the Corporation legally available for distribution to the Series B
Preferred Stock and the Pari Passu Securities shall be distributed ratably
among such shares in proportion to the ratio that the Liquidation
Preference payable on each such share bears to the aggregate Liquidation
Preferences payable on all such shares.
(b) At the option of each Holder, the sale, conveyance of disposition
of all or substantially all of the assets of the Corporation, the
effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation
is disposed of, or the consolidation, merger or other business combination
of the Corporation with or into any other Person (as defined below) or
Persons when the Corporation is not the survivor shall be deemed to be a
liquidation, dissolution or winding up of the Corporation pursuant to which
the Corporation shall be required to distribute, upon consummation of and
as a condition to, such transaction an amount equal to 120% of the
Liquidation Preference with respect to each outstanding share of Series B
Preferred Stock in accordance with and subject to the terms of this Article
5; provided, that all holders of Series B Preferred Stock shall be deemed
to elect the option set forth above if at least a majority in interest of
such holders elect such option. "Person" shall mean any individual,
corporation, limited liability company, partnership, association, trust or
other entity or organization.
(c) For purposes hereof, the "Liquidation Preference" with respect to
a share of the Series B Preferred Stock shall mean an amount equal to the
sum of (i) the Stated Value thereof, plus (ii) the aggregate of all accrued
and unpaid dividends on such share of Series B Preferred Stock until the
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most recent Dividend Payment Date; provided that, in the event of an actual
liquidation, dissolution or winding up of the Corporation, the amount
referred to in clause (ii) above shall be calculated by including accrued
and unpaid dividends to the actual date of such liquidation, dissolution or
winding up, rather than the Dividend Payment Due Date referred to above.
ARTICLE 6
CONVERSION OF PREFERRED STOCK
SECTION 6.1 Conversion; Conversion Price. At the option of the Holder, the
shares of Series B Preferred Stock may be converted, either in whole or in part,
into Common Shares (calculated as to each such conversion to the nearest 1/100th
of a share), at any time, and from time to time following the date ninety (90)
days after the date of issuance of the Series B Preferred Stock (the "Issue
Date") at a Conversion Price equal to the lower of (i) 82.0% of the Market Price
(ii) $3.00 per Common Share or (iii) 118% of the Closing bid price of the Common
Shares as reported by NASDAQ for the Trading Day prior to the Closing Date;
provided, however, that the Holder shall not have the right to convert any
shares of Series B Preferred Stock, if at the time of any such conversion, the
Holder of Common Shares in the absence of this provision would be deemed the
"beneficial owner" of 5% or more of the then outstanding Common Shares within
the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended. At
the Corporation's option, the amount of accrued and unpaid dividends as of the
Conversion Date shall not be subject to conversion but instead may be paid in
cash as of the Conversion Date; if the Corporation elects to convert the amount
of accrued and unpaid dividends at the Conversion Date into Common Stock, the
Common Stock issued to the Holder shall be valued at the Conversion Price.
Notwithstanding the previous sentence, in no event shall the Holder have the
right to convert that portion of the Series B Preferred Stock to the extent that
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<PAGE>
the issuance of Common Shares upon the conversion of such Series B Preferred
Stock, when combined with shares of Common Stock received upon other conversions
of Series B Preferred Stock by such Holder and any other holders of Series B
Preferred Stock, would exceed 19.99% of the Common Stock outstanding on the
Closing Date. Within ten (10) Business Days after the receipt of the Conversion
Notice which upon conversion would, when combined with shares of Common Stock
received upon other conversions of Series B Preferred Stock by such Holder and
any other holders of Series B Preferred Stock, exceed 19.99% of the Common Stock
outstanding on the Closing Date, the Corporation shall redeem all remaining
outstanding shares of Series B Preferred Stock at one hundred thirty-five
percent (135%) of the Stated Value thereof, together with all accrued and unpaid
dividends thereon, in cash, to the date of redemption.
The number of shares of Common Stock due upon conversion of Series B
Preferred Stock shall be (i) the number of shares of Series B Preferred Stock to
be converted, multiplied by (ii) the Stated Value and divided by (iii) the
applicable Conversion Price.
Within two (2) Business Days of the occurrence of a Valuation Event, the
Corporation shall send notice (the "Valuation Event Notice") of such occurrence
to the Holder. Notwithstanding anything to the contrary contained herein, if a
Valuation Event occurs during any Valuation Period, a new Valuation Period shall
begin on the Trading Day immediately following the occurrence of such Valuation
Event and end on the Conversion Date; provided that, if a Valuation Event occurs
on the fifth (5th) day of any Valuation Period, then the Conversion Price shall
be the Current Market Price of the Common Shares on such day; and provided,
further, that the Holder may, in its discretion, postpone such Conversion Date
to a Trading Day which is no more than five (5) Trading Days after the
occurrence of the latest Valuation Event by delivering a notification to the
Corporation within two (2) Business Days of the receipt of the Valuation Event
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Notice. In the event that the Holder deems the Valuation Period to be other than
the five (5) Trading Days immediately prior to the Conversion Date, the Holder
shall give written notice of such fact to the Corporation in the related
Conversion Notice at the time of conversion.
For purposes of this Section 6.1, a "Valuation Event" shall mean an event in
which the Corporation at any time during a Valuation Period takes any of the
following actions:
(a) subdivides or combines its Capital Shares;
(b) makes any distribution of its Capital Shares;
(c) issues any additional Capital Shares (the "Additional Capital
Shares"), otherwise than as provided in the foregoing Sections 6.1(a) and
6.1(b) above, at a price per share less, or for other consideration lower,
than the Current Market Price in effect immediately prior to such
issuances, or without consideration, except for issuances under employee
benefit plans consistent with those presently in effect and issuances under
presently outstanding warrants, options or convertible securities;
(d) issues any warrants, options or other rights to subscribe for or
purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant
to such warrants, options or other rights shall be less than the Current
Market Price in effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable or
exercisable for Capital Shares and the consideration per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant
to the terms of such convertible, exchangeable or exercisable securities
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shall be less than the Current Market Price in effect immediately prior to
such issuance;
(f) makes a distribution of its assets or evidences of indebtedness to
the holders of its Capital Shares as a dividend in liquidation or by way of
return of capital or other than as a dividend payable out of earnings or
surplus legally available for the payment of dividends under applicable law
or any distribution to such holders made in respect of the sale of all or
substantially all of the Corporation's assets (other than under the
circumstances provided for in the foregoing Sections 6.1(a) through
6.1(e)); or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing Sections
6.1(a) through 6.1(f) hereof, inclusive, which in the opinion of the
Corporation's Board of Directors, determined in good faith, would have a
material adverse effect upon the rights of the Holder at the time of a
conversion of the Preferred Stock.
