1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the First Quarter Ended Commission File Number
March 31, 1996 33-92752
IN-FLIGHT PHONE CORPORATION
One Tower Lane
Oakbrook Terrace, IL 60181
(708) 573-2660
Delaware 36-3733319
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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________
At March 31, 1996, Registrant had outstanding 2,339,754 shares of $0.01 par
value common stock.
2
IN-FLIGHT PHONE CORPORATION
(A Subsidiary of IFP Holdings, Inc.)
INDEX TO FORM 10-Q
Page No.
--------
COVER 1
INDEX 2
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet as of 3
March 31, 1996 and December 31, 1995
Condensed Consolidated Statement of Operations for the 4
three months ended March 31, 1996 and 1995
Condensed Consolidated Statement of Cash Flows for the 5
three months ended March 31, 1996 and 1995
Condensed Consolidated Statement of Changes in
Stockholder's Deficit 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
FINANCIAL DATA SCHEDULE 17
3
IN-FLIGHT PHONE CORPORATION
(A Subsidiary of IFP Holdings, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
Mar. 31, 1996 Dec. 31, 1995
------------- -------------
(unaudited)
ASSETS
- ------
Cash and cash equivalents $33,805 $47,918
Short-term investments at fair value 20,002 28,123
Other current assets 186 103
-------- --------
Total current assets 53,993 76,144
Fixed assets 111,814 104,511
Other noncurrent assets 11,398 19,245
-------- --------
Total assets $177,205 $199,900
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
- -------------------------------------
Accounts payable and accrued liabilities $ 28,230 $ 32,746
Notes payable and lease obligations-current
portions 2,079 1,684
--------- ---------
Total current liabilities 30,309 34,430
--------- ---------
Senior discount notes 198,929 191,591
Notes payable-related parties 24,964 24,964
Interest payable-related parties 4,172 3,118
Other long-term liabilities 5,492 6,058
--------- ---------
Total long-term liabilities 233,557 225,731
--------- ---------
Exchangeable, mandatorily redeemable
preferred stock 39,280 37,434
Warrants 27,387 27,387
Stockholder's deficit:
Common stock and paid in capital, $.01 par
value, 10,000,000 shares
authorized; 2,339,754 shares
issued and outstanding at
March 31, 1996 and December 31, 1995 157,758 159,604
Accumulated deficit (311,431) (285,080)
Unrealized gain on investments 345 394
-------- --------
Total stockholder's deficit (153,328) (125,082)
-------- --------
Total liabilities and stockholder's deficit $177,205 $199,900
======== ========
The accompanying notes are an integral part of these financial statements
4
IN-FLIGHT PHONE CORPORATION
(A Subsidiary of IFP Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands)
(unaudited)
Three months ended
March 31,
1996 1995
---- ----
REVENUES
- --------
FlightLink system revenue $ 1,450 $ 445
EXPENSES
- --------
Direct operating costs 1,959 940
Research and development 828 1,134
Selling, general and administrative 13,180 5,512
Depreciation and amortization 3,722 2,966
--------- ---------
19,689 10,552
--------- ---------
Loss from operations (18,239) (10,107)
Interest expense (8,913) (1,954)
Interest income 801 45
--------- ---------
Loss before income taxes (26,351) (12,016)
Income taxes - -
--------- ---------
Net loss $ (26,351) $ (12,016)
========= =========
The accompanying notes are an integral part of these financial statements
5
IN-FLIGHT PHONE CORPORATION
(A Subsidiary of IFP Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands except share data)
(unaudited)
Three months ended
March 31,
1996 1995
------ ------
Cash flows used for operating activities:
Net loss $(26,351) $(12,016)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 3,722 2,966
Amortization of financing fees and discounts 7,858 1,728
Employee stock option plan expense 470
Change in assets and liabilities:
Other current assets (83) (49)
Accounts payable and accrued liabilities (4,516) 2,852
Accounts payable-affiliate - 90
Interest payable 1,083 (54)
Other long-term liabilities 124 (15)
Other-net 412 (3)
-------- --------
Net cash used for operating activities (17,751) (4,031)
-------- --------
Cash flows used for investing activities:
Purchase of short term investments (26,557) -
Proceeds from maturity and sale of short term
investments 34,188 -
Decrease (increase) in other noncurrent assets 7,306 (1,481)
Additions to fixed assets (11,004) (16,364)
-------- --------
Net cash provided (used) by investing activities 3,933 (17,845)
-------- --------
Cash flows from financing activities:
Advances from (repayment to) parent - 19,886
Repayment of debt - -
Repayments to related parties - (387)
Repayments under capital leases (295) (550)
-------- --------
Net cash provided (used) by financing activities (295) 18,949
-------- --------
Net decrease in cash and cash equivalents (14,113) (2,927)
Cash and cash equivalents at beginning of period 47,918 5,711
-------- --------
Cash and cash equivalents at end of period $ 33,805 $ 2,784
