-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QmHqqqtWTRD5onmJfCqL/LMjV6Icd5qtFX8oDqFRiZsaHuii7fu2fOqVRF75MZtB X+ZMrz/S7jInE4XhcDDGzg== 0000950115-99-000890.txt : 19990615 0000950115-99-000890.hdr.sgml : 19990615 ACCESSION NUMBER: 0000950115-99-000890 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERACTIVE FLIGHT TECHNOLOGIES INC CENTRAL INDEX KEY: 0000932021 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 113197148 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-25668 FILM NUMBER: 99645764 BUSINESS ADDRESS: STREET 1: 4041 NORTH CENTRAL AVENUE STREET 2: SUITE B 200 CITY: PHOENIX STATE: AZ ZIP: 85012 BUSINESS PHONE: 6022008900 MAIL ADDRESS: STREET 1: 4041 N CENTRAL AVE STREET 2: STE B 200 CITY: PHOENIX STATE: AZ ZIP: 85012 10QSB 1 QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB -------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended April 30, 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. ----------------------------------------------------------------- (Exact Name of Small Business Issuer as Specified in Its Charter) Delaware 11-3197148 - ------------------------------- ---------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation of Organization) Identification Number) 4041 North Central Avenue Suite B-200 Phoenix, Arizona 85012 ---------------------------------------- (Address of Principal Executive Offices) (602) 200-8900 ------------------------------------------------ (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 ----- --------------------------- 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 -- INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY Index to Consolidated Financial Statements
PAGE ---- PART I. FINANCIAL INFORMATION 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
2 INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY Condensed Consolidated Balance Sheets
April 30, October 31, Assets 1999 1998 ------------ ------------ (unaudited) 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 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY Condensed Consolidated Statements of Operations Unaudited
Three Months Six Months Ended April 30, Ended April 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 4 INTERACTIVE FLIGHT TECHNOLOGIES, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows Unaudited
Six Months Ended April 30, ---------------------------------- 1999 1998 ------------ ------------ 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 ============ ============
See accompanying notes to condensed consolidated financial statements. 5 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. 6 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. 7 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 8 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 9 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. 10 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 11 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 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 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 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 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 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 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
Exhibit No. Description Page No. - ----------- ----------- -------- 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
18 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 *
- --------- * 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 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 INDEX OF EXHIBITS
Exhibit No. Description Page No. - ----------- ----------- -------- 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
21 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 *
- --------------- * 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 EX-3.5 2 CERTIFICATE OF AMENDMENT 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." 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." 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 EX-4.13 3 CERTIFICATE OF DESIGNATIONS 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: 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 (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. 3 (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 4 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. 5 (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 6 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. 7 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 8 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 9 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. 10 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 11 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 12 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 13 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 14 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 15 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 16 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 17 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; 18 (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 19 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 20 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 21 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. 22 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: 23 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 24 Fill in for registration of Series A Preferred Stock: Please print name and address (including zip code number): ____________________________________________________________________ ____________________________________________________________________ 25 EX-4.14 4 CERTIFICATE OF DESIGNATIONS 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: 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 2 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. 3 (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 4 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"). 5 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 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 7 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. 8 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 9 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 10 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 11 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 12 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 13 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 14 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. 15 (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. 16 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 17 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%) 18 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 19 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 20 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: 21 (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 22 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 23 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 24 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. 25 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: 26 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 27 Fill in for registration of Series B Preferred Stock: Please print name and address (including zip code number): ___________________________________________________________ ___________________________________________________________ 28 EX-10.23 5 SECURITIES PURCHASE AGREEMENT 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 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 2 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 3 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, 4 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 5 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 6 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 7 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 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. 9 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 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 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 "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 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 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 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 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 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 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 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 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 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 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 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 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 (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 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 By: ___________________________ Name: Title: 28 EX-27 6 FDS --
5 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. 6-MOS 3-MOS OCT-31-1998 OCT-31-1998 NOV-01-1998 FEB-01-1999 APR-30-1999 APR-30-1999 19,732,520 19,732,520 9,664,188 9,664,188 1,281,255 1,281,255 0 0 1,513,298 1,513,298 33,103,095 33,103,095 1,453,462 1,453,462 817,349 817,349 37,560,378 37,560,378 9,344,947 9,344,947 0 0 0 0 0 0 53,421 53,421 28,162,010 28,162,010 37,560,378 37,560,378 0 0 626,748 301,990 (1,423,032) (1,609,474) 2,332,326 (35,065) 0 0 0 0 2,880 1,191 (814,846) 756,924 0 0 (814,846) 756,924 0 0 0 0 0 0 (814,846) 756,924 (0.15) 0.14 (0.15) 0.14
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