SECTION 6.2 Exercise of Conversion Privilege. (a) Conversion of the Series
B Preferred Stock may be exercised, in whole or in part, by the Holder by
telecopying an executed and completed notice of conversion in the form annexed
hereto as Annex I (the "Conversion Notice") to the Corporation. Each date on
which a Conversion Notice is telecopied to and received by the Corporation in
accordance with the provisions of this Section 6.2 shall constitute a Conversion
Date. The Corporation shall convert the Preferred Stock and issue the Common
Stock Issued at Conversion effective as of the Conversion Date. The Conversion
Notice also shall state the name or names (with addresses) of the persons who
are to become the holders of the Common Stock Issued at Conversion in connection
with such conversion. The Holder shall deliver the shares of Series B Preferred
Stock to the Corporation by express courier within fifteen (15) days following
the date on which the telecopied Conversion Notice has been transmitted to the
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Corporation. Upon surrender for conversion, the Preferred Stock shall be
accompanied by a proper assignment hereof to the Corporation or be endorsed in
blank. Such endorsement shall be signature guaranteed by a member of the Stock
Transfer Agents Medallion Program. As promptly as practicable after the receipt
of the Conversion Notice and the Series B Preferred Stock as aforesaid, but in
any event not more than five (5) Business Days after the Corporation's receipt
of such Conversion Notice and the Series B Preferred Stock (whichever is later),
the Corporation shall (i) issue the Common Stock issued at Conversion in
accordance with the provisions of this Article 6, and (ii) cause to be mailed
for delivery by overnight courier to the Holder (X) a certificate or
certificate(s) representing the number of Common Shares to which the Holder is
entitled by virtue of such conversion, (Y) cash, as provided in Section 6.3, in
respect of any fraction of a Share issuable upon such conversion and (Z) cash in
the amount of accrued and unpaid dividends as of the Conversion Date. Such
conversion shall be deemed to have been effected at the time at which the
Conversion Notice indicates so long as the Preferred Stock shall have been
surrendered as aforesaid at such time, and at such time the rights of the Holder
of the Preferred Stock, as such, shall cease and the Person and Persons in whose
name or names the Common Stock Issued at Conversion shall be issuable shall be
deemed to have become the holder or holders of record of the Common Shares
represented thereby. The Conversion Notice shall constitute a contract between
the Holder and the Corporation, whereby the Holder shall be deemed to subscribe
for the number of Common Shares which it will be entitled to receive upon such
conversion and, in payment and satisfaction of such subscription (and for any
cash adjustment to which it is entitled pursuant to Section 6.4), to surrender
the Preferred Stock and to release the Corporation from all liability thereon.
No cash payment aggregating less than $1.50 shall be required to be given unless
specifically requested by the Holder.
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(b) If, at any time (i) the Corporation challenges, disputes or denies
the right of the Holder hereof to effect the conversion of the Preferred
Stock into Common Shares or otherwise dishonors or rejects any Conversion
Notice delivered in accordance with this Section 6.2 or (ii) any third
party who is not and has never been an Affiliate of the Holder commences
any lawsuit or proceeding or otherwise asserts any claim before any court
or public or governmental authority which seeks to challenge, deny, enjoin,
limit, modify, delay or dispute the right of the Holder hereof to effect
the conversion of the Preferred Stock into Common Shares, then the Holder
shall have the right, by written notice to the Corporation, to require the
Corporation to promptly redeem the Series B Preferred Stock for cash at a
redemption price equal to one hundred and twenty-five percent (125%) of the
Stated Value thereof together with all accrued and unpaid dividends thereon
(the "Mandatory Purchase Amount"). Under any of the circumstances set forth
above, the Corporation shall be responsible for the payment of all costs
and expenses of the Holder, including reasonable legal fees and expenses,
as and when incurred in disputing any such action or pursuing its rights
hereunder (in addition to any other rights of the Holder).
(c) The Holder shall be entitled to exercise its conversion privilege
notwithstanding the commencement of any case under 11 U.S.C. ss.101 et seq.
(the "Bankruptcy Code"). In the event the Corporation is a debtor under the
Bankruptcy Code, the Corporation hereby waives to the fullest extent
permitted any rights to relief it may have under 11 U.S.C. ss.362 in
respect of the holder's conversion privilege. The Corporation hereby waives
to the fullest extent permitted any rights to relief it may have under 11
U.S.C. ss.362 in respect of the conversion of the Series B Preferred Stock.
The Corporation agrees, without cost or expense the Holder, to take or
consent to any and all action necessary to effectuate relief under 11
U.S.C. ss.362.
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SECTION 6.3 Fractional Shares. No fractional Common Shares or scrip
representing fractional Common Shares shall be issued upon conversion of the
Series B Preferred Stock. Instead of any fractional Common Shares which
otherwise would be issuable upon conversion of the Series B Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction. No cash payment of less than $1.50 shall be required
to be given unless specifically requested by the Holder.
SECTION 6.4 Reclassification, Consolidation, Merger or Mandatory Share
Exchange. At any time while the Series B Preferred Stock remains outstanding and
any shares thereof have not been converted, in case of any reclassification or
change of Outstanding Common Shares issuable upon conversion of the Series B
Preferred Stock (other than a change in par value, or from par value to no par
value per share, or from no par value per share to par value or as a result of a
subdivision or combination of outstanding securities issuable upon conversion of
the Series B Preferred Stock) or in case of any consolidation, merger or
mandatory share exchange of the Corporation with or into another corporation
(other than a merger or mandatory share exchange with another corporation in
which the Corporation is a continuing corporation and which does not result in
any reclassification or change, other than a change in par value, or from par
value to no par value per share, or from no par value per share to par value, or
as a result of a subdivision or combination of Outstanding Common Shares upon
conversion of the Series B Preferred Stock), or in the case of any sale or
transfer to another corporation of the property of the Corporation as an
entirety or substantially as an entirety, the Corporation, or such successor,
resulting or purchasing corporation, as the case may be, shall, without payment
of any additional consideration therefor, execute a new Series B Preferred Stock
providing that the Holder shall have the right to convert such new Series B
Preferred Stock (upon terms and conditions not less favorable to the Holder than
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those in effect pursuant to the Series B Preferred Stock) and to receive upon
such exercise, in lieu of each Common Share theretofore issuable upon conversion
of the Series B Preferred Stock, the kind and amount of shares of stock, other
securities, money or property receivable upon such reclassification, change,
consolidation, merger, mandatory share exchange, sale or transfer by the holder
of one Common Share issuable upon conversion of the Series B Preferred Stock had
the Series B Preferred Stock been converted immediately prior to such
reclassification, change, consolidation, merger, mandatory share exchange or
sale or transfer. The provisions of this Section 6.4 shall similarly apply to
successive reclassifications, changes, consolidations, mergers, mandatory share
exchanges and sales and transfers. The Conversion Price and the number of shares
of Common Stock into which the Series B Preferred Stock is convertible shall be
adjusted for stock splits, combinations or other similar events.
SECTION 6.5 Intentionally omitted.
SECTION 6.6 Optional Redemption Under Certain Circumstances. (a) At any
time after the date of issuance of the Series B Preferred Stock until the date
one year after the Issue Date, the Corporation, upon notice delivered to the
Holder as provided in Section 6.7, may redeem the Series B Preferred Stock (but
only with respect to such shares as to which the Holder has not theretofore
furnished a Conversion Notice in compliance with Section 6.2), at the Applicable
Percentage (as hereinafter defined) of the Stated Value per share (the "Optional
Redemption Price"), together with all accrued and unpaid dividends thereon to
the date of redemption (the "Redemption Date"). Except as set forth in this
Section 6.6 or Section 6.9, the Corporation shall not have the right to prepay
or redeem the Series B Preferred Stock. The Applicable Percentage is the sum of
one hundred five percent (105%) plus the product of twenty percent (20%)
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multiplied by a fraction the numerator of which is the number of days since the
Issue Date (but not more than 365) and the denominator of which is 365.
(b) At any time after the date of issuance of the Series B Preferred
Stock, the Holder, upon notice delivered to the Corporation, may require
the Corporation to redeem the Series B Preferred Stock, at the Applicable
Percentage of the Stated Value thereof; provided, however, if the
Corporation's cash and cash equivalents are less than $6,000,000, the
redemption price shall in all events be one hundred and twenty-five percent
(125%) of the Stated Value per share of Series B Preferred Stock being
redeemed, together with all accrued and unpaid dividends thereon to the
date of redemption.
SECTION 6.7 Notice of Redemption. Notice of redemption pursuant to Section
6.6(a) or (b) by the Corporation to the Holder or by the Holder to the
Corporation, respectively, shall be provided in writing (by registered mail or
overnight courier at the Holder's last address appearing in the Corporation's
security registry or at the Corporation's principal place of business, as the
case may be) not less than ten (10) nor more than fifteen (15) days prior to the
Redemption Date, which notice shall specify the Redemption Date and refer to
Section 6.6 (including, a statement of the Market Price per Common Share) and
this Section 6.7.