======== ========
The accompanying notes are an integral part of these financial statements
6
IN-FLIGHT PHONE CORPORATION
(A Subsidiary of IFP Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
(amounts in thousands except share data)
Common Stock
-------------------
Number Accumulated Unrealized Gain Stockholder's
of Shares Amount Deficit (Loss) on Investments Deficit
--------- ------ ----------- --------------------- -------------
Balance at December 31, 1995 2,339,754 $159,604 $(285,080) $394 $(125,082)
Dividends and accretion of exchangeable
mandatorily redeemable preferred
stock (unaudited) (1,846) (1,846)
Net loss for three months ended March 31,
1996 (unaudited) (26,351) (26,351)
Unrealized loss on investments (unaudited) (49) (49)
--------- -------- --------- ---- ---------
Balance at March 31, 1996 (unaudited) 2,339,754 $157,758 $(311,431) $345 $(153,328)
========= ======== ========= ==== =========
The accompanying notes are an integral part of these financial statements
7
IN-FLIGHT PHONE CORPORATION
(A Subsidiary of IFP Holdings, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, all normal recurring adjustments necessary
for a fair presentation of the results for the unaudited interim periods
have been included in the accompanying condensed consolidated financial
statements. These condensed consolidated financial statements should be
read in conjunction with the Company's financial statements and notes
thereto for the year ended December 31, 1995.
2. Fixed assets at March 31, 1996 and December 31, 1995 were as follows:
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
(amount in thousands)
FlightLink system $ 56,804 $ 50,685
Equipment held for installation 80,453 76,124
Assets under capital lease 4,803 4,994
Furniture, fixtures, equipment
and leasehold improvements 4,722 3,976
-------- --------
146,782 135,779
Less accumulated depreciation (34,968) (31,268)
-------- --------
$111,814 $104,511
======== ========
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The financial statements of the Company as of December 31, 1995 have
been audited by the Company's independent public accountants. The financial
data as of and for the three months ended March 31, 1996 and March 31, 1995,
as presented herein, have been prepared by management and are unaudited.
This unaudited data reflects all adjustments, consisting primarily of normal
recurring accruals, which, in the opinion of management, are necessary to
present fairly the financial position, results of operations and cash flows
of the Company for the periods then ended. These interim statements are
condensed and do not include all the information required by generally
accepted accounting principles in a full set of financial statements. These
interim statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1995 and the notes
thereto.
The results of operations for the three months ended March 31, 1996 are
not necessarily indicative of the results to be expected for the full year.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995 the Company had an excess of current assets over
current liabilities of $41.7 million, including cash of $47.9 million and
short-term investments of $28.1 million. In the first quarter of 1996, the
Company completed the installation of the FlightLink system on 22 aircraft
bringing the total of aircraft installed with the FlightLink system to 115.
The Company incurred a net loss for the period ended March 31, 1996 of $26.4
million compared to a loss of $12.0 million for the same period last year.
At March 31, 1996, the Company had an excess of current assets over current
liabilities of $23.7 million, including cash of $33.8 million and short-term
investments of $20.0 million.
The Company plans to complete substantially all installations of the
basic FlightLink system on its aircraft subject to existing contracts during
1996 and 1997. Additionally, under certain airline agreements, the Company
has committed to maintaining technological competitiveness of the FlightLink
system, including installation of live television and radio capability during
1997, the technology for which has not yet been developed. These commitments
will require significant capital expenditures. The ability of the Company to
meet these commitments will depend upon achieving significant and sustained
cash flow from operations or obtaining additional sources of financing.
The Company's ability to generate such cash flow is subject to a number
of risks and uncertainties. There can be no assurance as to whether or when
the Company's operations will be profitable or whether the Company will at
any time have sufficient resources to meet all of its capital expenditure
requirements. Based upon current estimates, management believes that the
Company will not have sufficient cash resources to meet all of its capital
expenditure requirements or to repay in full the principal of the Senior
Discount Notes which is due in the year 2002, and will therefore be required
to seek additional financing.