SECTION 6.8 Surrender of Preferred Stock. Upon any redemption of the Series
B Preferred Stock pursuant to Sections 6.6 or 6.9, the Holder shall either
deliver the Series B Preferred Stock by hand to the Corporation at its principal
executive offices or surrender the same to the Corporation at such address by
express courier. Payment of the Optional Redemption Price specified in Section
6.6 shall be made by the Corporation to the Holder against receipt of the Series
B Preferred Stock (as provided in this Section 6.8) by wire transfer of
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immediately available funds to such account(s) as the Holder shall specify to
the Corporation. If payment of such redemption price is not made in full by the
Mandatory Redemption Date or the Redemption Date, as the case may be, the Holder
shall again have the right to convert the Series B Preferred Stock as provided
in Article 6 hereof.
SECTION 6.9 Mandatory Conversion. On the third anniversary of the date of
the Securities Purchase Agreement] (the "Mandatory Redemption Date"), the
Corporation shall redeem all Series B Preferred Stock outstanding at one hundred
and thirty-five percent (135%) of the Stated Value thereof, together with all
accrued and unpaid dividends thereon, in cash, to the date of redemption.
ARTICLE 7
VOTING RIGHTS
The holders of the Series B Preferred Stock have no voting power, except as
otherwise provided by the General Corporation Law of the State of Delaware
("DGCL"), in this Article 7, and in Article 8 below.
Notwithstanding the above, the Corporation shall provide each holder of
Series B Preferred Stock with prior notification of any meeting of the
stockholders (and copies of proxy materials and other information sent to
stockholders). In the event of any taking by the Corporation of a record of its
stockholders for the purpose of determining stockholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
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winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least thirty (30) days prior to the consummation of the transaction
or event, whichever is earlier), of the date on which any such action is to be
taken for the purpose of such dividend, distribution, right or other event, and
a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time.
To the extent that under the DGCL the vote of the holders of the Series B
Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the shares of the Series B
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of Series B Preferred Stock
(except as otherwise may be required under the DGCL) shall constitute the
approval of such action by the class. Holders of the Series B Preferred Stock
shall be entitled to notice of all stockholder meetings or written consents (and
copies of proxy materials and other infirmation sent to stockholders) with
respect to which they would be entitled to vote, which notice would be provided
pursuant to the Corporation's bylaws and the DGCL.
ARTICLE 8
PROTECTIVE PROVISIONS
So long as shares of Series B Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the DGCL) of the holders of at least a majority of the
then outstanding shares of Series B Preferred Stock as one class:
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(a) alter or change the rights, preferences or privileges of the
Series B Preferred Stock or amend this Certificate of Designations;
(b) create any new class or series of capital stock having a
preference over the Series B Preferred Stock as to distribution of assets
upon liquidation, dissolution or winding up of the Corporation ("Senior
Securities") or alter or change the rights, preferences or privileges of
any Senior Securities so as to affect adversely the Series B Preferred
Stock;
(c) increase the authorized number of shares of Series B Preferred
Stock;
(d) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series B Preferred Stock under Section 305 of the Internal
Revenue Code of 1986, as amended (or any comparable provision of the
Internal Revenue Code as hereafter from time to time amended); or
(e) make any change in the foregoing amendment provisions.
In the event holders of at least a majority of the then outstanding shares
of Series B Preferred Stock agree to allow the Corporation to alter or change
the rights, preferences or privileges of the shares of Series B Preferred Stock,
pursuant to subsection (a) above, so as to affect the Series B Preferred Stock,
then the Corporation will deliver notice of such approved change to the holders
of the Series B Preferred Stock that did not agree to such alteration or change
(the "Dissenting Holders") and Dissenting Holders shall have the right for a
period of thirty (30) days to convert pursuant to the terms of this Certificate
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of Designation as they exist prior to such alteration or change or continue to
hold their shares of Series B Preferred Stock.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 Loss, Theft, Destruction of Preferred Stock. Upon receipt of
evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of shares of Series B Preferred Stock and, in the case of any such
loss, theft or destruction, upon receipt of indemnity or security reasonably
satisfactory to the Corporation, or, in the case of any such mutilation, upon
surrender and cancellation of the Series B Preferred Stock, the Corporation
shall make, issue and deliver, in lieu of such lost, stolen, destroyed or
mutilated shares of Series B Preferred Stock, new shares of Series B Preferred
Stock of like tenor. The Series B Preferred Stock shall be held and owned upon
the express condition that the provisions of this Section 9.1 are exclusive with
respect to the replacement of mutilated, destroyed, lost or stolen shares of
Series B Preferred Stock and shall preclude any and all other rights and
remedies notwithstanding any law or statute existing or hereafter enacted to the
contrary with respect to the replacement of negotiable instruments or other
securities without the surrender thereof.
SECTION 9.2 Who Deemed Absolute Owner. The Corporation may deem the Person
in whose name the Series B Preferred Stock shall be registered upon the registry
books of the Corporation to be, and may treat it as, the absolute owner of the
Series B Preferred Stock for the purpose of receiving payment of dividends on
the Series B Preferred Stock, for the conversion of the Series B Preferred Stock
and for all other purposes, and the Corporation shall not be affected by any
notice to the contrary. All such payments and such conversion shall be valid and
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effectual to satisfy and discharge the liability upon the Series B Preferred
Stock to the extent of the sum or sums so paid or the conversion so made.
SECTION 9.3 Notice of Certain Events. In the case of the occurrence of any
event described in Sections 6.1, 6.6 or 6.9 of this Certificate of Designations,
the Corporation shall cause to be mailed to the Holder of the Series B Preferred
Stock at its last address as it appears in the Corporation's security registry,
at least twenty (20) days prior to the applicable record, effective or
expiration date hereinafter specified (or, if such twenty (20) days notice is
not possible, at the earliest possible date prior to any such record, effective
or expiration date), a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution, issuance or granting of
rights, options or warrants, or if a record is not to be taken, the date as of
which the holders of record of Series B Preferred Stock to be entitled to such
dividend, distribution, issuance or granting of rights, options or warrants are
to be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of record
of Series B Preferred Stock will be entitled to exchange their shares for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale transfer, dissolution, liquidation or winding-up.
SECTION 9.4 Register. The Corporation shall keep at its principal office a
register in which the Corporation shall provide for the registration of the
Series B Preferred Stock. Upon any transfer of the Series B Preferred Stock in
accordance with the provisions hereof, the Corporation shall register such
transfer on the Series B Preferred Stock register.
The Corporation may deem the Person in whose name the Series B
Preferred Stock shall be registered upon the registry books of the
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Corporation to be, and may treat it as, the absolute owner of the Series B
Preferred Stock for the purpose of receiving payment of dividends on the
Series B Preferred Stock, for the conversion of the Series B Preferred
Stock and for all other purposes, and the Corporation shall not be affected
by any notice to the contrary. All such payments and such conversions shall
be valid and effective to satisfy and discharge the liability upon the
Series B Preferred Stock to the extent of the sum or sums so paid or the
conversion or conversions so made.
SECTION 9.5 Withholding. To the extent required by applicable law, the
Corporation may withhold amounts for or on account of any taxes imposed or
levied by or on behalf of any taxing authority in the United States having
jurisdiction over the Corporation from any payments made pursuant to the Series
B Preferred Stock.
SECTION 9.6 Headings. The headings of the Articles and Sections of this
Certificate of Designations are inserted for convenience only and do not
constitute a part of this Certificate of Designations.
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations, Preferences and Rights to be signed by its duly authorized
officers on this 6th day of May, 1999.
INTERACTIVE FLIGHT TECHNOLOGIES,
INC.
By: ______________________________
Name:
Title:
By: ______________________________
Name:
Title:
INITIAL
HOLDER
THE SHAAR FUND LTD.
By: _________________________
Name:
Title:
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ANNEX I
[FORM OF CONVERSION NOTICE]
TO: _____________________________________________
_____________________________________________
_____________________________________________
The undersigned owner of this Series B 8% Convertible Preferred Stock (the
"Series B Preferred Stock") issued by Interactive Flight Technologies, Inc. (the
"Corporation") hereby irrevocably exercises its option to convert __________
shares of the Series B Preferred Stock into shares of the common stock, $.01 par
value, of the Corporation ("Common Stock"), in accordance with the terms of the
Certificate of Designations. The undersigned hereby instructs the Corporation to
convert the number of shares of the Series B Preferred Stock specified above
into Shares of Common Stock Issued at Conversion in accordance with the
provisions of Article 6 of the Certificate of Designations. The undersigned
directs that the Common Stock issuable and certificates therefor deliverable
upon conversion, the Series B Preferred Stock recertificated, if any, not being
surrendered for conversion hereby, together with any check in payment for
fractional Common Stock, be issued in the name of and delivered to the
undersigned unless a different name has been indicated below. All capitalized
terms used and not defined herein have the respective meanings assigned to them
in the Certificate of Designations.
Dated: ______________________________________
_____________________________________________
Signature
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<PAGE>
Fill in for registration of Series B Preferred Stock:
Please print name and address (including zip code number):
___________________________________________________________
___________________________________________________________
28
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT dated as of May 6, 1999, between Interactive
Flight Technologies, Inc., a Delaware corporation with principal executive
offices located at 4041 North Central Avenue, Suite B 200, Phoenix, Arizona
85012 (the "Company"), and the undersigned ("Buyer").
W I T N E S S E T H:
WHEREAS, Buyer desires to purchase from Company, and the Company desires to
issue and sell to the Buyer, upon the terms and subject to the conditions of
this Agreement, (i) Series A 8% Convertible Preferred Stock, $.01 par value (the
"Preferred Stock"), having the rights, preferences and privileges set forth in
the Certificate of Designations, Rights and Preferences attached hereto as Annex
I (the "Certificate of Designations") and warrants (the "Warrants") to purchase
Common Stock (as defined);
WHEREAS, upon the terms and subject to the conditions set forth in the
Certificate of Designations, the Preferred Stock is convertible into shares of
the Company's Class A common stock, $.01 par value ("Common Stock"), or into the
Company's Series B 8% Convertible Preferred Stock, $.01 par value (the "Series B
Preferred Stock"), having the rights, preferences and privileges set forth in
the certificate of designations, rights and preferences attached hereto as Annex
II);
WHEREAS, the Warrants, upon the terms and subject to the conditions in the
Warrants (attached hereto as Annex III), will for a period of three (3) years be
exercisable to purchase 87,500 shares of Common Stock;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties
<PAGE>
hereto, intending to be legally bound, hereby agree as follows:
I. PURCHASE AND SALE OF PREFERRED SHARES
A. Transaction. Buyer hereby agrees to purchase from the Company, and the
Company has offered and hereby agrees to issue and sell to the Buyer in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act of 1933, as amended (the "Securities Act"), 3,000 shares of
Preferred Stock, (the "Preferred Shares") and the Warrants.
B. Purchase Price; Form of Payment. The purchase price for the Preferred
Shares and the Warrants to be purchased by Buyer hereunder shall be (i) U.S.
$1,030,000 and (ii) 1,500 shares of Series B Convertible Preferred Stock of The
Network Connection, Inc., ("TNC") including any accrued interest and penalties
thereon and any and all accrued and unpaid dividends thereon (collectively, the
"Purchase Price"). Buyer shall pay the Purchase Price by wire transfer of
immediately available funds to the Company. Simultaneously with the execution of
this Agreement, the Company shall deliver one or more duly authorized, issued
and executed certificates (I/N/O Buyer or, if the Company otherwise has been
notified, I/N/O Buyer's nominee) evidencing the number of Preferred Shares which
the Buyer is purchasing and the Warrants, to the Buyer.
C. Method of Payment. Payment of the Purchase Price shall be made by wire
transfer of immediately available funds to:
Bank One
P.O. Box 71
Phoenix, AZ 85001-0071
ABA #122100024
Account #13246042
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<PAGE>
II. BUYER'S REPRESENTATIONS, WARRANTIES; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION.
Buyer represents and warrants to and covenants and agrees with the Company
as follows:
A. Buyer is purchasing the Preferred Shares, the Warrants, the Common Stock
issuable upon exercise of the Warrants (the "Warrant Shares") and the Common
Stock issuable upon conversion of the Preferred Stock or Series B Preferred
Shares (the "Conversion Shares" and, collectively with the Preferred Shares, the
Warrants and the Warrant Shares, the "Securities") for its own account, for
investment purposes only and not with a view towards or in connection with the
public sale or distribution thereof.
B. Buyer is (i) an "accredited investor" within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, (ii) experienced in making
investments of the kind contemplated by this Agreement, (iii) capable, by reason
of its business and financial experience, of evaluating the relative merits and
risks of an investment in the Securities, and (iv) able to afford the loss of
its investment in the Securities.
C. Buyer understands that the Securities are being offered and sold by the
Company in reliance on an exemption from the registration requirements of the
Securities Act and equivalent state securities and "blue sky" laws, and that the
Company is relying upon the accuracy of, and Buyer's compliance with, Buyer's
representations, warranties and covenants set forth in this Agreement to
determine the availability of such exemption and the eligibility of Buyer to
purchase the Securities;
D. Buyer acknowledges that in making its decision to purchase the
Securities it has been given an opportunity to ask questions of and to receive
answers from the Company's executive officers, directors and management
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<PAGE>
personnel concerning the terms and conditions of the private placement of the
Securities by the Company.
E. Buyer understands that the Securities have not been approved or
disapproved by the Securities and Exchange Commission (the "Commission") or any
state securities commission and that the foregoing authorities have not reviewed
any documents or instruments in connection with the offer and sale to it of the
Securities and have not confirmed, determined or passed on the adequacy or
accuracy of any such documents or instruments.
F. This Agreement has been duly and validly authorized, executed and
delivered by Buyer and is a valid and binding agreement of Buyer enforceable
against it in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally.
G. Neither Buyer nor its affiliates nor any person acting on its or their
behalf has the intention of entering, or will enter into, prior to the closing,
any put option, short position or other similar instrument or position with
respect to the Common Stock and neither Buyer nor any of its affiliates nor any
person acting on its or their behalf will use at any time shares of Common Stock
acquired pursuant to this Agreement or the Certificate of Designations to settle
any put option, short position or other similar instrument or position that may
have been entered into prior to the execution of this Agreement.
H. Buyer is a corporation organized and existing under the laws of the
State of Israel with its principal place of business located at 62 King George
Street, Apartment 4F, Jerusalem, Israel.
I. Neither Buyer nor any of its officers or directors, is or has been
subject to, or a respondent in,
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<PAGE>
any legal action, proceeding, or investigation, which has resulted in, or which
if still pending could result in, an injunction, cease and desist order, or
stipulation to desist or refrain from any action or practice relating to the
offering or sale of securities in any jurisdiction.
J. Neither Buyer nor any of its officers or directors has ever been
suspended from or expelled from membership in any securities or commodities
exchange or association or had a securities or commodities exchange license or
registration denied, suspended, or revoked.
K. Buyer has received a notice of redemption from TNC dated December 14,
1998 attached hereto as Annex V relating to TNC's Series B Convertible Preferred
Stock. Buyer has not received from TNC the redemption price required to be paid
pursuant to such redemption notice nor has Buyer received any other or further
written notice or communications regarding the redemption of the TNC Series B
Convertible Preferred Stock. Since the date of issuance, Buyer has not received
any dividends from TNC on account of TNC's Series B Convertible Preferred Stock.