9
RESULTS OF OPERATIONS
For the three months ended March 31, 1996, the Company incurred a loss
of approximately $26.4 million, which was approximately $14.4 million higher
than the loss for the corresponding period in 1995.
Period Ended March 31, 1996 and Period Ended March 31, 1995
Revenues
Revenues increased to $1.4 million in the first quarter of 1996 from
$.4 million for the same period in 1995. At March 31, 1996, the Company had
installed the FlightLink system on 115 aircraft compared to 109 aircraft at
March 31, 1995. The increase in revenue results from the increase in the charge
for telephone usage from $.99 per minute with no set-up charge in 1995, to
$2.99 per minute and a $2.50 set-up charge in 1996, partially offset by a
reduction in telephone usage. Furthermore, the Company increased game pricing
in 1996 to $5.00 from $.99 in 1995 and experienced a decrease in game usage of
38%.
Direct Operating Costs
Direct operating expenses increased $1.1 million to $2.0 million due to
higher airline commission, increased maintenance costs, and costs associated
with the implementation and operation of call hand-off.
Research and Development Expense
Research and development expenses decreased $0.3 million to $.8 million
from the same period in 1995 due to the completion of significant developmental
projects associated with call hand-off and seat group electronic boards,
without the immediate replacement by new projects.
Selling, General and Administrative Expense
Selling, general and administrative expense increased to $13.2 million
from $5.5 million for the same period in 1995. This increase is due to higher
consultant and outside labor expense, increased charges for marketing
activities, an increase in salary expense, and revised estimates for asset
write-offs.
Depreciation and Amortization
Depreciation and amortization expense increased to $3.7 million
from $3.0 million for the same period in 1995. This $0.7 million
increase resulted from the increase in installed FlightLink equipment,
increase in ground system expeditures, and increase in capital assets to
support the Company's infrastructure.
Net Interest Expense
Net interest expense increased to $8.1 million, an increase of $6.2
million from the same period in 1995. The increase was primarily the result
of the interest on the Senior Discount Notes, issued in May, 1995.
10
Income Tax
The Company has not recorded a provision for income taxes since
inception due to the net losses incurred. The Company has substantial net
operating loss carryovers and expects to incur additional losses. While
utilization of such losses on a carryover basis will be limited to the extent
that the Company undergoes one or more ownership changes, the occurrence and
timing of such changes may be subject to factual and legal uncertainties. No
net deferred tax asset has been recorded due to the uncertainties associated
with the realization of the Company's deferred tax assets.
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PART II.
ITEM 1. - LEGAL PROCEEDINGS
On December 6, 1995, the Company commenced litigation against USAir for
wrongful termination of the USAir Agreement. The complaint was filed in the
Circuit Court of Cook County, Illinois, and seeks declaratory and injunctive
relief, or damages for breach of contract in excess of $186 million. The
complaint alleges that USAir breached its obligations under the USAir Agreement
by failing and refusing to cooperate with the Company during the 30-day period
to cure defaults under the USAir Agreement and by defeating the Company's right
to a cure period. On December 7, 1995, the Company sought a restraining order,
enjoining USAir from acting to effect a termination of the USAir Agreement
before the Company had been given the opportunity to cure. This motion was
denied. On December 14, 1995, the Company's motion for a preliminary
injunction, seeking similar injunction relief, was also denied. USAir answered
the complaint on December 13, 1995, generally denying the allegations in the
complaint. No counterclaims were asserted against the Company in the answer.
On January 12, 1996, the court ordered that the litigation be transferred from
the Chancery Division to the Law Division, and on March 15, 1996 the case was
placed on the commercial calendar. The litigation remains pending.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The Exhibits listed in the "Exhibit Index" are filed as a part of
this report.
b) Reports on Form 8-K.
No reports on Form 8-K were filed during the period covered by this
Form 10-Q.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
IN-FLIGHT PHONE CORPORATION
Date: May 14, 1996 By: /s/ MICHAEL K. NISSENBAUM
-----------------------------
Michael K. Nissenbaum
Chief Financial Officer
Vice President - Finance & Administration
Secretary & Treasurer
Duly Authorized Officer and
Principal Financial Officer.