III. COMPANY'S REPRESENTATIONS
The Company represents and warrants to Buyer that:
A. Capitalization. 1. The authorized capital stock of the Company consists
of 40,000,000 shares of Class A Common Stock, of which 5,317,900 shares are
outstanding on the date hereof, 4,000,000 Shares of Class B Common Stock, of
which 118,519 are outstanding on the date hereof, and 5,000,000 shares of
preferred stock, $.01 per value, of which none are outstanding on the date
hereof. All of the issued and outstanding shares of Common Stock and preferred
stock have been duly authorized and validly issued and are fully paid and
non-assessable. As of the date hereof, the Company has outstanding stock options
and warrants to purchase 2,969,181 shares of Common Stock. The Conversion Shares
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<PAGE>
and Warrant Shares have been duly and validly authorized and reserved for
issuance by the Company, and when issued by the Company upon conversion of, or
in lieu of accrued dividends on the Preferred Shares, or upon exercise of the
Warrants will be duly and validly issued, fully paid and non-assessable and will
not subject the holder thereof to personal liability by reason of being such
holder. There are no preemptive, subscription, "call" or other similar rights to
acquire the Common Stock (including the Conversion Shares) that have been issued
or granted to any person.
2. Except as disclosed in the Company's Commission Filings, the Company
does not own or control, directly or indirectly, any interest in any other
corporation, partnership, limited liability company, unincorporated business
organization, association, trust or other business entity.
B. Organization; Reporting Company Status. 1. The Company, is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and is duly qualified as a foreign corporation in all
jurisdictions in which the failure to so qualify would have a material adverse
effect on the business, properties, prospects, condition (financial or
otherwise) or results of operations of the Company or on the consummation of any
of the transactions contemplated by this Agreement (a "Material Adverse
Effect").
2. The Company has registered the Common Stock pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and has
timely filed with the Commission all reports and information required to be
filed by it pursuant to all reporting obligations under Section 13(a) or 15(d),
as applicable, of the Exchange Act for the 12-month period immediately preceding
the date hereof. The Common Stock is listed and traded on the Nasdaq National
Market ("Nasdaq") and the Company has not received any notice regarding, and to
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<PAGE>
its knowledge there is no threat, of the termination or discontinuance of the
eligibility of the Common Stock for such listing.
C. Authorized Shares. The Company has duly and validly authorized and
reserved for issuance 1,100,000 shares of Common Stock for the conversion of
3,000 Preferred Shares and 3,000 shares of its Series B Preferred Stock and the
exercise of the Warrants. The Company understands and acknowledges the
potentially dilutive effect to the Common Stock of the issuance of the Preferred
Shares and Warrant Shares upon conversion of the Preferred Stock and exercise of
the Warrants, respectively. The Company further acknowledges that its obligation
to issue Conversion Shares upon conversion of the Preferred Shares and Warrant
Shares upon exercise of the Warrants in accordance with this Agreement, the
Certificate of Designations and the Warrants is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company and notwithstanding the
commencement of any case under 11 U.S.C. ss.101 et seq. (the "Bankruptcy Code").
In the event the Company is a debtor under the Bankruptcy Code, the Company
hereby waives to the fullest extent permitted any rights to relief it may have
under 11 U.S.C. ss.362 in respect of the conversion of the Preferred Stock and
the exercise of the Warrants. The Company agrees, without cost or expense to the
Buyer, to take or consent to any and all action necessary to effectuate relief
under 11 U.S.C. ss.362.
D. Authority; Validity and Enforceability. The Company has the requisite
corporate power and authority to file and perform its obligations under the
Certificate of Designations and to enter into this Agreement, the Registration
Rights Agreement of even date herewith between the Company and Buyer, a copy of
which is annexed hereto as Annex IV (the "Registration Rights Agreement") and
the Warrants and to perform all of its obligations hereunder and thereunder
(including the issuance, sale and delivery to Buyer of the Securities). The
execution, delivery and performance by the Company of this Agreement, the
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<PAGE>
Warrants and the Registration Rights Agreement, and the consummation by the
Company of the transactions contemplated hereby and thereby (including without
limitation the filing of the Certificate of Designations, the issuance of the
Preferred Shares and Warrants and the issuance and reservation for issuance of
the Conversion Shares and Warrant Shares), has been duly authorized by all
necessary corporate action on the part of the Company. Each of this Agreement,
the Warrants and the Registration Rights Agreement has been duly validly
executed and delivered by the Company and the Certificate of Designations has
been duly filed by the Company and each instrument constitutes a valid and
binding obligation of the Company enforceable against it in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally. The Securities have been duly and validly authorized for
issuance by the Company and, when executed and delivered by the Company, will be
valid and binding obligations of the Company enforceable against it in
accordance with their terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally.
E. Non-contravention. The execution and delivery by the Company of this
Agreement, the Warrants, the Registration Rights Agreement, the issuance of the
Securities, and the consummation by the Company of the other transactions
contemplated hereby and thereby, do not and will not conflict with or result in
a breach by the Company of any of the terms or provisions of, or constitute a
default (or an event which, with notice, lapse of time or both, would constitute
a default) under (i) the Certificate of Incorporation or by-laws of the Company
or its subsidiaries or (ii) any indenture, mortgage, deed of trust or other
material agreement or instrument to which the Company is a party or by which its
8
<PAGE>
properties or assets are bound, or any law, rule, regulation, decree, judgment
or order of any court or public or governmental authority having jurisdiction
over the Company or any of the Company's properties or assets, except as to (ii)
above such conflict, breach or default which would not have a Material Adverse
Effect.
F. Approvals. No authorization, approval or consent of any court or public
or governmental authority is required to be obtained by the Company for the
issuance and sale of the Preferred Stock or the Warrants (and the Conversion
Shares and Warrant Shares) to Buyer as contemplated by this Agreement, except
such authorizations, approvals and consents that have been obtained by the
Company prior to the date hereof.
G. Commission Filings. None of the Commission Filings contained at the time
they were filed any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading.
H. Absence of Certain Changes. Since the Balance Sheet Date (as defined in
Section III(L)), there has not occurred any change, event or development in the
business, financial condition, prospects or results of operations of the
Company, and there has not existed any condition having or reasonably likely to
have, a Material Adverse Effect.
I. Full Disclosure. There is no fact known to the Company (other than
general economic or industry conditions known to the public generally) that has
not been fully disclosed in writing to the Buyer that (i) reasonably could be
expected to have a Material Adverse Effect or (ii) reasonably could be expected
to materially and adversely affect the ability of the Company to perform its
obligations pursuant to this Agreement, the Registration Rights Agreement, the
Warrants or the Certificate of Designations.
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J. Absence of Litigation. There is no action, suit, claim, proceeding,
inquiry or investigation pending or, to the Company's knowledge, threatened, by
or before any court or public or governmental authority which, if determined
adversely to the Company, would have a Material Adverse Effect.
K. Absence of Events of Default. No "Event of Default" (as defined in any
agreement or instrument to which the Company is a party) and no event which,
with notice, lapse of time or both, would constitute an Event of Default (as so
defined), has occurred and is continuing, which could have a Material Adverse
Effect.
L. Financial Statements; No Undisclosed Liabilities. The Company has
delivered to Buyer true and complete copies of its audited balance sheet as at
October 31, 1998 and the related audited statements of operations and cash flows
for the fiscal year ended October 31, 1998 including the related notes and
schedules thereto as well as the same financial statements as of and for the
three month period ended January 31, 1999 collectively, the "Financial
Statements"), and all management letters, if any, from the Company's independent
auditors relating to the dates and periods covered by the Financial Statements.
Each of the Financial Statements is complete and correct in all material
respects, has been prepared in accordance with United States General Accepted
Accounting Principles ("GAAP") (subject, in the case of the interim Financial
Statements, to normal year end adjustments and the absence of footnotes) and in
conformity with the practices consistently applied by the Company without
modification of the accounting principles used in the preparation thereof, and
fairly presents, subject to the limitations set forth in the report of the
Company's independent accountants, the financial position, results of operations
and cash flows of the Company as at the dates and for the periods indicated. For
purposes hereof, the audited balance sheet of the Company as at October 31, 1998
is hereinafter referred to as the "Balance Sheet" and October 31, 1998 is
hereinafter referred to as the "Balance Sheet Date". The Company does not have
10
<PAGE>
any indebtedness, obligations or liabilities of any kind (whether accrued,
absolute, contingent or otherwise, and whether due or to become due) that would
have been required to be reflected in, reserved against or otherwise described
in the Balance Sheet or in the notes thereto in accordance with GAAP, which was
not fully reflected in, reserved against or otherwise described in the Balance
Sheet or the notes thereto or was not incurred in the ordinary course of
business consistent with the Company's past practices since the Balance Sheet
Date.
M. Compliance with Laws; Permits. The Company is in compliance with all
laws, rules, regulations, codes, ordinances and statutes (collectively "Laws")
applicable to it or to the conduct of its business, except for such
non-compliance which would not have a Material Adverse Effect. The Company
possesses all permits, approvals, authorizations, licenses, certificates and
consents from all public and governmental authorities which are necessary to
conduct its respective business, except for those the absence of which would not
have a Material Adverse Effect.
N. Securities Law Matters. Based, in part, upon the representations and
warranties of Buyer set forth in Section II hereof, the offer and sale by the
Company of the Securities is exempt from (i) the registration and prospectus
delivery requirements of the Securities Act and the rules and regulations of the
Commission thereunder and (ii) the registration and/or qualification provisions
of all applicable United States state securities and "blue sky" laws. The
Company shall not directly or indirectly take, and shall not permit any of its
directors, officers or Affiliates directly or indirectly to take, any action
(including, without limitation, any offering or sale to any person or entity of
the Preferred Shares or shares of Common Stock), so as to make unavailable the
exemption from Securities Act registration being relied upon by the Company for
11
<PAGE>
the offer and sale to Buyer of the Preferred Shares (and the Conversion Shares)
as contemplated by this Agreement. No form of general solicitation or
advertising has been used or authorized by the Company or any of its officers,
directors or Affiliates in connection with the offer or sale of the Preferred
Shares (and the Conversion Shares) as contemplated by this Agreement or any
other agreement to which the Company is a party.
O. Internal Controls and Procedures. The Company maintains accurate books
and records and internal accounting controls.
P. No Misrepresentation. To the best of the Company's knowledge, no
representation or warranty of the Company contained in this Agreement, any
schedule, annex or exhibit hereto or any agreement, instrument or certificate
furnished by the Company to Buyer pursuant to this Agreement, contains any
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein, not
misleading.
Q. Finders Fee. The Company hereby represents and warrants that there are
no finder's or broker's fees for which the Buyer is liable in connection with
the transactions contemplated by this Agreement.
IV. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
A. Restrictive Legend. Buyer acknowledges and agrees that, upon issuance
pursuant to this Agreement, the Securities (and any shares of Common Stock
issued in conversion of the Preferred Shares or exercise of the Warrants) shall
have endorsed thereon a legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the Preferred Shares, the
Warrant Shares and the Conversion Shares):
12
<PAGE>
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OR SUCH OTHER LAWS."
B. Filings. The Company shall make all necessary SEC and "blue sky" filings
required to be made by the Company in connection with the sale of the Securities
to the Buyer as required by all applicable Laws, and shall provide a copy
thereof to the Buyer promptly after such filing.
C. Reporting Status. So long as the Buyer beneficially owns any of the
Securities, the Company shall use its reasonable commercial efforts to file all
reports required to be filed by it with the Commission pursuant to Section 13 or
15(d) of the Exchange Act.
D. Use of Proceeds. The Company shall use the proceeds from the sale of the
Securities (excluding amounts paid by the Company for legal fees in connection
with such sale) solely for general corporate and working capital purposes.
E. Listing. Except to the extent the Company lists its Common Stock on The
New York Stock Exchange, the Company shall use its reasonable commercial efforts
to maintain its listing of the Common Stock on Nasdaq.
13
<PAGE>
F. Reserved Conversion Shares. The Company at all times from and after the
date hereof shall have 1,100,000 shares of Common Stock duly and validly
authorized and reserved for issuance to satisfy the conversion (pursuant to the
Certificate of Designations), in full, of the 3,000 Preferred Shares and 3,000
shares of its Series B Preferred Shares and upon exercise of the Warrants. The
Company shall irrevocably instruct its transfer agent to reserve such number of
shares for issuance upon conversion of the Preferred Stock and exercise of the
Warrants.
G. The Company shall not repurchase any of its Common Stock at any time
that such purchases will cause the amount of Common Stock issuable upon
conversion of the Preferred Stock to be in excess of 20% of the amount of Common
Stock outstanding at such time.
H. The Company acknowledges that Buyer has informed the Company that TNC
has failed to honor the redemption notice delivered in connection with TNC's
Series B Convertible Preferred Stock or to pay any dividends on such preferred
stock.
V. TRANSFER AGENT INSTRUCTIONS.
A. The Company undertakes and agrees that no instruction other than the
instructions referred to in this Section V and customary stop transfer
instructions prior to the registration and sale of the Common Stock pursuant to
an effective Securities Act registration statement will be given to its transfer
agent for the Common Stock and that the Common Stock issuable upon conversion of
the Preferred Shares and exercise of the Warrants otherwise shall be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement, the Registration Rights Agreement and applicable
law. Nothing contained in this Section V(A) shall affect in any way Buyer's
obligations and agreement to comply with all applicable securities laws upon
resale of such Common Stock. If, at any time, Buyer provides the Company with an
14
<PAGE>
opinion of counsel reasonably satisfactory to the Company that registration of
the resale by Buyer of such Common Stock is not required under the Securities
Act and that the removal of restrictive legends is permitted under applicable
law, the Company shall permit the transfer of such Common Stock and, promptly
instruct the Company's transfer agent to issue one or more certificates for
Common Stock without any restrictive legends endorsed thereon.
B. The Company shall permit Buyer to exercise its right to convert the
Preferred Shares by telecopying an executed and completed Notice of Conversion
to the Company. Each date on which a Notice of Conversion is telecopied to and
received by the Company in accordance with the provisions hereof shall be deemed
a Conversion Date. Within fifteen (15) days after Buyer delivers the Notice of
Conversion to the Company, Buyer shall deliver to the Company the Preferred
Shares being converted. The Company shall transmit the certificates evidencing
the shares of Common Stock issuable upon conversion of any Preferred Shares
(together with certificates evidencing any Preferred Shares not being so
converted) to Buyer via express courier, by electronic transfer or otherwise,
within five (5) Business Days after the later of (i) receipt by the Company of
the Notice of Conversion or (ii) receipt of the Preferred Shares being converted
(the "Delivery Date").
C. The Company shall permit Buyer to exercise its right to purchase shares
of Common Stock pursuant to exercise of the Warrants in accordance with its
applicable terms of the Warrants. The last date that the Company may deliver
shares of Common Stock issuable upon any exercise of Warrants is referred to
herein as the "Warrant Delivery Date."