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EXHIBIT INDEX
DESIGNATION DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, as filed May 15, 1995 (incorporated by reference to
Exhibit 3.1 to Amendment No. 3 to the Company's Registration Statement
on Form S-4 dated November 13, 1995, file number 33-92752).
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit
3.2 to Amendment No. 3 to the Company's Registration Statement on Form
S-4 dated November 13, 1995, file number 33-92752).
4.1 Indenture, dated as of May 9, 1995, between the Registrant and
Marine Midland Bank, as Trustee (incorporated by reference to Exhibit
4.1 to Amendment No. 3 to the Company's Registration Statement on Form
S-4 dated November 13, 1995, file number 33-92752).
4.2 Warrant Agreement, dated as of May 9, 1995, between the
Registrant and Marine Midland Bank, as Warrant Agent (incorporated by
reference to Exhibit 4.2 to Amendment No. 3 to the Company's
Registration Statement on Form S-4 dated November 13, 1995, file
number 33-92752).
4.3 Unit Agreement, dated as of May 9, 1995, between the Registrant
and Marine Midland Bank, as Unit Agent (incorporated by reference to
Exhibit 4.3 to Amendment No. 3 to the Company's Registration Statement
on Form S-4 dated November 13, 1995, file number 33-92752).
4.4 Warrant Agreement, dated May 9, 1995, between the Registrant and
MCI (incorporated by reference to Exhibit 10.8 to Amendment No. 3 to
the Company's Registration Statement on Form S-4 dated November 13,
1995, file number 33-92752).
4.5 Form of 14% Series B Senior Discount Notes due 2002 of the
Registrant (incorporated by reference to Exhibit 4.5 to Amendment No.
3 to the Company's Registration Statement on Form S-4 dated November
13, 1995, file number 33-92752).
4.6 Warrant Agreement, dated as of April 4, 1995 between the
Registrant and IFPC Funding, Inc. (incorporated by reference to
Exhibit 4.3 of Form S-1 dated May 1, 1996, file number 333-4292).
10.1 Telephone and interactive Data Services System Agreement, dated
March 6, 1993, between the Registrant and USAir, Inc. (incorporated by
reference to Exhibit 10.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-4 dated November 13, 1995, file number
33-92752).
10.2 Telephone System Agreement, dated June 7, 1994, between the
Registrant and Continental Airlines, Inc. ("Continental"), as amended
(incorporated by reference to Exhibit 10.2 to Amendment No. 3 to the
Company's Registration Statement on Form S-4 dated November 13, 1995,
file number 33-92752).
10.21 Letter Agreement, dated March 29, 1995 between the Registrant and
Continental amending the terms of the Telephone System Agreement,
dated June 7, 1994, between the Registrant and Continental
(incorporated by reference to exhibit 10.2 of Form S-1 dated
May 1, 1996, file number 333-4292).
10.22 Letter Agreement, dated April 5, 1996 between the Registrant
and Continental amending the terms of the Telephone System
Agreement, dated June 7, 1994 between the Registrant and Continental
(incorporated by reference to exhibit 10.2 of Form S-1 dated May 1,
1996, file number 333-4292).
10.3 Standby Operating Agreement, dated June 7, 1994, among Continental,
MCI Telecommunications Corporation ("MCI") and the Registrant (the
"Standby Operating Agreement") (incorporated by reference to Exhibit
10.3 to Amendment No. 3 to the Company's Registration Statement on Form
S-4 dated November 13, 1995, file number 33-92752).
10.4 Financial Guaranty, dated June 7, 1994, between MCI and Continental
(the "Financial Guaranty") (incorporated by reference to Exhibit 10.4
to Amendment No. 3 to the Company's Registration Statement on Form S-4
dated November 13, 1995, file number 33-92752).
15
DESIGNATION DESCRIPTION
10.5 Agreement as to compensation under the Standby Operating Agreement
dated June 7, 1994 between the Registrant and MCI (incorporated by
reference to Exhibit 10.5 to Amendment No. 3 to the Company's
Registration Statement on Form S-4 dated November 13, 1995, file number
33-92752).
10.6 Agreement concerning payments under the MCI Financial Guaranty,
dated June 7, 1994 among the Registrant, Holdings, and MCI
(incorporated by reference to Exhibit 10.6 to Amendment No. 3 to the
Company's Registration Statement on Form S-4 dated November 13, 1995,
file number 33-92752).