D. The Company understands that a delay in the issuance of the shares of
Common Stock issuable upon conversion of the Preferred Stock or Series B
Preferred Stock or exercise of the Warrants beyond the applicable Dividend
15
<PAGE>
Payment Due Date (as defined in the Certificate of Designations), Delivery Date
or Warrant Delivery Date could result in economic loss to Buyer. As compensation
to Buyer for such loss (and not as a penalty), the Company agrees to pay to
Buyer for late issuance of Common Stock issuable in lieu of cash dividends on
the Series B Preferred Shares, upon conversion of the Preferred Stock or Series
B Preferred Stock or exercise of the Warrants in accordance with the following
schedule (where "No. Business Days" is defined as the number of Business Days
beyond ten (10) days from the Dividend Payment Due Date, the Delivery Date or
the Warrant Delivery Date, as applicable):
Compensation For Each
10 Shares of Preferred
Stock Not Converted
Timely or 500 Shares of
Common Stock Issuable In
Lieu of Cash Dividends or
Shares of Common Stock
Issuable Upon Exercise of
Each 1,500 Warrants
No. Business Days Not Issued Timely
----------------- -----------------
1 $25
2 $50
3 $75
4 $100
5 $125
6 $150
7 $175
8 $200
9 $225
10 $250
more than 10 $250 + $100 for each
Business Day Late
beyond 10 days
16
<PAGE>
The Company shall pay to Buyer the compensation described above by the transfer
of immediately available funds upon Buyer's demand. Nothing herein shall limit
Buyer's right to pursue actual damages for the Company's failure to issue and
deliver Common Stock to Buyer, and in addition to any other remedies which may
be available to Buyer, in the event the Company fails for any reason to effect
delivery of such shares of Common Stock within ten (10) Business Days after the
relevant Dividend Payment Due Date, the Delivery Date or the Warrant Delivery
Date, as applicable, Buyer shall be entitled to rescind the relevant Notice of
Conversion by delivering a notice to such effect to the Company whereupon the
Company and Buyer shall each be restored to their respective original positions
immediately prior to delivery of such Notice of Conversion on delivery.
VI. DELIVERY INSTRUCTIONS.
The Securities shall be delivered by the Company to the Company pursuant to
Section I(B) hereof on a "delivery-against-payment basis".
VII. CLOSING DATE.
The date and time of the issuance and sale of the Securities (the "Closing
Date") shall be May 10, 1999 or such other date mutually agreed upon in writing
by the parties hereto. The issuance and sale of the Securities shall occur on
the Closing Date.
VIII. CONDITIONS TO THE COMPANY'S OBLIGATIONS.
The Buyer understands that the Company's obligation to sell the Securities
on the Closing Date to Buyer pursuant to this Agreement is conditioned upon:
A. Delivery by Buyer to the Company of the Purchase Price;
17
<PAGE>
B. Assignment by Buyer to the Company of all of its rights under the TNC
Series B Convertible Preferred Stock, including without limitation the right of
first refusal set forth in Paragraph 4G of that certain Securities Purchase
Agreement among TNC and Buyer and the registration rights set forth in that
certain Registration Rights Agreement among TNC and Buyer;
C. The accuracy in all material respects on the Closing Date of the
representations and warranties of Buyer contained in this Agreement as if made
on the Closing Date (except for representations and warranties which, by their
express terms, speak as of and relate to a specified date, in which case such
accuracy shall be measured as of such specified date) and the performance by
Buyer in all material respects on or before the Closing Date of all covenants
and agreements of Buyer required to be performed by it pursuant to this
Agreement on or before the Closing Date;
D. There shall not be in effect any Law or order, ruling, judgment or writ
of any court or public or governmental authority restraining, enjoining or
otherwise prohibiting any of the transactions contemplated by this Agreement.
IX. CONDITIONS TO BUYER'S OBLIGATIONS.
The Company understands that Buyer's obligation to purchase the Securities
on the Closing Date pursuant to this Agreement is conditioned upon:
A. Delivery by the Company to Buyer of evidence that the Certificates of
Designations have been filed and are effective.
B. Delivery by the Company to the Buyer of one or more certificates (I/N/O
Buyer) evidencing the Securities to be purchased by Buyer pursuant to this
Agreement;
18
<PAGE>
C. The accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained in this Agreement as if
made on the Closing Date (except for representations and warranties which, by
their express terms, speak as of and relate to a specified date, in which case
such accuracy shall be measured as of such specified date) and the performance
by the Company in all material respects on or before the Closing Date of all
covenants and agreements of the Company required to be performed by it pursuant
to this Agreement on or before the Closing Date;
D. Buyer having received an opinion of counsel for the Company, dated the
Closing Date, in form, scope and substance reasonably satisfactory to the Buyer,
which shall include customary opinions.
E. There not having occurred (i) any general suspension of trading in, or
limitation on prices listed for, the Common Stock on the Nasdaq, (ii) the
declaration of a banking moratorium or any suspension of payments in respect of
banks in the United States, or (iii) in the case of the foregoing existing at
the date of this Agreement, a material acceleration or worsening thereof.
F. There not having occurred any event or development, and there being in
existence no condition, having or which reasonably and forseeably could have a
Material Adverse Effect.
G. The Company shall have delivered to reimbursement of Buyer's
out-of-pocket costs and expenses incurred in connection with the transactions
contemplated by this Agreement (including the fees and disbursements of Buyer's
legal counsel) in the aggregate amount of $50,000.
19
<PAGE>
H. There shall not be in effect any Law or order, ruling, judgment or writ
of any court or public or governmental authority restraining, enjoining or
otherwise prohibiting any of the transactions contemplated by this Agreement.
I. Delivery of irrevocable instructions to the Company's transfer agent to
reserve 1,100,000 shares of Common Stock for issuance upon conversion of the
Preferred Stock and the Company's Series B Preferred Stock and exercise of the
Warrants.
X. TERMINATION.
A. Termination by Mutual Written Consent. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned, for any reason and at
any time prior to the Closing Date, by the mutual written consent of the Company
and Buyer.
B. Termination by the Company or Buyer. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned by action of the
Company or Buyer if (i) the Closing shall not have occurred at or prior to 5:00
p.m., New York City time, on May 12, 1999; provided, however, that the right to
terminate this Agreement pursuant to this Section X(B)(i) shall not be available
to any party whose failure to fulfill any of its obligations under this
Agreement has been the cause of or resulted in the failure of the Closing to
occur at or before such time and date or (ii) any court or public or
governmental authority shall have issued an order, ruling, judgment or writ, or
there shall be in effect any Law, restraining, enjoining or otherwise
prohibiting the consummation of any of the transactions contemplated by this
Agreement.
C. Termination by Buyer. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned by Buyer at any time prior to
20
<PAGE>
the Closing Date, if (i) the Company shall have failed to comply in any material
respect with any of its covenants or agreements contained in this Agreement,
(ii) there shall have been a breach by the Company with respect to any
representation or warranty made by it in this Agreement (iii) there shall have
occurred any event or development, or there shall be in existence any condition,
having or reasonably and forseeably likely to have a Material Adverse Effect or
(iv) any of the conditions provided in Section IX hereof become incapable of
being satisfied.
D. Termination by the Company. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned by the Company at any time
prior to the Closing Date, if (i) Buyer shall have failed to comply in any
material respect with any of its covenants or agreements contained in this
Agreement, (ii) there shall have been a breach by Buyer with respect to any
representation or warranty made by it in this Agreement or (iii) any of the
conditions provided in Section VIII hereof shall become incapable of being
satisfied.
XI. SURVIVAL; INDEMNIFICATION.
A. The representations, warranties and covenants made by each of the
Company and Buyer in this Agreement, the annexes, schedules and exhibits hereto
and in each instrument, agreement and certificate entered into and delivered by
them pursuant to this Agreement, shall survive the Closing and the consummation
of the transactions contemplated hereby for a period of one year. In the event
of a breach or violation of any of such representations, warranties or
covenants, the party to whom such representations, warranties or covenants have
been made shall have all rights and remedies for such breach or violation
available to it under the provisions of this Agreement or otherwise, whether at
21
<PAGE>
law or in equity, irrespective of any investigation made by or on behalf of such
party on or prior to the Closing Date.
B. The Company hereby agrees to indemnify and hold harmless the Buyer, its
Affiliates and their respective officers, directors, partners and members
(collectively, the "Buyer Indemnitees"), from and against any and all losses,
claims, damages, judgments, penalties, liabilities and deficiencies
(collectively, "Losses"), and agrees to reimburse the Buyer Indemnitees for all
out-of-pocket expenses (including the fees and expenses of legal counsel), in
each case promptly as incurred by the Buyer Indemnitees and to the extent
arising out of or in connection with:
1. any misrepresentation, omission of fact or breach of any of the
Company's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company pursuant to this
Agreement; or
2. any failure by the Company to perform in any material respect any
of its covenants, agreements, undertakings or obligations set forth in this
Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by the Company pursuant
to this Agreement.
C. Buyer hereby agrees to indemnify and hold harmless the Company, its
Affiliates and their respective officers, directors, partners and members
(collectively, the "Company Indemnitees"), from and against any and all Losses,
and agrees to reimburse the Company Indemnitees for all out-of-pocket expenses
(including the fees and expenses of legal counsel), in each case promptly as
incurred by the Company Indemnitees and to the extent arising out of or in
connection with:
22
<PAGE>
1. any misrepresentation, omission of fact, or breach of any of
Buyer's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by Buyer pursuant to this Agreement;
or
2. any failure by Buyer to perform in any material respect any of its
covenants, agreements, undertakings or obligations set forth in this
Agreement or any instrument, certificate or agreement entered into or
delivered by Buyer pursuant to this Agreement.
D. Promptly after receipt by either party hereto seeking indemnification
pursuant to this Section XI (an "Indemnified Party") of written notice of any
investigation, claim, proceeding or other action in respect of which
indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party against whom indemnification pursuant to this
Section XI is being sought (the "Indemnifying Party") of the commencement
thereof; but the omission to so notify the Indemnifying Party shall not relieve
it from any liability that it otherwise may have to the Indemnified Party,
except to the extent that the Indemnifying Party is materially prejudiced and
forfeits substantive rights and defenses by reason of such failure. In
connection with any Claim the Indemnifying Party shall be entitled to assume the
23
<PAGE>
defense thereof. Notwithstanding the assumption of the defense of any Claim by
the Indemnifying Party, the Indemnified Party shall have the right to employ
separate legal counsel and to participate in the defense of such Claim, at the
reasonable cost and expense of the Indemnifying Party unless the Indemnified
Party and the Indemnifying Party reasonably shall have concluded that
representation of the Indemnified Party and the Indemnifying Party by the same
legal counsel would not be appropriate due to actual or, as reasonably
determined by legal counsel to the Indemnifying Party, potentially differing
interests between such parties in the conduct of the defense of such Claim, or
if there may be legal defenses available to the Indemnified Party that are in
addition to or disparate from those available to the Indemnifying Party, or the
Indemnifying Party shall have failed to employ legal counsel reasonably
satisfactory to the Indemnified Party within a reasonable period of time after
notice of the commencement of such Claim. Except as provided above, the
Indemnifying Party shall not, in connection with any Claim in the same
jurisdiction, be liable for the fees and expenses of more than one firm of legal
counsel for the Indemnified Party (together with appropriate local counsel). The
Indemnifying Party shall not, without the prior written consent of the
Indemnified Party (which consent shall not unreasonably be withheld), settle or
compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnified Party from all liabilities
with respect to such Claim or judgment.
E. In the event one party hereunder should have a claim for indemnification
that does not involve a claim or demand being asserted by a third party, the
Indemnified Party promptly shall deliver notice of such claim to the
Indemnifying Party. If the Indemnified Party disputes the claim, such dispute
shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
procedures and rules of the American Arbitration Association. Judgment upon any
award rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.
XII. GOVERNING LAW: MISCELLANEOUS.
This Agreement shall be governed by and interpreted in accordance with the
laws of the State of New York, without regard to the conflicts of law principles
of such state. Each of the parties consents to the jurisdiction of the federal
24
<PAGE>
courts whose districts encompass any part of the City of New York or the state
courts of the State of New York sitting in the City of New York in connection
with any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions. A
facsimile transmission of this signed Agreement shall be legal and binding on
all parties hereto. This Agreement may be signed in one or more counterparts,
each of which shall be deemed an original. The headings of this Agreement are
for convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction. This Agreement may be amended only by an instrument
in writing signed by the party to be charged with enforcement. This Agreement
supersedes all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof.
XIII. NOTICES. Except as may be otherwise provided herein, any notice or
other communication or delivery required or permitted hereunder shall be in
writing and shall be delivered personally or sent by certified mail, postage
prepaid, or by a nationally recognized overnight courier service, and shall be
deemed given when so delivered personally or by overnight courier service, or,
if mailed, three (3) days after the date of deposit in the United States mails,
as follows:
25
<PAGE>
(1) if to the Company, to:
Interactive Flight Technologies, Inc.
4041 North Central Avenue
Suite B 200
Phoenix, Arizona 86012
Attention: Irwin L. Gross
with a copy to:
Mesirov Gelman Jaffe Cramer & Jamieson LLP
1735 Market Street
Philadelphia, Pennsylvania 19103-7598
38th Floor
Attn: Richard P. Jaffe
(2) if to the Buyer, to
THE SHAAR FUND LTD.,
c/o SHAAR ADVISORY SERVICES LTD.
62 King George Street, Apartment 4F
Jerusalem,Israel
Attention: Samuel Levinson
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Gerald S. Backman, P.C.
The Company or the Buyer may change the foregoing address by notice given
pursuant to this Section XIII.
XIV. CONFIDENTIALITY. Each of the Company and Buyer agrees to keep
confidential and not to disclose to or use for the benefit of any third party
the terms of this Agreement or any other information which at any time is
26
<PAGE>
communicated by the other party as being confidential without the prior written
approval of the other party; provided, however, that this provision shall not
apply to information which, at the time of disclosure, is already part of the
public domain (except by breach of this Agreement) and information which is
required to be disclosed by law (including, without limitation, pursuant to Item
10 of Rule 601 of Regulation S-K under the Securities Act and the Exchange Act).
XV. ASSIGNMENT. This Agreement shall not be assignable by either of the
parties hereto prior to the Closing without the prior written consent of the
other party, and any attempted assignment contrary to the provisions hereby
shall be null and void; provided, however, that Buyer may assign its rights and
obligations hereunder, in whole or in part, to any affiliate of Buyer who
furnishes to the Company the representations and warranties set forth in Section
II hereof and otherwise agrees to be bound by the terms of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement on the date first above written.
INTERACTIVE FLIGHT TECHNOLOGIES INC.
By: ___________________________
Name:
Title:
THE SHAAR FUND LTD.
27
<PAGE>
By: ___________________________
Name:
Title:
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
LEGEND: THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE 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> 6-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1998
<PERIOD-START> NOV-01-1998 FEB-01-1999
<PERIOD-END> APR-30-1999 APR-30-1999
<CASH> 19,732,520 19,732,520
<SECURITIES> 9,664,188 9,664,188
<RECEIVABLES> 1,281,255 1,281,255
<ALLOWANCES> 0 0
<INVENTORY> 1,513,298 1,513,298
<CURRENT-ASSETS> 33,103,095 33,103,095
<PP&E> 1,453,462 1,453,462
<DEPRECIATION> 817,349 817,349
<TOTAL-ASSETS> 37,560,378 37,560,378
<CURRENT-LIABILITIES> 9,344,947 9,344,947
<BONDS> 0 0
0 0
0 0
<COMMON> 53,421 53,421
<OTHER-SE> 28,162,010 28,162,010
<TOTAL-LIABILITY-AND-EQUITY> 37,560,378 37,560,378
<SALES> 0 0
<TOTAL-REVENUES> 626,748 301,990
<CGS> (1,423,032) (1,609,474)
<TOTAL-COSTS> 2,332,326 (35,065)
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,880 1,191
<INCOME-PRETAX> (814,846) 756,924
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (814,846) 756,924
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (814,846) 756,924
<EPS-BASIC> (0.15) 0.14
<EPS-DILUTED> (0.15) 0.14
</TABLE>