10.7 Air-to-Ground Telecommunications Agreement, dated November 24,
1993, between the Registrant and America West Air Lines, Inc.
(incorporated by reference to Exhibit 10.7 to Amendment No. 3 to the
Company's Registration Statement on Form S-4 dated November 13, 1995,
file number 33-92752).
10.71 Agreement dated November 2, 1995 among the Registrant, America West
Air Lines, Inc. and MCI Telecommunications Corporation (incorporated by
reference to Exhibit 10.71 to Amendment No. 3 to the Company's
Registration Statement on Form S-4 dated November 13, 1995, file number
33-92752).
10.8 Subordinated Notes Due July 1, 2003 issued by the Registrant to
John Hancock Mutual Life Insurance Company ("Hancock") in the aggregate
principal amount of $18,780,753.39 (incorporated by reference to
Exhibit 10.9 to Amendment No. 3 to the Company's Registration Statement
on Form S-4 dated November 13, 1995, file number 33-92752).
10.9 Subordinated Note Due July 1, 2003 issued by the Registrant to the
State Treasurer of the State of Michigan, Custodian of the Michigan
Public School Employees' Retirement System, State Employees' Retirement
System and Michigan Judges Retirement System in the principal amount of
$6,182,684.57 (incorporated by reference to Exhibit 10.10 to Amendment
No. 3 to the Company's Registration Statement on Form S-4 dated
November 13, 1995, file number 33-92752).
10.10 Shareholders Agreement, dated April 4, 1995, among MCI, Hancock and
Dearborn Financial Inc., and certain of its affiliates (incorporated by
reference to Exhibit 10.11 to Amendment No. 3 to the Company's
Registration Statement on Form S-4 dated November 13, 1995, file number
33-92752).
10.11 Tax Sharing Agreement, dated April 4, 1995, between the Registrant
and Holdings (incorporated by reference to Exhibit 10.12 to Amendment
No. 3 to the Company's Registration Statement on Form S-4 dated November
13, 1995, file number 33-92752).
10.12 Employment Agreement among the Registrant, Holdings and Phil Bakes
(incorporated by reference to Exhibit 10.13 to Amendment No. 3 to the
Company's Registration Statement on Form S-4 dated November 13, 1995,
file number 33-92752).
10.13 Employment Agreement between the Registrant and Neal F. Meehan
(incorporated by reference to Exhibit 10.14 to Amendment No. 3 to the
Company's Registration Statement on Form S-4 dated November 13, 1995,
file number 33-92752).
10.14 Consulting Agreement among the Registrant, Holdings and Sojourn
Enterprises, Inc. (incorporated by reference to Exhibit 10.15 to
Amendment No. 3 to the Company's Registration Statement on Form S-4
dated November 13, 1995, file number 33-92752).
10.15 Registrant's 1995 Bonus Plan (incorporated by reference to Exhibit
10.16 to Amendment No. 3 to the Company's Registration Statement on Form
S-4 dated November 13, 1995, file number 33-92752).
10.16 Holdings' 1995 Stock Option Plan (incorporated by reference to
Exhibit 10.17 to Amendment No. 3 to the Company's Registration Statement
on Form S-4 dated November 13, 1995, file number 33-92752).
10.17 Employment Agreement between the Registrant and Edward F. Upton
(incorporated by reference to Exhibit 10.18 to Amendment No. 3 to the
Company's Registration Statement on Form S-4 dated November 13, 1995,
file number 33-92752).
10.18 Employment Agreement between the Registrant and Michael K.
Nissenbaum (incorporated by reference to Exhibit 10.19 to Amendment No.
3 to the Company's Registration Statement on Form S-4 dated November 13,
1995, file number 33-92752).
16
DESIGNATION DESCRIPTION
10.19 Employment Agreement between the Registrant and Anand B. Malani
(incorporated by reference to Exhibit 10.20 to Amendment No. 3 to the
Company's Registration Statement on Form S-4 dated November 13, 1995,
file number 33-92752).
23.1 Consent of Rogers & Wells (contained in opinion filed as Exhibit
5.1) (incorporated by reference to Exhibit 23.1 to Amendment No. 3 to
the Company's Registration Statement on Form S-4 dated November 13,
1995, file number 33-92752).
23.2 Consent of Price Waterhouse LLP (incorporated by reference to
Exhibit 23.2 to Amendment No. 3 to the Company's Registration Statement
on Form S-4 dated November 13, 1995, file number 33-92752).